When the U.S Treasury Department declared in March 2013 that exchangers and administrators of virtual currencies like Bitcoin were "money service businesses" subject to regulation under the Bank Secrecy Act, Reason's Brian Doherty issued a prescient warning.

"What the government cannot stop (and ought not try to stop) it can still interfere with, and ruin lives in the process," he wrote that May. "Those who think it necessary that Bitcoin be regulated, even if they want to be in on making the regulations as sane and harmless as possible, need to remember that every regulation has a punishment attached for violating it."

On Friday, the Treasury's Financial Crimes Enforcement Network charged Phoenix-area neurologist Peter Steinmetz with operating an unlicensed bitcoin exchange.

FinCEN alleges that Steinmetz, along with co-defendant Thomas Costanzo, "enabled their customers to exchange cash for 'virtual currencies' charging a fee for their service" without a federal or state money transmitting license in violation of the Bank Secrecy Act.

Costanzo, whose internet alias is Morpheus Titania, established a localbitcoins.com account to conduct in-person exchanges of cash for bitcoin a month after FinCEN made such exchanges without a money transmitters license a crime, according to the indictment.

While Steinmetz and Costanzo's business failed to attract federal attention for several years, Steinmetz had received $10,000 in Bitcoin funding from an anonymous donor to continue his work researching memory for the Arizona-based Barrow Neurological Institute (BNI).

"It's almost appropriate actually, that a cutting-edge method of funding is used to fund cutting-edge research," he told the Arizona Republic at the time of the donation.

A month later security arrested Steinmetz for carrying a loaded AR-15 into the Phoenix Sky Harbor airport as a protest against the TSA. BNI cut ties with him soon after.

Undercover federal agents in 2015 initiated a series of transactions with Costanzo, paying him roughly $160,000 in cash in exchange for bitcoin over two years. Agents arrested Costanzo on April 20 and got an indictment issued for Steinmetz two months later.

The indictment does not make clear what role Steinmetz played in the bitcoin-for-cash business.

Several men have already been convicted of similar offenses. In April, a New York man pleaded guilty to operating an unlicensed money transmitting business after an undercover federal agent paid him $37,000 for 37 Bitcoins. In May, Missouri tech entrepreneur Jason Klein pleaded guilty to the same crime after making several in-person cash-for-bitcoin transfers with an undercover federal agent.

There has been some legal pushback to these prosecutions.

In 2016, Florida State Circuit Judge Teresa Pooler dismissed state-level charges against Michell Espinoza for selling $1,500 worth of bitcoin to an undercover cop he met via localbitcoins.com, ruling that bitcoin did not count as a "payment instrument" under Florida law.

"Attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole," Pooler wrote at the time.

Pooler's interpretation of a Florida statute is unlikely to help Steinmetz.

Making the square bitcoin peg fit into the round financial regulation hole could mean as much as five years in prison for Steinmetz. An associated conspiracy charge could cost him even more.

If convicted, Steinmetz could join the "ruined lives" of which Doherty warned.

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Phoenix Neurologist is Charged With Selling Bitcoin Without a License - Reason (blog)