Sunday, May 17, 2020

Case o' The Week: Needing Neo in the Ninth - Costanzo, bitcoin, and interstate commerce

  Morpheus versus the Agents, again.

  (Spoiler alert: not a happy ending, this time).
United States v. Costanzo, 956 F.3d 1088 (9th Cir. Apr. 17, 2020), decision available here.

Players: Decision by Judge Hawkins, joined by Judges Owens and Bennett. Hard-fought appeal by D. Arizona AFPD Dan Kaplan.  

Facts: Costanzo’s (a.k.a. “Morpheus Titania”) enthusiastic bitcoin sales drew the Feds’ attention. Id. at 1089. Over five meetings, undercover agents used cash to purchase over $100k in bitcoin. Id. at 1090. Agents explained the cash came from drug sales. Id. 
  Costanzo was charged with, among other things, money laundering and went to trial. Id. at 1091. At trial, the government presented evidence about the “verification process,” as bitcoin was transferred from Costanzo to the agents. Id. One such verification took place in Germany. Id. 
  The Court denied Costazno’s motion for acquittal, and he was convicted. Id.

Issue(s): “Appellant contends that the transfer did not have the requisite effect on interstate commerce, an element of each of the charged offenses.” Id. at 1089. (footnote omitted). 
  “Costanzo [argues] that the government failed to prove that the transactions affected interstate commerce in any way.” Id. at 1091.

Held:Because we conclude that the transfer in question, which involved the use of an Internet or cellular network connected Personal Computer Device (PCD) to transfer bitcoin (together with the digital code necessary to unlock the bitcoin) to the digital wallet of another Internet or cellular network connected PCD, had the necessary effect on interstate commerce, we affirm.” Id. (footnote omitted). “Here, the government presented evidence regarding Costanzo's business; his use of global platforms; and the transfer of bitcoin through a digital wallet, which by its nature invokes a wide and international network. Costanzo advertised his business through—a website based outside of the United States. He encouraged the undercover agents to download applications from the Apple Store or other similar platforms to facilitate their communications and transactions. He then utilized those applications to engage in encrypted communications with the agents to arrange the transfers. Then, in each transaction, Costanzo and the agent used those applications on their smartphones to transfer bitcoin from one digital wallet to another. Each transaction was complete only after it was verified on the blockchain. Viewing all of this evidence in the light most favorable to the government, we are satisfied that the evidence is sufficient for some trier of fact to find the ‘minimal’ interstate commerce nexus required under § 1956.” Id. at 1092-93.

Of Note: Constanzo’s co-D, Peter Steinmetz, was less blasé about the illegal origins of the cash. Like Constanzo, Steinmetz was charged with money laundering using bitcoin. Transcripts later revealed, however, that Steinmetz refused to sell bitcoin to an agent posing as a Russian heroin buyer. Steinmetz became “a poster child for heavy-handed bitcoin enforcement.” See article here
  New currencies: old law-enforcement problems.

How to Use: What is the standard of review, for the sufficiency of evidence for an interstate commerce element? Judge Hawkins uses de novo review, and asked whether “any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.” Id. at 1091-92 (emphasis in original). The government, however, argued that the proper standard of review was, “manifest injustice.” Id. at 1092 & n.3. The panel avoids the issue by explaining the result would be the same under either standard. Id.
  Beware, however, of the government’s more-onerous theory of review for future interstate commerce challenges.
For Further Reading: The federal Terminal Island and Lompoc facilities are now the subjects of new civil suits, brought by medically-vulnerable inmates facing the COVID-19 pandemic.

For a must-read brace of terrifying Complaints, by Bird Marella and the SoCal ACLU, see here.

Steven Kalar, Federal Public Defender, N.D. Cal. Website available at

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