The case is now in the 9th Circuit Court of Appeals under case # 18-10291.
Thomas Costanzo and Peter Steimetz were arrested and their respective home searched.
This case was going to test the theory whether bitcoin is money un 18 U.S.C. 1960, however the US governement dropped those 2 charges against Peter and Thomas.
The judge granted the defence motion about dropping the charge of a felon in possession of ammunitions leaving Thomas with 5 counts of Money Laundering.
Both Thomas and Peter are Liberterian activists and leaving by the same code of conduct. Their story was reported by Donna and Ernest Hancock of Freedoms Phoenix.
Peter Steimetz was initialy defended by Brian Klein, chair of the Digital Currency & Ledger Defence Coalition. (same lawyer that defended Anthony Murgio and Burt Wagner) and Thomas Costanzo is being defended by the Phoenix Public Defendant Office.
Peter Steimetz strategy is outlined in Coincenter Blog titled Does 18 U.S.C. §1960 create felony liability for bitcoin businesses and Thomas Costanzo strategy is outlined in the Magistrate Judge Scott non binding document that bitcoin is not money or funds under section 1960 presented during US v. Petix in the Western District of New York.
Peter strategy was successfully used for incidental transactions whereas Thomas strategy is still being tested.
The two cases that can potentially answer that questions are US v. Stetkiw and US v.Rockcoons and maybe US v. Lord if he wins his appeal to change his plea. Since those first two cases are pending, the decision lies with Brad and Morgan.
On March 28, 2018, Thomas Costanzo was found guilty of 5 counts of Money Laundering under 18 U.S.C. § 1956(a)(3)(B) and not
guilty of Money Laudering under 18 U.S.C. § 1956(a)(3)(C).
The raw case documents:
18 U.S. Code § 1956 - Laundering of monetary instruments:
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Thomas Costanzo "Morpheus Titania" Bitcoin Trial (Please note that these notes convey only a portion of the trial and are written from one individual's perspective) Judge: G. Murray Snow March 20th, 2018 --- 1st Day --- Jury selection: -Juror 12 was dismissed because he stated that he couldn't put knowledge he already had of Bitcoin aside if someone testified something false about Bitcoin. -Before opening statements: -The prosecution asked the judge to address two men who were wearing t-shirts with the same words on them that were covered up, so the judge dismissed the jury. Then the judge asked one of the two men to show his t-shirt. It read: Google "Jury Nullification". The judge expressed disapproval for wearing these shirts in his courtroom. One of the men questioned the judge at the microphone, asking the judge if he expected that the shirts remain covered outside the courtroom. The judge recommended that they remain covered, but noted that his jurisdiction did not extend outside of the courtroom. The prosecution then asked the judge to impose sanctions on the two men, but the judge said he "did not want to threaten anyone." Opening by prosecution: -Stated that Morpheus charged with drug money, and that this is just like any other money laundering case. -Quote: "secretly converted dirty drug money into Bitcoin." Point of fact, the feds converted the FAKE dirty drug cash into Bitcoin, Morpheus merely converted Bitcoin into cash. -Noted that Mycelium breaks up Bitcoin sent into multiple different sends. -Claim that undercover agent T gave Morpheus an opportunity to back out of heroin money trade, but Morpheus didn't want to. -Claim that an actual drug dealer got caught and revealed Morpheus as Bitcoin trader. --- 2nd Day --- -Prosecutor calls first witness: Undercover agent KS -KS traded $2000 with Morpheus and said he wanted to do larger trades for his import/export business. -KS's audio recordings of conversations with Morpheus are very poorly recorded and only discernible in parts, yet a full transcript of what was supposedly being said is displayed to the jury. -At one point in the transcript, KS says: "You know that the money is from drugs, right?" Morpheus's response is: "I know nothing". KS testified that this response by Morpheus showed that he was "unphased" by the prospect of funding Bitcoin deals to be used for drugs. -KS testifies that conversation about heroin trading took place between himself and Morpheus, but whether or not the word "heroin" was mentioned, or even if a conversation took place about it is very debatable, as the audio is mostly background noise, with only faint hints of any conversation, most of which is completely indiscernible. -At one point in the audio, the audio transcript shows KS saying "The Bills are clean", to which Morpheus responds with: "that's all I care about." KS testifies on the stand that by saying the bills were "clean", he meant that the bills weren't counterfeit. However, there's nothing clearly stated in the recording or transcript to indicate that "clean" had such a meaning, and it could have just as easily been an indication to Morpheus that the bills were "clean" from drug deals. After all, most people who want to indicate that money is not counterfeit say "the money is real" or the money is not counterfeit", as the word "clean" doesn't convey authenticity/realness, but is instead a word used to contrast "dirty", for instance, "dirty drug money". (Unfortunately, the public defender did not raise this simple point on cross-examination). -KS testifies that Morpheus was very interested in his drug business, but nothing in the audio or transcript seem to convey this. In fact, at one point in the recording Morpheus states: "I don't want to know anything I don't need to know." -KS seemed to be on autopilot during the testimony, making everything seem as nefarious and evil as possible. At one point, this even causes him to slip up, when the prosecutor asks him: "is selling flowers illegal?" to which KS responds: "yes, selling flowers is very illegal," at which point the prosecutor urges him to rethink what he just said, and he corrects his statement. -KS regularly attended Phoenix area Bitcoin meetups. -Brought up the failed trade with Peter Steinmetz, in which he notes that Steinmetz is considered innocent of crime because he walked away from the trade as soon as drugs were mentioned. This a particularly interesting tactic, because the government did not consider Steinmetz innocent at all, and were attempting to charge him in this very same trial with these very same crimes, until the judge dismissed the charges. Cross-examination: -KS admitted that localbitcoins.com ad did not invite illegal deals. -KS notes that Morpheus's clothing, car, etc, were not flashy. -KS admitted that Morpheus did not have any interest in doing anything illegal during first $2000 trade. -KS notes that 2nd trade for $3000 was agreed to in advance of the trade, and that only during moments immediately preceding the trade, was any mention to drugs made. -KS notes that Morpheus informed him that he'd never done over a $20,000 trade. Prosecutor's 2nd witness: DEA Task Force Officer (name unknown) -Got search warrant served on Morpheus's apartment by Maricopa County SWAT Team. -Showed pictures from apartment of silver/gold coins and Bitcoin brochure. 3rd witness: JS -Works for USPS postal service but was DEA computer forensic examiner before that. -Used Cellebrite UFED Digital Analyzer to extract messages, pictures, and browser history from Morpheus's cell phone. --- 3rd Day --- 4th witness: TK -Undercover agent for the CIA -TK uses the word "product" in the recorded audio between himself and Morpheus, but when testifying about that "product" on the stand, claims he was actually referring to heroin. Cross-examination: -TK testified that he initiated the raise of the trade over $10,000 (the bank recording limit), and testified that this raise was not initiated by Morpheus. 5th witness: NS -ASU student who was caught dealing Ecstasy. -Entered into plea agreement to avoid 4-5 years in federal prison. -Didn't know that he would be testifying against Morpheus until after he signed the plea and cooperation agreements (both of which were signed at the same time). -Mentioned Morpheus to the government, they didn't bring up Morpheus's name to him. -Did not mention that he was buying drugs at first meeting with Morpheus. -Told Morpheus that drugs he'd try to buy had been seized. -Testified that Morpheus had asked if acquiring DMT was possible. -Acquired DMT for Morpheus 1-2 times. Morpheus might have given him cash or Bitcoin for the DMT, he didn't remember. -Testified that to Morpheus "he never explicitly said that" he was using the Bitcoin he bought from Morpheus to purchase drugs. Cross-examination: -Didn't tell Morpheus that friend who he sold drugs with was selling drugs. -Testified: "I never told him I was a drug dealer" -Testified: "I never told him I was selling pills" -In actuality, was facing 20 year x 35 international drug importations from out of the country. -Recognized that cooperating with the government provides "significant benefits". Redirect by government: -Tried to establish that the Bitcoin used to purchase the drugs originated with Morpheus, but NS could not establish that for them. 7th witness: SK -Attended Phoenix area Bitcoin meetup groups undercover --- 4th Day --- 8th witness: Special Agent JN for DEA -Surveillance of Morpheus Feb 2nd, 2017. Cross-examination: -Watched Morpheus travel to home of Peter Steinmetz after $30,000 BTC transaction with Det. M. -Not in possession of bag holding $30K after leaving Steinmetz's place. 9th witness: KL Special Agent DEA -Surveillance of Morpheus -Present during 4/20/17 arrest. 10th Witness: IRS Special agent E -Testified about CTRs ($10,000 reporting requirement), SARs, and why a drug dealer or money launderer would find Bitcoin attractive due to anonymous elements. -Showed image of Blockchain.info BTC transaction and explained sends. Cross-examination: -Equated BTC to gold and silver. -Testified that he knew of no laws congress has passed on Bitcoin. -Testified that peer-2-peer transactions are legal -Testified that localbitcoins.com legal and still running. -Testified that Bitcoin is not protected by FDIC and that the government does not protect against theft or loss. Judge asked gov. if there is any obligation for p2p trader to file reporting requirements? -Gov responded that no requirements exist, but that because Morpheus helped others avoid reporting requirements, he is guilty. -Judge was unsure of gov's reasoning. -Judge also wondered whether reporting requirements and penalties that apply to institutions can be used as a law to convict an individual conducting a p2p trade. -Judge denied defense's request to dismiss 3b money laundering charge. -Deferred ruling on dismissing 29c as it applies to institutions not individuals -Reporting requirements found in 18 USC 1956 a3c -Judge noted specified intent requirement is different in c then b. Closing arguments. Government: -Prior to meeting UC agents, Morpheus noted that whether or not people were buying drugs with Bitcoin was "none of [his] business", which the government presented to the jury as evidence that shows Morpheus was "predisposed" to launder drug money. -Told outright lies about what Morpheus said that was never presented in evidence such as the statement: "the defendant said: 'let's use Bitcoin so that you can hide your drug money.'" -Noted that Morpheus said "don't get shot", so because he expressed this desire, it shows that he must not have been engaging in legitimate business because the only people who worry about getting shot are those who deal drugs. -On the topic of entrapment: -Morpheus was not "induced" by the government to trade because the government offered "no reward". Apparently the government does not consider the thousands of dollars in cash they presented to Morpheus as a "reward." -Morpheus didn't make efforts to "get to know the families" of those he traded with, demonstrating that he was in it solely to do money laundering. By that logic, the McDonald's cashier is guilty because he's more interested in taking your money that getting to know your family. -One of the undercover agents mentioned that he was "dealing with a bunch of drug dealers", and from that Morpheus was supposed to infer that his undercover agent was implying that he himself was a drug dealer. -Played poor audio that was not discernible, but flashed the words "Heroin" in big red letters on a screen to the jury. In order to prove that Morpheus had an "intent to conceal or disguise the nature, location, source, ownership, or control of the property", the government brought up as evidence that Morpheus said he liked to keep a "low profile". Even though nothing about these two words "low profile" talks about "concealing" or "disguising", they were the only two words that the government could pull from 2 years of recorded audio to defend this claim. -"You need a fanny pack if you're a money launderer" words spoken while displaying a picture of Morpheus's fanny pack on the screen. -On another claim of being "predisposed" to launder money, the government used as evidence Morpheus's saying that he had exchanged $20 bills for $100 bills at a casino. Defense: -Gov was hunter hunting prey -Let real drug dealer and drug importer off the hook in unprecedented manner. -Defended drug war. -Morpheus was living in apartment with broken car. Painted him as loser who had never achieved "success". -Asked the question: "who will be next?" Defense never brought up: -Issue with institutional reporting requirements being applied to individual. -The terrible audio clips which were completely indiscernible. -The fact that drug dealer NS testified: "I never told [Morpheus] I was a drug dealer". -The outright lies made by the government, nor did they mention any of the outrageous claims made by the government (listed above). -The fact that a reward was offered to Morpheus to induce him to trade. -The fact that the "crime" was based on a fantasy story concocted by government story tellers. No victim. And much, much else.... Government rebuttal: -Still maintain no "reward" was offered to induce Morpheus and entrap him. -Admitted that government was dishonest, but noted that they weren't dishonest about everything. -Asked jury to rely on common sense. -Claimed that the only person profiting from NS's drug dealing was Morpheus. -Claimed that Morpheus had a "belief" that money used was drug money, unclear as to what evidence (if any) they're referring to. Government prosecutors: ended trial with smiles, laughs, and back pats – who cares about a totally nonviolent man who has harmed nobody spending years in prison when you've just advanced your career! Result: Jury convicted Morpheus on all 5 counts in an hour. All members were convinced of government's logic. Interviews: -One member of the jury interviewed said that although she has her own opinions about the drug war creating a better society, she didn't see how anything about this case related to the drug war. -Prosecuting lawyers fled when approached. -Undercover agents were surprisingly candid. Noted that they identified as Christians. Not against Bitcoin. Believe that what they are doing is creating a better world. Didn't want to talk about whether or not deceiving people for a living was moral or not. Noted that they are aware of things that citizens watching the trial aren't, and to trust that their convicting a nonviolent man of a fantasy crime that they concocted in their heads and acted out like they were actors on a movie set is ultimately creating a better society.