On a hot Florida morning a week ago, a young Quebecker named Pascal Reid showed up at a boutique hotel in Miami’s Art Deco district, carrying a laptop and an electronic wallet that held $316,000 in digital currency.
Mr. Reid was expecting to meet a man who had purchased bitcoins from him before. The buyer was, in fact, an undercover agent for the U.S. Secret Service, which arrested Mr. Reid and charged him with money laundering.
The case has shone a spotlight on the way that virtual currencies such as bitcoin have been used for illicit purposes. The arrest is also significant because it targeted people using Localbitcoins.com, an online directory that is one of the last places where bitcoins can be traded anonymously, an expert said.
“Bitcoin may be pseudonymous, but actually buying and selling bitcoins anonymously is not easy,” Nicholas Weaver, a senior researcher at the University of California at Berkeley’s International Computer Science Institute, said in an e-mail interview.
He said there were past examples of criminals using Localbitcoins.com as a black-market venue. “Criminals have to buy their bitcoin using some anonymous method. Thus it is natural to expect law enforcement to continue to focus on anonymous transactions used to buy and sell significant quantities of bitcoin.”
In Canada, concerns about the illicit use of bitcoins are reflected in Tuesday’s federal budget, which stated that the government wants to bring in legislative amendments to regulate the “emerging risks” associated with online currencies such as bitcoin and prevent their use for terrorism or money laundering.
According to his arrest form, Mr. Reid was told by the undercover agent that the money used to buy his bitcoins came from credit-card data stolen in the highly publicized hacking of the Target retail chain. Mr. Reid also asked the agent about buying forged identification papers, the police document alleged.
“The use of bitcoins in the transactions is a new technological flourish to this very old crime. Today’s arrests may be the first state prosecutions involving the use of bitcoins in money-laundering operations,” the office of Miami-Dade State Attorney Katherine Fernandez Rundle said in a statement after the arrest.
Mr. Reid is a 29-year-old Montrealer who moved to Florida about 15 years ago, according to his mother.
The allegations against Mr. Reid have not been tested in court. His lawyer, Ron Lowy, said the authorities are trying to send a message to other bitcoin users by prosecuting his client, who has pleaded not guilty.
The investigation began in early December last year when Secret Service Special Agent Mark Kramer went on the Localbitcoins.com website, looking for sellers of bitcoins. He saw that someone calling himself Proy33 could be contacted “anytime” to meet in public places and trade bitcoins for cash.
According to the arrest form, the agent texted Proy33, saying, “I want to start with about 600.”
They met at a Starbucks, where Proy33 sold the bitcoins to Mr. Kramer, with a 20 per cent commission. Afterward, a surveillance team followed Proy33 to his Broward County home and identified him as Mr. Reid.
At a second meeting, Mr. Kramer bought nearly $1,000 in bitcoins and offered to sell stolen credit card data to Mr. Reid. The Quebecker declined but said he would “think about it,” the arrest form says.
By the end of January, the two men agreed to a $30,000 transaction and Mr. Reid said he would send Mr. Kramer four to six bank account numbers to break up the deal into smaller portions, the arrest form alleges. Mr. Reid also told the agent that he would be flying to Switzerland to meet with bankers about bitcoins.
Mr. Reid later texted that “there has been some crazy stuff happening with cash deposits with Chase and Bank America since Saturday” and that they would need to meet in person.
They agreed to a rendezvous last Thursday at a beachfront hotel, the Casa Grande Suite.
They met around 9:30 a.m. and Mr. Kramer told Mr. Reid that the money used in the previous two transactions came from credit-card data stolen in the Target hacking.
“Reid replied by stating that it would be good for the bitcoin community. Reid then redirected the conversation by asking if Kramer was able to obtain counterfeit Florida driver’s licences and other counterfeit documents, such as social security cards and passports,” the arrest form says.
The undercover officer mentioned the Target stolen credit-card data again and then showed a “flash roll” of $30,000 in $100 bills.
Mr. Reid inspected some of the cash, then, to prove that he was able to cover the deal, revealed that he had a wallet with 403 bitcoins, worth $316,000, the arrest form says.
Using a laptop, Mr. Reid completed the transaction, taking a $5,000 commission, the arrest form says. He was then arrested.
Less than two hours later, in the same hotel, in a similar investigation, investigators arrested Michell Abner Espinoza, a 30-year-old Peruvian who was approached on Localbitcoins.com in the same fashion as Mr. Reid.
Both men were each charged with two counts of money laundering and one count of operating an unlicensed money services business.
Mr. Reid is to return for a hearing in Miami-Dade criminal court on Feb. 27.
“He’s a good kid. Never been any problem before, never, never, never,” his mother, Chantal Desbois, said in an interview. “I don’t know what could have happened. I don’t understand.”
Mr. Lowy, Mr. Reid’s lawyer, described his client as a well-meaning “techno-geek” who is being scapegoated by authorities who are trying to send a message about the use of bitcoins.
“This is going to have a chilling effect on the public perception of bitcoins,” he said in an interview.Report Typo/Error