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Opinion: What did Jason Klein do wrong with bitcoin?

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Many were left in disbelief and confusion after Springfield Business Journal broke the news local entrepreneur Jason Klein pleaded guilty to a federal charge for selling bitcoin.

Klein is well known in the Springfield-area tech industry. His company Logic Forte took part in the Spin 66 Innovation Summit Pitch Pit and the Springfield Area Chamber of Commerce’s Go Big Pitch Competition. He’s 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.

The times that I’ve spoken with him, he’s been informative and pleasant. That sentiment appears to echo some comments in the community. I didn’t speak to Klein for this column, but more on that in a bit.

So, onto the burning question. What did he do wrong?

The answer is simple, yet veiled in complexity.

On May 2, Klein pleaded guilty to conducting an illegal money transmitting business by exchanging bitcoin for cash without a license. Bitcoin is a decentralized form of electronic currency, and because it’s used entirely online and largely without government intervention, it’s been attractive and rather controversial – on a global scale.

Facebook comments on SBJ’s breaking news post pointed to legal gray areas surrounding bitcoin. Some wondered why Klein’s activity was even a crime at all. Indeed, the news created quite a stir on the internet and in offices across town.

Reading through the court documents related to the case, it’s clear Klein’s biggest blunder was acting as what’s called an “exchanger” without a license. That bitcoin was involved appears to be secondary – court documents continually cite the fact Klein did not have a license. In fact, the law cited in the case was put into place well before bitcoin was even introduced.

Section 5330 of Title 31 in the Code of Laws of the United States of America states a person who owns or controls a money transmitting business must register said business with the federal government. The section defines a money transmitting business as one other than the U.S. Postal Service that “provides check cashing, currency exchange, or money transmitting or remittance services, or issues or redeems money orders, travelers’ checks and other similar instruments, or any other person who engages as a business in the transmission of funds.” The code was first published in 1994 and amended in 2001, according to the U.S. Government Publishing Office.

Bitcoin was introduced in 2008. Its creator, Satoshi Nakamoto, implemented it for use by others the next year.

The U.S. statute does not specifically mention bitcoin, and because it predates the electronic currency, federal agents and litigators have taken a bit of an on-the-fly approach to regulating it.

According to the Fordham Journal of Corporate & Financial Law, there’s been speculation in recent years as to whether bitcoin classifies as “money” or “funds” under the U.S. statute. Criminal investigations into unlicensed bitcoin operations appear to lean on such judgments as United States v. Faiella and Shrem, in which bitcoins were classified as funds. That order was made in 2014, before Klein committed the crimes he pled guilty to.

In his guilty plea, Klein admitted he represented himself on the internet as a bitcoin exchanger through LocalBitcoins.com. Working with another unnamed person, Klein met with two undercover federal agents on numerous occasions to exchange bitcoin for cash. Court documents cite five separate transactions in which Klein sold bitcoin for sums between $1,000 and $15,000, plus a 10 percent commission. Under federal statutes, Klein is subject to a sentence of up to five years in federal prison without parole, according to the office of Tom Larson, acting U.S. attorney for the Western District of Missouri.

Two Facebook comments in particular on SBJ’s post have stuck with me. Josh Willis received nine likes when he said “anyone, literally anyone” could have made this mistake. Another commentator, Chad Carleton, said Klein provided “a service without any illicit activity,” garnering seven likes.

The notion anyone could have engaged in this action is ludicrous. Not just anyone would even know how to go about exchanging bitcoin for cash. In Klein’s case, we’re talking about a person whose career is shaped by the technology industry. In that capacity, he would (or should) have read about the rules governing bitcoin operations. To put it bluntly, Klein should have known better.

As to whether his actions were unlawful, that’s hardly for any one person to decide. Though bitcoin is relatively new, and therefore so are laws regulating it, a precedent has been set through various court cases. Simply, it’s illegal to sell bitcoin like Klein did without a license. Granted, that precedent is still fresh, and it’s possible Klein got swept up in an enforcement crackdown. Don Ledford, spokesman for the U.S. attorney for the Western District, told me he doesn’t recall any other similar cases in our district.

I wanted to talk to Klein about why he did what he did, and whether he believed a crime warranting prison time was committed. Klein’s attorney, Mark Milton of Husch Blackwell LLP in St. Louis, issued a statement that left me wanting.

“Through his guilty plea, we believe Jason has accepted responsibility for his actions,” the statement reads. “At sentencing, we intend to ask the court for probation (no prison time). During this difficult time, Jason greatly appreciates all of the support he and his family have received from their friends in the Springfield business community. We have no further comment at this time.”

Stepping back a bit, I’d bet each of us believe certain laws are ridiculous, unnecessary or unwarranted. But unless those laws are changed, it’s still illegal for us to violate them.

For example, would you think twice when reading about a salesperson who sold insurance without a license? Doubtful, and I’d argue this situation is in the same camp. Certainly, federal officials think it is.

Regardless of whether you personally believe federal and state licenses should be required for certain activities, those rules exist. Violators must suffer the consequences. Klein is no exception.

SBJ Web Producer Geoff Pickle can be reached at gpickle@sbj.net.


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