United States v. Harmon

Decision Date24 July 2020
Docket NumberCriminal Action No. 19-395 (BAH)
Citation474 F.Supp.3d 76
Parties UNITED STATES of America v. Larry Dean HARMON, Defendant.
CourtU.S. District Court — District of Columbia

Christopher Brodie Brown, U.S. Attorney's Office for the District of Columbia, Washington, DC, for United States of America.

MEMORANDUM OPINION

BERYL A. HOWELL, Chief Judge Defendant, Larry Dean Harmon, is charged in three counts related to his alleged operation of Helix, an underground tumbler for bitcoin, a form of virtual currency. See Indictment (Dec. 3, 2019) at ¶¶ 3, 8–9, ECF No. 1. As described in the indictment, Helix "enabled customers, for a fee, to send bitcoins to designated recipients in a manner which was designed to conceal and obfuscate the source or owner of the bitcoins." Id. ¶ 4. This service, which was located on the Darknet — a collection of hidden websites accessible only to anonymized users — was allegedly "advertised ... as a way to" mask drug, gun, or other illegal "transactions from law enforcement." Id. ¶ 5. Between 2014 and 2017, Helix was used to "exchange[ ] ... approximately 354,468 bitcoins — the equivalent of approximately $311 million in U.S. dollars." Id. ¶ 8. On December 3, 2019, a federal grand jury in the District of Columbia indicted defendant for conspiracy to launder monetary instruments, in violation of 18 U.S.C. § 1956(h), id. ¶¶ 14–16 (Count One); operating an unlicensed money transmitting business, in violation of 18 U.S.C. § 1960(a), id. ¶¶ 17–18 (Count Two); and engaging, without a license, in the business of money transmission, as defined in D.C. Code § 26-1001(10), in violation of the District of Columbia's Money Transmitters Act (MTA), D.C. Code § 26-1023(c), id. ¶¶ 19–20 (Count Three). Defendant has now moved to dismiss, for failure to state an offense, see FED. R. CRIM. P. 12(b)(3)(B)(v), both Counts Two and Three, see Def.’s Mot. to Dismiss, ECF No. 31; Def.’s Mem. Supp. Mot. to Dismiss ("Def.’s Mem."), ECF No. 31. The motion to dismiss raises two novel questions: Is bitcoin "money" for purposes of the District of Columbia's MTA? Was Helix, which operated as a bitcoin tumbler, an "unlicensed money transmitting business" under 18 U.S.C. § 1960(b)(1)(B) ? After examination of the relevant statutes, case law, and other sources, the Court concludes that bitcoin is money under the MTA and that Helix, as described in the indictment, was an "unlicensed money transmitting business" under applicable federal law. Accordingly, defendant's motion to dismiss Counts Two and Three is denied.

I. BACKGROUND

The facts and charges in the indictment are summarized below, after a brief review of the operation of bitcoin and the Darknet.

A. Technical Primer on Bitcoin and the Darknet

Brief primers on bitcoin and the Darknet are helpful to understand the charged activity that is the focus of defendant's pending motion to dismiss.

1. Bitcoin

"Bitcoin is a decentralized form of electronic or digital currency that exists only on the [i]nternet." United States v. Lord , 915 F.3d 1009, 1013 n.1 (5th Cir. 2019) ; see also United States v. Brown , 857 F.3d 334, 337 (6th Cir. 2017) (defining bitcoin as "a virtual, sovereign-free currency"); United States v. Costanzo , 956 F.3d 1088, 1091 (9th Cir. 2020) ("Bitcoin is an alternative currency that can be transferred electronically anywhere in the world with no bank and no government forms."); United States v. Gratkowski , No. 19-50492, 964 F.3d 307, 308–09, (5th Cir. June 30, 2020) ("Bitcoin is a type of virtual currency."). The term bitcoin refers to both a system and a unit. As a system, Bitcoin is a peer-to-peer network enabling proof and transfer of ownership — of units, or tokens, also called bitcoin — without involving a third-party such as a bank. See Eric D. Chason, How Bitcoin Functions As Property Law , 49 SETON HALL L. REV . 129, 139 (2018) ("[T]he Bitcoin system comprises both a protocol for transferring ownership and a set of records of all transactions."); THE LAW OF BITCOIN 30 (Stuart Hoegner ed., 2015).1 Conventionally, the Bitcoin network and its protocols are referred to with a capital B, while the units transmitted on the network are referred to with a lowercase b.

Transferring or otherwise using a bitcoin requires an address, a public encryption key, and a private encryption key. "Units of [b]itcoin are stored by reference to" the "address[ ]." Shawn S. Amuial, Josias N. Dewey & Jeffery R. Seul, The Blockchain: A Guide for Legal & Business Professionals § 1:3 (2016). The address, "similar to a bank account number, ... is a long string of letters and numbers." Gratkowski , 964 F.3d at 309, ; see also Chason, supra , at 141 (analogizing the address to a user name). Every address is associated with a public key. See Chason, supra , at 141. Every public key is derived from a private key. Importantly, private keys are secret, like passwords. See id. at 143 ("Private keys create public addresses, but public addresses do not reveal the associated private keys.").

To transfer bitcoin from one address to another, the sender transmits a message — called a transaction — on the Bitcoin public network, and that transaction is eventually recorded on a blockchain, a public ledger that records every bitcoin transaction. See Gratkowski , 964 F.3d at 309–10, ; THE LAW OF BITCOIN , supra , at 31.2 The transaction must contain: (1) the amount of bitcoin to be transferred; (2) the address to which the bitcoin will be sent; (3) the address from which the bitcoin is being sent; and (4) the public key associated with the sender and the sending address. See The Blockchain: A Guide for Legal & Business Professionals § 1:3; see also Chason, supra , at 147–48. With these elements in place, the sender must sign the transaction using a digital signature generated using the sender's private key. Id. ; see also THE LAW OF BITCOIN , supra , at 31. Once signed, the transaction is broadcast to the Bitcoin network.

The network then verifies the transaction by confirming that (1) the public key is associated with the address of the sender and (2) the digital signature was produced for this transaction using the sender's private key. See Chason, supra , at 150; THE LAW OF BITCOIN , supra , at 31. After the transaction is verified, the bitcoin being sent becomes associated with the recipient address and its attendant private and public keys. See The Blockchain: A Guide for Legal & Business Professionals § 1:3. The transaction is also recorded on the blockchain. Id. The recording process is a complex one that involves nodes on the network "bundl[ing] up transactions into blocks of aggregated transactions and append[ing] each block to the prior block." Id. The result of this process is that every node in the network "ha[s] a current, immutable history of all transactions ever logged on the blockchain." Id. ; see also Bitcoin 101: What is Bitcoin? , COINDESK (Jul. 6, 2020), http://coindesk.com/learn/bitcoin-101/what-is-bitcoin ("The network records each transaction onto these ledgers and then propagates them to all of the other ledgers on the network").

The Bitcoin blockchain records "only the sender's address, the receiver's address, and the amount of Bitcoin transferred." Gratkowski , 964 F.3d at 309, . "The owners of the addresses are anonymous on the Bitcoin blockchain, but it is possible to discover the owner of a Bitcoin address by analyzing the blockchain." Id. Analyzing the blockchain does not, however, allow for discovery of the private keys associated with those addresses. The Blockchain: A Guide for Legal & Business Professionals § 1:8 (discussing anonymity and the blockchain). Ownership of bitcoin is thus based on a user's possession or knowledge of the private key associated with a public key and address. See id. § 1:3; THE LAW OF BITCOIN , supra , at 31. Many users therefore store their private keys securely in a digital wallet, which "can take the form of software or hardware;" the physical, hardware devices are more secure because they "benefit from the added protection of not being connected to any network." The Blockchain: A Guide for Legal & Business Professionals § 1:9.

2. The Darknet

The Darknet is a collection of hidden websites "accessible only through anonymization software that obscures users’ internet protocol addresses" by "filter[ing] their traffic through" a network of relay computers called the Tor network. United States v. Le , 902 F.3d 104, 107 (2d Cir. 2018) ; see also United States v. Galarza , No. 18-mj-146 (RMM), 2019 WL 2028710, at *2 (D.D.C. May 8, 2019) (Howell, C.J.) (explaining that Tor-based websites "anonymize[ ] [i]nternet activity by routing user's communications through a global network of relay computers (or proxies), thus effectively masking the internet-protocol (‘IP’) address of the user" (internal quotation marks omitted)). According to the indictment, "[t]he Darknet includes a number of hidden websites that sell illegal goods, like guns and drugs, and services, like hacking and money laundering." Indictment ¶ 2.

B. The Indictment

The following facts are taken from the indictment, and are assumed to be true, as is required at the motion to dismiss stage. See United States v. Park , 938 F.3d 354, 358 (D.C. Cir. 2019).

Defendant began "own[ing] and operat[ing] a Darknet search engine called Grams" around April 2014. Indictment ¶ 2. As this description suggests, Grams allowed users to search the Darknet. Only a few months later, by July 2014, defendant had begun "own[ing] and operat[ing]" Helix. Id. ¶ 3. Helix was openly affiliated with Grams, "and the two services were sometimes referred to collectively as Grams-Helix." Id.

As already stated, customers used Helix "to send bitcoins to designated recipients in a manner which was designed to conceal and obfuscate the source or owner of the bitcoins." Id. "This type of service is commonly referred to as a bitcoin ‘mixer’ or ‘tumbler.’ " Id. These services are so-called because they "work by literally...

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