Charlie Shrem, Bitcoin Foundation VP, Charged With Money Laundering for Silk Road

by looked like a potential game-changer, an innovation that could nudge bitcoin into mainstream use. When the service opened up shop in summer 2011, it offered to exchange cash for bitcoins within minutes, perhaps seconds–over the previous three years of the digital currency’s existence, cash exchanges took days, a risky proposition given bitcoin’s volatile market value. Bit Instant, which was co-founded in New York City by then-21-year-old Charlie Shrem, was “likely to encourage a new crop of casual traders and the bitcoin-curious,” the New York Observer speculated at the time. The prospects were promising enough for the Winklevoss twins to invest $1 million into the company. And Shrem, a high-profile Bitcoin advocate, went on to become vice president of the Bitcoin Foundation, the digital currency’s primary trade group.

But Bit Instant also found a more nefarious purpose, according to federal prosecutors. On Monday, Preet Bharara, U.S. Attorney for the Southern District of New York, announced that Shrem and a partner, 52-year-old Robert Faiella, laundered money for people intending to buy or sell drugs on Silk Road, the underground black market website that the FBI shut down in October.

“Truly innovative business models don’t need to resort to old-fashioned law-breaking,” Manhattan U.S. Attorney Preet Bharara said in a statement. “We will aggressively pursue those who would co-opt new forms of currency for illicit purposes.”

According to prosecutors, Faiella, under the username “BTCKing,” solicited his services as a bitcoin salesman on the Silk Road. Bitcoins were the only currency accepted on the site. Faiella then took those orders to BitInstant, the Feds say.

Shrem “knew that Faiella was operating a bitcoin exchange service for Silk Road users,” the U.S. Attorney’s Office said in a statement. “Nevertheless, Shrem knowingly facilitated Faiella’s business with the company in order to maintain Faiella’s business as a lucrative source of company revenue.”

Shrem personally processed the orders and provided discounts on Faiella’s “high-volume transaction,” prosecutors claim.

The two allegedly processed more than $1 million of bitcoin exchanges from August 2011 to July 2013, when Bit Instant stopped accepting cash payments. Faiella continued his bitcoin sales without Shrem up until Silk Road’s demise.

Shrem, who serves as the company’s C.E.O. and compliance officer, also faces charges of violating the Bank Secrecy Act by willfully failing to file any suspicious activity report about Faiella’s transactions.

“Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way,” James Hunt, the D.E.A. agent heading the investigation, said in a statement. “Drug law enforcement’s job is to investigate and identify those who abet the illicit drug trade at all levels of production and distribution including those lining their own pockets by feigning ignorance of any wrong doing and turning a blind eye.”

Tyler and Cameron Winklevoss released a statement on Monday:

When we invested in BitInstant in the fall of 2012, its management made a commitment to us that they would abide by all applicable laws — including money laundering laws — and we expected nothing less. Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest. We were passive investors in BitInstant and will do everything we can to help law enforcement officials. We fully support any and all governmental efforts to ensure that money laundering requirements are enforced, and look forward to clearer regulation being implemented on the purchase and sale of bitcoins.

Law enforcement arrested Shrem at JFK International Airport on Sunday. Faiella was arrested at his home in Florida. The most serious charge against them, conspiracy to commit money laundering, carries a maximum prison sentence of 20 years.