Federal prosecutors filed a motion last week to dismiss charges of illegal bitcoin trading against Tempe brain scientist and gun-rights activist Peter Steinmetz.
A judge is expected to approve the motion soon, which will have the effect of dropping the case and most of the forfeiture proceedings against Steinmetz, according to his lawyer, Lee Stein.
Prosecutors filed the motion a few weeks after Stein introduced evidence that showed Steinmetz had repeatedly told an undercover agent that he wasn't interested in doing anything illegal.
"So, you'd be okay if you know the product is heroin?" — IRS undercover agent to bitcoin seller Peter Steinmetz in March 2016.
According to a transcript of a meeting between between Steinmetz and the agent posing as a Russian buyer, the negotiation went like this:
"So, you'd be okay if you know the product is heroin?" the agent asked Steinmetz.
"Uh, no, absolutely not," Steinmetz told him. "In fact, we can't even discuss this any further."
"Yeah, sorry," Steinmetz said. "We can't do any more deals together."
The evidence prompted the Arizona U.S. Attorney's Office to have the two counts against Steinmetz dismissed "without prejudice," meaning that a case could be refiled if new evidence comes up.
"The government intends to continue its investigation into Dr. Steinmetz' bitcoin activities following a dismissal of the pending charges, and will make a determination as to whether to refile after discussing the matter with counsel for Dr. Steinmetz," prosecutors stated in their November 13 motion.
"The case can come back," Stein acknowledged. "We're hopeful it won't."
Steinmetz became a poster child for heavy-handed bitcoin enforcement in June, when he and Mesa resident Thomas Costanzo, a.k.a. Morpheus Titania, were each charged with one count of conspiracy to operate an illegal money-transmitting business and another count of managing a digital currency exchange business without a state or federal license.
Bitcoin, a cybercurrency that some see as the future of money, has gained massively in investor interest this year, resulting in a roller-coaster ride that has seen values go from about $1,000 per bitcoin to its current price this week of more than $8,000. (Like business stock or the price of gold, the dollar value of bitcoins fluctuate depending on how much people are willing to pay.)
Bitcoin traders often utilize online exchanges like Coinbase.com or LocalBitcoins.com. Buying and selling between individuals has been more problematic, with several people arrested this year on suspicion of money laundering or failing to follow state and federal financial rules.
The government's new motion to dismiss the counts would leave Costanzo, whose Mesa apartment was raided in April, with six remaining counts related to his alleged attempt to conceal $150,000 he made in financial transactions and illegal possession of 60 rounds of ammunition. Costanzo was previously convicted of felony marijuana possession so he isn't allowed to own guns or ammunition.
Assuming the motion is approved, Steinmetz, who lives with his wife and teenage son, would be off the hook, for now. The government's motion to dismiss states that forfeiture proceedings against his Tempe home will cease, and he'll get back $103,033 in U.S. currency, three bitcoin accounts, about 70 bitcoins, and "assorted firearms" that were seized in June.
Steinmetz's interest in guns brought him to the public's attention in July 2014 when he brought an AR-15 to Phoenix Sky Harbor International Airport. He was arrested after the rifle's muzzle briefly was pointed at a woman and her daughter, who complained to police. That November, Maricopa County Attorney Bill Montgomery cut a deal with Steinmetz that avoided prosecution.
Throughout the ordeal, Steinmetz maintained that he took his rifle to the airport as a one-man, pro-gun-rights demonstration. He's protested the Transportation Security Administration twice at the airport since then, though without displaying any firearms.
After the airport gun incident, though, Barrow wiped the scientist from its website; he later resigned and founded his own brain-science research institute, which he apparently runs out of his home.
"Dr. Steinmetz's interest in bitcoin and his willingness to engage in the one-to-one trades of bitcoin caused him to become a target of the undercover investigation that resulted in the indictment in this case," Stein wrote on behalf of Steinmetz in an October 27 motion.
In March 2015, Steinmetz met a "Russian" man he knew only as Sergei at a local pizza joint, where they discussed a possible bitcoin deal over pepperoni slices and soft drinks. The motion doesn't state how the two met, but Sergei was actually an Internal Revenue Service agent. Transcripts of their conversations, which were recorded by the IRS agent, were entered into the court as exhibits to the October motion.
Steinmetz told Sergei that he bitcoins to sell, if Sergei had cash. He usually dealt only in "larger volume" deals for "thousand of dollars at a time," and received a 5 percent fee from the sales, he told the man. Buyers connect online, then go to meetups where multiple people might bid on the coins, he explained.
After Steinmetz told Sergei he dabbled in bitcoins for investment and "political" purposes, the undercover agent replied that his interest was purely "financial," and that he hoped to avoid government scrutiny.
The agent mentioned that maybe he could deposit money in small chunks to avoid bank reporting requirements. Steinmetz told him that would make him "guilty of the federal crime of structuring your deposits," adding that, "I just try to keep all my stuff legal."
Steinmetz then told the man he wasn't sure he could do the bitcoin deal "if you tell me outright that what you're doing is illegal."
The man said he didn't bring any money, and no deal came out of the meeting.
Almost exactly a year later, Sergei visited Steinmetz at his Tempe home. This time, the pretend Russian buyer brought $22,000 in cash and said he planned to do a lot of business with Steinmetz. He said his friends had found a way to move "product," but needed a plan to "deal with the money."
That's when the conversation took place where Steinmetz clearly told the bogus buyer he wasn't going to deal with him.
The libertarian scientist insisted that he had philosophical problems with the laws against heroin and other drugs, but that, as a doctor, he also realized that people getting into heroin was "terrible."
"But my objection here is that I cannot do any deals which involve an illegal activity," he went on. "Just because of federal money-laundering laws."
The undercover agent complained that Morpheus [Costanzo] had been able to help him out a little, but that Morpheus was "not very reliable," especially when dealing with large sums of money.
Steinmetz repeated that he had no interest in a deal with Sergei. The undercover agent pressed on, telling Steinmetz that he'd be paid a "higher commission" because of the risk, the transcripts show.
The scientist refused to be bought off, adding that drugs were "crap," though admitting he was "tempted."
The two men talked further, however, and Steinmetz mentioned the names of a couple of people he thought might deal with Sergei.
"If there's anything else I can help you with, where it's connected to only legalized business, (laughter), it has to be only, only strictly above board," Steinmetz told Sergei. "And that's just because I have a family, a house, a career, things like that."
Stein also filed a transcript of an April 2017 meeting between the agent and Costanzo, in which the two discussed the supposed source of Sergei's money. Costanzo told Sergei that Steinmetz would exit any deal that involved illegal drug proceeds.
Stein noted in his October motion to dismiss the case that the government didn't end the case after Steinmetz "directly rebuffed" the undercover agent's offers.
"Rather, the government adopted, as a tactic of its investigation, a practice of agreeing with Costanzo to lie to Dr. Steinmetz and keeping from him any suggestion that the money was provided to Costanzo was from an illegal source," the motion states.
While it's true that Steinmetz occasionally participated in one-to-one sales of bitcoin, the motion states, he did so with the understanding that he didn't need a license if it was done for his own investment purposes. Stein's motion acknowledges that the indictment asserts that Steinmetz should have had a license for any such deals. However, at the same time, the indictment fails to specify any transaction he made, making it impossible to defend himself, Stein wrote.
Stein told New Times that the government won't be returning the voluminous records it seized from Steinmetz anytime soon. Investigators will continue to probe the records and may determine that Steinmetz should be charged again. In the meantime, Steinmetz — who, unlike Costanzo, has remained free since the indictment — will try to get his life back to normal.
"He's done everything he could to comply with the law," Stein said. "We think he hasn't committed any crime."
UPDATE: On Wednesday, November 22, Arizona U.S. District Judge G. Murray Snow dismissed the charges against Steinmetz.