The Slow Criminalization of Peer-to-Peer Transfers

Peer-to-peer bitcoin exchanges face new legal challenges in America and the trend will probably spread to other money-hungry countries. There is a simple reason.

Also Read: A New Bitcoin Improvement Proposal Aims to Compromise

Regulators use financial The Slow Criminalization of Peer-to-Peer Transfersinstitutions such as banks to control the flow of wealth. The digital exchange companies that serve as “trusted third parties” are the main control points for bitcoin. That’s the point at which privacy is stripped from users, and the transfer of wealth can be closely monitored. For regulations to work, therefore, users must be herded toward trusted third parties who function as an arm of the government.

Because peer-to-peer exchanges sidestep digital exchanges, the former are slowly being criminalized.

Sal Mansy should serve as a cautionary tale.

Criminalizing Localbitcoins Exchanges

On May 17, entrepreneur Sal Mansy of Detroit, Michigan plead guilty to violating Title 18, Section 1960 of the United States Code. The statute specifically refers to Section 5330 of Title 31 in the U.S. Code of Laws, which states, in part, “Any person who owns or controls a money transmitting business shall register the business…with the Secretary of the Treasury.”

Registration involves providing the feds with an impressive list of information which culminates with the vague catch-all statement, “[s]uch other information as the Secretary of the Treasury may require.” In short, both statutes forbid a business to act as a money service without obtaining government licenses and turning over any information demanded.

The unlicensed Mansy had been The Slow Criminalization of Peer-to-Peer Transferstrading bitcoin for years. At first, the purchase of bitcoin was apparently conducted through digital currency exchanges such as Coinbase and Bitstamp, with the sale occurring on Localbitcoins. The resulting profit was then channeled through the business bank accounts of his corporation. Coinbase closed Mansy’s account in 2014 partly because he had not registered with the US Financial Crimes Enforcement Network (FinCEN) as a money transmitter.

Unfortunately, Mansy sold bitcoin to undercover agents who may have been alerted to his activity by the digital exchanges, his bank or both. His residence was raided and three bank accounts were seized which collectively amounted to about $180,000. Mansy could receive a sentence of five years as well as a $250,000 fine. A tax investigation has not been mentioned but one seems likely to occur.

Localbitcoins is coming under attack because it is an immensely popular alternative to digital exchanges for users who wish to retain both privacy and control of their wealth. The company describes itself as a peer-to-peer exchange “where users can buy and sell Bitcoins to and from each other.” Traders advertise at the online site “with the price and the payment method they want to offer.” As in Craigslist, buyers and sellers in the same area can find each through published ads.

Mansy Is Not Alone

On May 2, prominent businessman Jason Klein pled guilty before a Missouri court to charges of “conducting an unlicensed and unregistered money transmitting business.” He had also sold coins through a Localbitcoins to “two undercover agents.” Klein ran afoul of “both the Financial Crimes Enforcement Network (FinCEN) as well as the Missouri government to operate a money transmission business.”

Both Mansy and Klein may have The Slow Criminalization of Peer-to-Peer Transfersbeen selectively prosecuted due to their prominence in order to send a warning to others. The Springfield Business Journal (May 15) reported that “many [in the community] were left in disbelief and confusion after…Jason Klein pleaded guilty to a federal charge for selling bitcoin.” Klein is “president of the Association of Information Technology Professionals’ Ozarks chapter, and was elected to serve this year on the leadership council of The Network, the chamber’s group for young professionals.” He also faces up to five years in prison and/or a $250,000 fine.

If the two cases are meant as a warning to other traders, both men are likely to be both sentenced and fined.

The news feature at the Coindesk site (May 3) commented on a flurry of similar prosecutions. They include:

On April 27, Richard Petix of New York State pled guilty “to making material false statements and operating an unlicensed money transmitting business.”

On April 20, Thomas Costanzo of Arizona:

was detained by the U.S. Department of Homeland Security when officers raided his home….[A]gents were authorized to confiscate financial records and any illegal contraband in his home.

The arrest of both Petix and  Constanzo had complicating factors. Petix is a sex offender who illegally accessed a computer. Constanzo possessed ammunition in violation of an agreement from a prior conviction. The money laundering charges were added later as a result of continuing investigation.

By contrast, Mansy’s and Klein’s conviction was about bitcoin, pure and simple.

A Change In How The Law Treats Peer-to-Peer?

The preceding arrests in four different states may signal a shift in how the law views and handles certain forms of peer-to-peer trading. In July 2016, for example, Bloomberg reported on “the first state money-laundering prosecution involving the virtual currency.” The article opened,  “A Florida judge threw out state money-laundering charges against a man who was accused of illegally selling more than $1,500 in bitcoins to undercover detectives, concluding the virtual currency doesn’t qualify as money.” The state is appealing the decision.

Cases may no longer be thrown The Slow Criminalization of Peer-to-Peer Transfersout. A May 6 headline in the Miami Herald stated, “Florida criminals who use bitcoins could now face money-laundering charges.” Those arrested do not need to deal drugs, sell sex or commit fraud, of course. Merely being unlicensed is a crime.

As Jamie Redman pointed out at, the bill “will essentially add bitcoin to the current definitions of ‘monetary instruments’ under Florida’s money laundering act.” The bill has passed both the Florida House and Senate; it awaits the governor’s signature.

The Crucial Importance of Freedom through Peer-to-Peer

Peer-to-peer buyers do not seem to be targeted yet. Nor is it necessary to do so for Localbitcoins to halt in America. If no peer-to-peer sellers are willing to risk draconian punishment, then digital exchanges come closer to a monopoly on sales. Either that or the sellers will apply for licenses and the government will come closer to knowing everything financial about everyone.

For bitcoin to bring real The Slow Criminalization of Peer-to-Peer Transfersfreedom, it must eschew the trusted third party approach because those parties almost always interact with government agencies in much the same manner as central banks do. They strip away privacy from customers and report on their financial practices.

Peer-to-peer liberates users. Personal wealth is protected from the corrupt money-grab of central banking. The relative anonymity it brings allows freedom of speech, especially on controversial and political matters; this is why election ballots are cast in secret. Peer-to-peer also supports peaceful individuals, who are called criminals by a government, to survive the onslaught.

When Wikileaks faced a financial blockage in 2010, for example, bitcoin became the only way most people could make a donation. Many if not most of the donations were anonymous. And peer-to-peer exchanges will become even more important in the future because the other most effective and private peer-to-peer transfer is being threatened: cash.

Governments will continue to assault bitcoin and the rights of users. Digital exchanges will continue to evolve into a grotesque imitation of crony banks. Both will fail. But before they do…how many traders will face five years in prison for the ‘crime’ of selling a “good”—in both senses of the word—to a person who wants to buy it?

What is needed is an electronic payment system based on cryptographic proof instead of trust,allowing any two willing parties to transact directly with each other without the need for a trusted third party

—Satoshi Nakamoto

Do you think the bitcoin ecosystem will eventually get away from trusted third party exchanges? Let us know in the comments section below.

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  • Andrew Downing

    Err, seems to have missed the point that you don’t need an exchange to move Bitcoin around at all. Only to convert it into other currencies, so in practice, exchange to exchange activity is not special. It’s like shutting the gate when the whole fence is down.

    • concerndcitizen

      From a practical point of view, the exchange is where people go to get bitcoins and other alt coins. It’s the central choke point where everything will be reported. After all, tax collection is the most important aspect of a free society. /sarc

    • Concerned citizen said it well. An added point, however…if peer-to-peer comes under attack then people who have no bitcoin and wish to get into it will be increasingly herded toward the exchanges that sell them and that report all information to the government…either upon request or automatically.

      • Darey Olushina

        so many people are missing the major point, the point is that bitcoin will become a standalone currency that can be used to get whatever you need, and then there will be no need of exchanging it for any currency, at that point it will look so ridiculous trying to change bitcoin to dollar, it will be same as trying go exchange dollar for cowries in order to trade, it will get to a time no one will need to buy bitcoin but rather yo earn them as salary or in forms of trade, let them do all they can as long as it last for them, they are i the last leg of their grip on peoples wealth

        • Darey…we are not missing the point. Even if what you say is true — and I’m willing to accept your vision is realistic — it will take time and it will happen unevenly across the globe. We do not currently live in the currency ideal you describe — I wish we did! And I am interested in preventing someone from being arrested next month or next year, because I believe the time your vision will require a longer time frame to become reality, at least, in North America where I live. There is no contradiction in accepting your vision as the final, ultimate destination of bitcoin AND arguing for caution right here and now.

          • Darey Olushina

            Nobody says freedom fight is easy and the earlier we understand that this is a fight for freedom, peaceful war as it may look, it is already hurting people that have been taking us hostage, this vision you talk about is not far in the future, right now i buy lots of stuffs online using bitcoin, in japan as we speak hundred of thousands of businesses are prepared to accept bitcoin, it will be surprising to many of us that we will wake up one day and discover how useless the dollar has become, mark my wordmit ll happen not too far into the future, mind you there are several app in the pipe currently undergoing testrun that will make bitcoin transactions a light speed activity

          • What you write is very encouraging. I do not claim to be technologically sophisticated — far from it. I am on the political side of the issue and I could not write a block of code to save my life. I merely know how highly to value those who can, those who do. Frankly, I think the day of bitcoin being standalone is farther off than you do but I would be delighted to be proved wrong.

          • Darey Olushina

            Well, i appreciate where you stand and your points are very reasonable too, but guess what ? Disruptive technology are always counterintuitive, if what is goin to disrupt the future makes sense to you now then it isnt disruptive at all, let me settle this whole thing with a question, imagine you are having this kind of discussion in 2009 with a bitcoin enthusiast, and he told you that buying 30dollar worth of bitcoin then would make you a billionaire by 2017, i bet you nobody would ever believe that because nothing of such has ever been seen or heard of in the history of humanity, im not just a programmer, am a futurist too, i can safely predict that in the next five year bitcoin and altcoin are going to transform our society in an unimaginable way, the irony of the whole thing is that most of the problems we see in cryptocurencies today already have solid solutions but politics is holding so many things back, but then you cant hold a dam for too long at a point you have to let go

          • Darey Olushina

            Ooooooh, i just scrolled up and found out you wrote the article, nice write, keep up the goodwork we are all working together from different jurisdiction toward making the bitcoin dream a reality

  • concerndcitizen

    Why do you think “Satoshi Nakamoto” is a ghost? These individuals knew that they would face imprisonment and worse if they were personally known for their “crime” of giving people a little freedom.

    By the way, nearly all money transmission laws have a loophole for personal lending, and even the exchange of property including digital currencies if it is not conducted as a regular business. In California, the local authorities allow up to $1000 per day in exchanging, before any registration is required.

    • Interesting about California. I didn’t know that since each state seems to have its own laws governing exchanges of property etc. But the federal laws seem very clear to me; the transactions must be viewed as a business in order for the statutes to apply. Of course, statutes can be rewritten easily enough or reinterpreted so elastically as to lose the original meaning. And, yes, Satoshi is a wise ghost whom I would like to buy an adult beverage of his choice if he ever comes within haunting distance.

  • Peter Groves

    Does THIS imply that We cannot be trusted to conduct Our OWN transactions, without a third party getting involved? I don’t trust ppl that tell Me I must have a trusted third party involved in My business dealings…smdh

    • Yes, I think that’s one of the things that authorities are suggesting. Or, rather, they don’t trust you to ‘respect’ their laws, especially the ones permitting them to make a money-grab into your pocket. Well you might sydh.

  • mike johns

    btc was established as the vine that would cross national fences and seed digital or a world finacial system….smarter minds or longer hours were spent to create a world financial system that would eventually become one world govt….any thought contrary is too idealistic or young in the ways of this filthy world.

    • I still think cryptocurrencies will break down financial borders and resist all attempts to chain them but I also think many good people will be harmed by government’s increasing interest in them. I guess most of all, I want good people to be careful and informed of risks. Ha…I remember being idealistic.

  • Martin Fuchs


    • You know, one of the few things that make me jealous of Americans is that there is no really good bastardization of the word “Canada.” I guess that means “Murica #1, Murica #1!”

  • Robert_

    So, lets see. I’m selling bitcoin, we meet up at starbucks, i buy your coffee, GIVE you 1 bitcoin, you pay me $2500 for the coffee.
    This needs to be challenged. $100 or $3000 transactions shouldn’t raise red flags.
    By their definition, buy/selling cars could me money transmitting.
    The other question I’d have is, were these face-2-face transaction, or purely on the internet? maybe thats the difference.

    • Robert, it is my understanding that they were face-to-face transactions with undercover agents. I think you are correct, however, that $100 to $3,000 transactions are current safe if only because the authorities seem either to go after high-profile traders or ones they stumble over. BTW, whether or not bitcoin is money in the meaning of the statute was challenged by Klein but unsuccessfully so. Thanks for the question.

  • tunaynaamo

    This story is very inspiring. I will make a decentralized exchange app which will eliminate that cancerous third party once and for all.

    • tunaynaamo…I hope very much you do so. It is badly needed.

    • Nathaniel Estrada

      Please do.

    • Darey Olushina

      Hollaaaa, this is the only thing that can result from them trying to kill bitcoin, only if they knew what they are fighting, there are millions of developers waiting to be given the clue of the next problem to be solved, so thanks to them each time they show us a vulnerability

    • why bother

      Tunaynaamo, I’m with you on this – I work on decentralization technology software for my voluntaryist reasons. It will be my full time effort once I turn 62 in four years!

    • Are you familiar with Bitsquare? There are also apps like Abra, Localbitcoins, and Mycelium LocalTrader that enable people to trade p2p.

  • William Wanklyn

    As with all laws, they break down eventually if people continue to ignore them. The only way to beat them is to ignore them and take the consequences should they come. Compliance is subservience. Be brave. Be bold.

    • Agreed. If even 5% of a population refuses to obey a law, then that law becomes unenforceable and cannot really be called a law anymore.

      • Fritz Knese

        Wendy, it takes a lot more than 5% noncompliance to laws. Look at drug laws for example. Lots more than 5% noncompliance, but the laws are still very meaningful for government uses them selectively to eliminate opponents! Small time druggies are busted thus protecting the big fish who are connected. Remember it was the CIA who started much of the drug use in the USA back in the 60s passing out LSD

        • William Wanklyn

          Drug laws are a great example. The pot laws are finally crumbling after 60-70 years.
          The harder drugs and opioids are still controlled because those at the top are in on the deal. CIA is probably close to self funding by now.

        • I have to agree with you, Fritz. The 5% figure came from the iconic 19th century libertarian Benjamin Tucker who is a hero of mine. Perhaps it was true in the 19th century because, perhaps, law enforcement then were not as willing to chain and kill mass quantities of the population for a trivial matter. Or, perhaps, it was never true. Good catch.

    • Fritz Knese

      It is easy to say the words. Damned tough to walk the walk. Nobody stands up when the punishments get draconian.

      • William Wanklyn

        You are right Fritz, it is very hard to buck the system, and very few actually do so. The French resistance was a very small number of people. Gandhi was alone much of the time.
        It is not true that nobody stands up when the punishments get draconian.

  • Darey Olushina

    Looking through comments here, so many people are missing the major point, the point is that bitcoin will become a standalone currency that can be used to get whatever you need, and then there will be no need of exchanging it for any currency, at that point it will look so ridiculous trying to change bitcoin to dollar, it will be same as trying go exchange dollar for cowries in order to trade, it will get to a time no one will need to buy bitcoin but rather yo earn them as salary or in forms of trade, let them do all they can as long as it last for them, they are i the last leg of their grip on peoples wealth

  • One of the reasons initiatives like Internet of Coins are slowly gaining a following. Decentralized, P2P opensource exchanges, freely distributed with standard protocols (like bittorrent did) are the only logical next step to ensure personal freedom. Built-in anonymization support is another, and not just in cryptocurrencies.

    • Thank you, Robert. I’m going to do some research tonight based on your post. Don’t be amazed if I quote you in a future column.

      • Always happy to help any journalist who understands the modern-day threats of digitalization, and is able to communicate them in a comprehensible way. Regarding the project; of course we’re not the only ones attempting to create a solution, but I believe we are the only initiative with an actual hardcoded non-profit approach, to prevent commercial motives from overshadowing development. (Our prime supporter is one of the Tor Project funding parties).

  • Fritz Knese

    Though in the short term a cryptographic system could work well, in the long run government will force folks to either give cryptographic keys or be shut down totally. Government will not allow free competition to its financial dominion. Make no mistake. Governments will kill freedom lovers rather than allow this to continue.

    • It is good to see your name in any forum I frequent, Fritz, and I am as cynical as you are about the state and its bloodthirsty nature. But I am more confident about the sheer power of bitcoin than you. I *do* get almost testy with people who dismiss any dangers by appealing to the ultimate utopia of bitcoin. (And no sarcasm infuses the word “utopia” because, compared to what’s the norm right now, that’s what bitcoin promises.) I still get testy, however, because that utopia will mean nothing to people who are unlucky or imprudent enough to become victims of the state and perish in prison, have their savings confiscated, etc. I have no doubt that bitcoin will prevail. I have no doubt that good people will be casualties of the state’s crusade to remain in control. One of the things bitcoin users had going for us is that the government didn’t have a clue of what it was. Those days may be ending. Take good care of yourself, Fritz. You’re not replaceable.

    • Darey Olushina

      Were they able to kill the internet ?

  • I am honored. I have followed your case and admired your fight. You are exactly the sort of hero the community needs…and, happily, there are a lot of pigheaded people in it when it comes to frivolities like freedom and fairness. I cannot tell you how much I wish you the best. And, if my voice means anything, then I urge people to support you and this cause. I am going to stop typing now because it is incompatible with applause. Oh, the conflict!

  • bill

    over time honest money (bitcoin) will support honest work. i think overall it will reduce criminality. just think through how insidiously destructive and nefarious fiat money is. it destroys manufacturing, it causes wars, it impoverishes people. all these things force people into criminal activity. in itself digital money is honest money and over time it will make for a better society and it will stop funneling wealth to the minority but instead it will spread wealth more evenly

    • Bill, crytocurrencies and their communities have made me feel optimistic about freedom again, and a large part of my reaction comes from the honesty of it all. We may disagree on what constitutes criminality — I’m for decriminalizing all drugs, for example — but the currency itself is honest to the core. There is no way to counterfeit a bitcoin or to write a bad bitcoin (as you can a check) etc…and its essence is so empowering to individuals.

  • Blake Lucas

    Government regulation is the only thing that could slow the progress of the cryptocurrency movement, and we know it will happen because many Governments are still run by the central banking cartel. The good news is that Silicon Valley is starting to take big bites of out Wall Street and a shift in power is already happening. Not to say that Zuckerberg and the new crop of tech billionaires are Saints, but they certainly look like Saints compared to the old money criminals of the central banking institutions.

    What gives me hope is that people like Bill Gates are in full support of this movement and they have the ability to take a stand against the forces that will inevitably push back on this change. For the rest of us, who don’t have unlimited resources to fight legal battles, we need to find ways to band together and support the boldest among us who are attacked like Mansy was here. Divided, the Government can attack individuals, one by one, the way a lion attacks a zebra that is separated from their heard. If we stick together and protect anyone that is being unfairly attacked by the Government, they will only fan the flames of progress.

    The other thing working in our favor right now is the state of global politics. Trump is making a fool of the American Government and will have little klout remaining if he tries to organize a unified effort from all countries to over-regulate cryptocurrencies. As long as the envelope continues to be pushed in the more progressive nations, the economic benefits will continue to prove out, and other nations will be incentivized to follow suit.