Teana Baker-Taylor spoke with Stephen Palley, partner at law firm Anderson Kill, about the recent decision by the U.S. 9th circuit of appeals in the Thomas Costanzo case. Costanzo in 2018 was convicted for selling bitcoin for USD to FBI agents posing as drug traffickers. He was sentenced to more than 40 months in federal prison for laundering money. Costanzo appealed, saying they didn’t prove the transaction was interstate commerce. He was convicted using the federal AML statute and in his appeal argued they didn’t prove the transaction was interstate commerce. Palley provided some insight, context and analysis.

(54:09) “Basically what happened is the agent…gave Costanzo $13,000 in cash. Costanzo transferred bitcoin to the agent, to his phone, is the way the court describes it. The next month, this happened again. And what Costanzo said, he was like look, there’s no interstate commerce nexus. This was peer-to-peer from one phone to another. So therefore you didn’t prove the interstate commerce nexus necessary to apply the statute. And the 9th circuit said look, it might have been what you call peer to peer, but you sent communication over the internet. And there’s a pretty well established law that says using the internet can create an interstate commerce nexus. And what’s more, we understand that this thing, bitcoin is, it’s recorded on a blockchain, which exists everywhere in the world. And to me, I didn’t think the analysis was that hard to get to if you’re familiar with…the case on jurisdiction. But it is really interesting in my mind to realize that in the court’s view…it took maybe a page or two pages to reach this conclusion — the court’s like nope, the very nature of a bitcoin transaction is that it implicates interstate commerce.”

Palley went on to explain that the 9th circuit court set a binding precedent in its decision that using bitcoin for a transaction is enough to trigger federal jurisdiction. He doesn’t think it will have much of an impact on financial services in and of itself, however, saying:

1:00:57: “I want to give you an explosive, ‘this will change the world,’ conclusion. I’m not sure that it does. I think..it’s another brick in a wall of jurisprudence about what this stuff is and what the transactions are. And a court is saying, these transactions appear to happen in interstate commerce. So that would mean that my, I suppose my business transaction with somebody within my state where I use bitcoin arguably implicates or creates a nexus to federal law even though neither of us have left the state simply by use of bitcoin.”

Palley warns that the crypto community can’t set their own interpretation of the law.

(1:02:18) “New technologies come along and people say, oh everything is different, the world has changed. Laws don’t apply. And this is just an example of how that’s not true. The court looks at it and they’re like, ‘walks like a duck, sounds like a duck. I guess it’s a duck.’ Right? We can always find a way to place things into existing categories.”

Palley ended with saying whether this is something someone should spend three years in prison for, he’s not so sure. (1:03:14)

Teana Baker-Taylor spoke with Stephen Palley, partner at law firm Anderson Kill, about the recent decision by the U.S. 9th circuit of appeals in the Thomas Costanzo case. Costanzo in 2018 was convicted for selling bitcoin for USD to FBI agents posing as drug traffickers. He was sentenced to more than 40 months in federal prison for laundering money. Costanzo appealed, saying they didn’t prove the transaction was interstate commerce. He was convicted using the federal AML statute and in his appeal argued they didn’t prove the transaction was interstate commerce. Palley provided some insight, context and analysis.

(54:09) “Basically what happened is the agent…gave Costanzo $13,000 in cash. Costanzo transferred bitcoin to the agent, to his phone, is the way the court describes it. The next month, this happened again. And what Costanzo said, he was like look, there’s no interstate commerce nexus. This was peer-to-peer from one phone to another. So therefore you didn’t prove the interstate commerce nexus necessary to apply the statute. And the 9th circuit said look, it might have been what you call peer to peer, but you sent communication over the internet. And there’s a pretty well established law that says using the internet can create an interstate commerce nexus. And what’s more, we understand that this thing, bitcoin is, it’s recorded on a blockchain, which exists everywhere in the world. And to me, I didn’t think the analysis was that hard to get to if you’re familiar with…the case on jurisdiction. But it is really interesting in my mind to realize that in the court’s view…it took maybe a page or two pages to reach this conclusion — the court’s like nope, the very nature of a bitcoin transaction is that it implicates interstate commerce.”

Palley went on to explain that the 9th circuit court set a binding precedent in its decision that using bitcoin for a transaction is enough to trigger federal jurisdiction. He doesn’t think it will have much of an impact on financial services in and of itself, however, saying:

1:00:57: “I want to give you an explosive, ‘this will change the world,’ conclusion. I’m not sure that it does. I think..it’s another brick in a wall of jurisprudence about what this stuff is and what the transactions are. And a court is saying, these transactions appear to happen in interstate commerce. So that would mean that my, I suppose my business transaction with somebody within my state where I use bitcoin arguably implicates or creates a nexus to federal law even though neither of us have left the state simply by use of bitcoin.”

Palley warns that the crypto community can’t set their own interpretation of the law.

(1:02:18) “New technologies come along and people say, oh everything is different, the world has changed. Laws don’t apply. And this is just an example of how that’s not true. The court looks at it and they’re like, ‘walks like a duck, sounds like a duck. I guess it’s a duck.’ Right? We can always find a way to place things into existing categories.”

Palley ended with saying whether this is something someone should spend three years in prison for, he’s not so sure. (1:03:14)