Arizona Outlaw Bitcoin Trader 'Morpheus Titiania' Sentenced to Prison

Thomas Mario Costanzo, known in the bitcoin world as "Morpheus Titania," was sentenced by a federal judge to 41 months in prison this week for conspiring to use the cryptocurrency to launder drug money.

Costanzo, 54, was found guilty by a federal jury on March 28 of money laundering in the case, which has attracted national attention by bitcoin enthusiasts. In a July 30 sentencing hearing, Arizona U.S. District Judge G. Murray Snow gave Costanzo credit for the 16 months he's served in jail since a federal task force raided his Mesa apartment in April 2017.

A prosecution sentencing memo paints Costanzo as a zealous, sometimes-violent, anti-government techie who loved using his skills to subvert the law.

Over two years, Costanzo earned money "by converting drug proceeds into bitcoin, in order to conceal or disguise the nature, location, source, ownership, or control of the drug money," the memo states. "He bragged that he had built a multi-million dollar business."

In a separate resolution of the case, the Arizona U.S. Attorney's Office announced on Wednesday, prosecutors have reached a deal to forfeit about $225,000 in bitcoins from a second man accused in the case: Peter Steinmetz, the Tempe brain scientist who made the news in July 2014 after being arrested for an incident in which he brought a loaded AR-15 he'd brought to Phoenix Sky Harbor International Airport and visitors complained it had been briefly pointed at them. He said he was conducting a gun-rights demonstration.

Steinmetz was indicted along with Costanzo in June 2017 on charges of operating an illegal money-transmitting business, and knowingly managing a digital currency exchange business without a proper state or federal license. (Costanzo faced additional charges.)

As Phoenix New Times detailed last year, Steinmetz's case fell apart, resulting in dismissed charges, after he and his lawyer presented evidence from undercover recordings showing that Steinmetz had balked at the idea of using bitcoin to knowingly aid any illegal acts.

The men have to give up about $600,000 in bitcoins in a forfeiture proceeding related to the case, Costanzo owned about 50 of 80.9 bitcoins seized in the case, worth an estimated $375,000 and Steinmetz had the other 30, worth about $225,000.

After the raid on Constanzo's home, some online case-watchers suspected Costanzo might have been a victim of heavy-handed government interference against bitcoin, the popular cryptocurrency that can be tough for law enforcement to trace when it's used in crimes. Costanzo's federal public defender, Jon Sands, argued in his own memo to the court that Costanzo would be getting unfair treatment unless sentenced to time served, because other people convicted of illegal bitcoin dealers had not received long prison sentences.

But the feds had damning evidence against Costanzo, who has numerous past convictions for crimes including assault, fleeing police, and resisting arrest.

Besides the financial and computer evidence, undercover agents posing as big-shot heroin and cocaine dealers collected audio recordings of black-market deals with Costanzo that reveal his full knowledge, if not pride, in what he was doing. Federal prosecutors describe Costanzo in court records as a government hater who "made it clear that he has no respect for laws, regulations, or any authority."

"He also bragged about his rules — don’t get shot, don’t get bit, and don’t talk to the police. He repeatedly cursed about the United States Government, and authority in general," records state.

He charged a 10 percent fee to exchange cash for bitcoins, and when the agents posing as heroin dealers asked him to confirm that he wouldn't talk about the "dirty money," Costanzo reportedly answered, "that's why you're paying me," and "it's part of my business model."

The feds say Costanzo understood how blockchain technology, a system of tracking computer changes with a unique code, doesn't require personal data like names or Social Security numbers when used to make bitcoin transactions. That made bitcoin the "perfect way to conceal and disguise" drug proceeds, he told the undercover agents.

The probe of Costanzo began after law enforcement officials saw an online ad he posted, offering cash transaction services of up to $50,000. He later provided the undercover agents with bitcoin, after they explained they needed to hide their illicit proceeds. He went out of his way to help them, records show, explaining to the agents that they should use a Trezor device, which is like an encrypted wallet for bitcoins, to store their virtual currency, allowing them take large amounts of money wherever in the world they traveled.

Evidence at trial also showed that "Costanzo used bitcoin to purchase drugs from others and that he provided bitcoin to individuals who were buying drugs via the internet," records state.

Steinmetz, as New Times detailed previously, was also approached by an IRS undercover agent, but when they told him they wanted to hide money from heroin sales, Steinmetz told the man, "Uh, no, absolutely not. In fact, we can't even discuss this any further."

A year later, he turned down another deal by the agent. However, authorities believe that Steinmetz had conducted other money-for-bitcoin transactions that didn't involve illegal activities, but for which he should have had a state or federal license.

In his deal with the government, Thursday's news release states, Steinmetz won't be prosecuted, but he's agreed to forfeit $54,000 in U.S. currency in addition to the 30.9 bitcoins.

"Dr. Steinmetz agrees that going forward, and for the next two years, he will only purchase or sell virtual currency on exchanges registered with the Financial Crimes Enforcement Network, also known as FinCEN," the release states.

"We're pleased that the government recognized that there was not a basis to prosecute Dr. Steinmetz," said Steinmetz's lawyer, Lee Stein. "We are also pleased that the government was willing to work with us to find a resolution that made sense under the circumstances. Dr. Steinmetz is looking forward to putting this matter behind him."

The case involved an alphabet soup of law enforcement agencies, the release notes. Taking part in the investigation under the U.S. Department of Justice’s Organized Crime Drug Enforcement Task Force were the IRS, the Drug Enforcement Administration, U.S. Immigration and Customs Enforcement Homeland Security Investigations, the Scottsdale Police Department. The Maricopa County Sheriff’s Office and the United States Postal Inspection Service also helped out.