Regulatory clarity: Roger Ver tax charges, CZ sentenced, Avi Eisenberg convicted and charged again, crypto mixers go down

By Amy Castor and David Gerard

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“There is always a weird solution to every crypto problem, complicated, Turing complete, and gives your money away to a third party.”

— lowmagnet

 

 

I’m Roger Ver, long-time bitcoin advocate and investor. Today I’m at the Roger Ver world headquarters in custody.

Roger Ver is a bitcoin old-timer. Back in the early days, he branded himself “Bitcoin Jesus” and evangelized bitcoin as hard as possible. He helped out the Mt. Gox exchange a lot when it had problems. [YouTube]

Unfortunately, Ver got a little fancy with his accounting. The DOJ has now charged him with evading $48 million in taxes. Ver messed around on his expatriation exit taxes, then didn’t pay capital gains taxes on bitcoins he had sold in 2017. He was arrested in Spain over the weekend. The US is currently seeking his extradition. [Press release; indictment, PDF]

The indictment is comedy gold. You need to read it. It’s the precise thing you would expect from a rich and successful libertarian who suddenly decides he knows more about tax laws than his own lawyers.

Ver founded Memory Dealers in 1999 — an e-commerce site that resold liquidated computer inventory from failed dotcoms. He also founded Agilestar, a similar business. He used both firms to invest heavily in bitcoin starting in April 2011.

Doing business as Bitcoinstore.com, Memory Dealers also accepted payment in BTC, starting in 2012. In the same year, Ver began making plans to renounce his US citizenship and thus no longer be liable for US taxes.

In February 2014, Ver became a citizen of St Kitts and Nevis — the only country he could find that would take him.

But expatriation has tax consequences! The Internal Revenue Code required property to be treated as having been sold for fair market value on the day before expatriation.

Ver’s lawyers warned him that this was a huge deal:

“… you are diving off the high dive into the pool without checking how much water is in the pool. Meaning — when you renounce you have committed yourself and whatever the tax results are, they are. No adjustments are possible.”

Ver failed to report the 131,000 BTC he owned — worth about $78.6 million in February 2014. Instead, he tried to play cat-and-mouse games with his own tax professionals:

A year later, when Law Firm 1 was preparing defendant VER’s expatriation-related tax returns, Return Preparer 1 e-mailed defendant VER on or about April 10, 2015, requesting additional information about defendant VER’s assets. Return Preparer 1 asked defendant VER how many bitcoins defendant VER owned and what he had paid for them. When he responded a few days later, defendant VER did not provide the requested information and instead discussed various aspects of the bitcoin market.

Ver apparently knew more about tax law than his own lawyers:

In August 2015, Lawyer 1 also asked defendant VER about his personal bitcoin holdings, specifically about how he had come to own bitcoins through bitcoinstore.com. Defendant VER responded that MemoryDealers “kept as many of the bitcoins as possible.” In response to Lawyer 1’s follow-up questions, defendant VER remarked that bitcoin wallets “were not registered to any name or associated with a tax id, and that no one, including the IRS, can freeze ones [sic] bitcoin accounts or seize ones [sic] bitcoins.” Defendant VER also asserted that all the bitcoins obtained from “MemoryDealers/Bitcoinstore were held in bitcoin wallets that only [he was] able to access.” Defendant VER stated that he believed a “smart tax strategy would be for [the bitcoins] to have been transferred to [his] personal ownership whenever it would have been cheapest to have done so from a tax perspective.”

Ver’s agents continued to press Ver on how many BTC he owned and the fair value of the bitcoins as of his expatriation date. He continued to supply them with non-answers:

Also on or about October 14, 2015, Return Preparer 1 e-mailed defendant VER and requested once again that he provide the total number of bitcoins he owned on February 4, 2014. Return Preparer 1 copied Lawyer 1 on the e-mail. Yet again, defendant VER did not tell them how many bitcoins he had. He instead asked, “[c]ompletely hypothetically speaking, what would the ramifications be if I were to have had 200,000 [bitcoins] at the time of my renunciation?”.

When Appraiser 1 (a large accounting firm) asked Ver how many BTC he owned in February 2014, Ver switched to Appraiser 2 (a solo operator):

While Law Firm 1 was preparing defendant VER’s expatriation-related tax returns, it reminded defendant VER of his need to obtain valuations of MemoryDealers and Agilestar. Instead of returning to Appraiser 1, who had already prepared draft valuations, in June 2015 defendant VER retained Appraiser 2 to start the process anew.

Lawyer 1 advised Ver to get an appraisal from a third party.

A week later, defendant VER asked Appraiser 2 if Appraiser 2 could provide a valuation for “an amount of Bitcoins as of Feb 4th 2014 in an illiquid market?”

In a follow-up e-mail, defendant VER asked if Appraiser 2 could assist, stating “I actually have all the information you need to make it super easy for you. I would just need to explain it all, and then you would affix your name to it.”

Ver will likely have another chance to “explain it all” — to a judge, who may have less patience for these games.

4 (months)

Binance founder Changpeng “CZ” Zhao was sentenced to four months behind bars by Judge Richard Jones of the Western District of Washington. Prosecutors wanted 36 months, the defense wanted no jail but just probation, and the probation officer recommended five months. [Bloomberg, archive]

Like many others, we were shocked at how short the sentence was. Elizabeth Lopatto of The Verge, who attended the hearing, suggests that CZ sang like a bird. “I was struck by repeated references to a sealed matter and significant emphasis on the word ‘cooperation.’’” [The Verge]

The defense’s sentencing memorandum has a long redacted section from pages 17 to 21 of the PDF that we would guess is about this. PDF page 29 talks about Binance helping US regulators with “other major high-risk entities” — that is, other than the entity that all the redacted details are about. Wonder which high-risk crypto entity that might be. [Doc 81, PDF]

David was quoted in Crypto News on the sentencing. [Crypto News]

What are you gonna do, jail me?

A Manhattan jury unanimously found Mango Markets exploiter Avi Eisenberg guilty of three counts of fraud and manipulation. Sentencing is scheduled for July 29. Eisenberg faces a maximum of 10 years on the commodities fraud and manipulation counts and 20 years on the wire fraud count. [Justice Department]

Eisenberg’s lawyer Brian Klein failed to impress the jury with his explanation of the technology behind the DeFi trades: “Somewhere in the thick of Klein’s explanation of smart contracts, a juror fell asleep.” [Axios, archive; Bloomberg, archive]

The government also added a charge of “possession of child pornography” in a court filing on April 3 — made public on April 26. FBI agents discovered the illegal porn on Eisenberg’s phone and laptop in January 2023 when he was taken into custody. This could add 10 years to Eisenberg’s sentence. [Charges, PDF]

Crackdown on mixers: Samourai Wallet busted

Until very recently, Samourai Wallet was a crypto mixer. Its co-founders Keonne Rodriguez and William Lonergan Hill are now behind bars. The DOJ has accused them of money laundering and operating an unlicensed money transmitter. [Press release; complaint, PDF]

Rodriguez was arrested in Pennsylvania and Hill was arrested in Portugal, where he is currently awaiting extradition to the US. Samourai Wallet’s servers and website were also seized on April 24.

Samourai Wallet had been in operation since 2015. The feds say it “facilitated more than $100 million in money laundering transactions from illegal dark web markets,” such as Silk Road and Hydra, and 80,000 BTC ($2 billion) in “unlawful transactions.”

Rodriguez and Hill blatantly (and stupidly) encouraged the illegal use of their service. At one point, they tweeted: “Welcome new Russian oligarch Samourai Wallet users.” [Twitter]

The rest of the wallets

The US has been coming down hard on crypto mixers, which are obvious money laundering machines. Bitzlato was busted in January 2023. Tornado Cash was blacklisted in August 2022, and its founders were arrested a year later.

Other crypto transmitters — mixers or not — are finally taking notice. zkSNACKs, the company behind Wasabi Wallet, is now blocking US users, “in light of recent announcements by U.S. authorities.” [Wasabi, archive]

Paris-based Acinq will block US users for its Phoenix Wallet, a self-hosting bitcoin wallet and personal Lightning Network node, starting May 3. “Recent announcements from US authorities cast a doubt on whether self-custodial wallet providers, Lightning service providers, or even Lightning nodes could be considered Money Services Businesses and be regulated as such.” [Twitter; Twitter]

The US authorities have been making these “recent” announcements for the past several years. FinCEN has been stating bluntly since 2019 that mixers are money transmitters and they need to register — because that was simply what the law already said.

But crypto is extremely accomplished at going “I didn’t hear that,” then acting surprised when they OFAC around and find out.

While these wallets are blocking users, that alone may not be enough. The services are still accessible with a VPN. The only way to fully block users is to do proper Know Your Customer — which they just won’t do. This leaves them open to future busts.

The searing light of regulatory clarity

Block is Jack Dorsey’s payments company, formerly known as Square — the provider of CashApp. A whistleblowing employee says that Block has been very sloppy with collecting KYC — and has ended up processing transactions, in both dollars and bitcoins, for sanctioned countries and for terrorists. Whoops. Two Block employees concur that the company’s compliance section is “led by people who should not be in charge of a regulated compliance program.” This comes after similar whistleblower reports in February 2024. The Southern District of New York is investigating. [NBC; NBC]

A Manhattan jury found Terraform Labs and its cofounder Do Kwon guilty of massive fraud on April 5, a little over a year after the SEC initially filed charges. The SEC is asking the court to order a $4.2 billion disgorgement, a $420 million civil penalty against Terraform Labs, and a $100 million civil penalty against Kwon. [Doc 231, PDF]

Senator Elizabeth Warren (D-MA) and Senator. Bill Cassidy (R-LA) sent a letter to the Department of Justice claiming that crypto is the payment of choice for child sexual abuse material and sexual exploitation. They want to know what steps Justice is taking to address this. [Letter, PDF]

Oh no, more Reggie Fowler news! (Like a single ting of a triangle half an hour after the symphony has finished.) The court ordered Bitfinex/Tether money mule Fowler to forfeit $740 million when he was sentenced a year ago. However, the government has only been able to recover $68 million so far. Where did all the money go? Bitfinex’ed thinks the money never existed and Bitfinex/Tether lied about it. [Order of forfeiture, PDF; Twitter]

Craig Wright has to put up another £1 million for bitcoin developers’ legal fees after his attempt to force them to reassign allegedly-hacked bitcoins to him failed. This comes on top of the £6 million that Wright already had to pay to Crypto Open Patent Alliance (COPA) for their legal fees in the case that ruled that he was not Satoshi Nakamoto. [Evening Standard]