Bitcoin exchange operators charged with money laundering

Prosecutors say accused tried to sell $1 million in the digital currency to users of the black market website Silk Road

Among those charged on Monday was Charlie Shrem, vice president of the Bitcoin Foundation.
Jim Urquhart/ Reuters

Federal prosecutors charged a prominent advocate of the virtual currency known as Bitcoin with conspiracy to commit money laundering and other financial crimes on Monday, dealing a very public blow to a community still struggling to rid itself of its association with illegal and underground activities.

Prosecutors in the Southern District of New York alleged that Charlie Shrem, the chief executive officer of one of the earliest Bitcoin exchanges, BitInstant, had knowingly helped a private Bitcoin exchanger sell Bitcoins to users of the huge online black market known as Silk Road.

Silk Road allegedly allowed thousands of buyers and sellers to exchange drugs, guns and other illegal services using the Tor browser, a way to access a special network for sites sometimes called the “dark web.”

Federal authorities took down Silk Road and arrested its alleged creator, 29-year-old Ross William Ulbricht, in October after a two-year-long investigation led by a special, Baltimore-based task force codenamed Marco Polo. Prosecutors have since seemed intent on pursuing Silk Road’s many threads, and in recent months, a growing number of alleged drug buyers and sellers, along with former administrators of Silk Road, have been charged in federal court.

In a statement, U.S. Attorney Preet Bharara said that Shrem and his alleged partner, Robert Faiella, “schemed to sell over $1 million in Bitcoins to criminals bent on trafficking narcotics on the dark web drug site, Silk Road.”

“Truly innovative business models don’t need to resort to old-fashioned law-breaking, and when Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act,” he said.

Shrem, who is also the vice chairman of the most prominent Bitcoin advocacy organization, the Bitcoin Foundation, was arrested at New York's John F. Kennedy International Airport on Sunday, the statement said.

His arrest comes at a sensitive moment for the controversial currency, which was first proposed as a theoretical experiment by an anonymous computer engineer in 2008 and has since attracted hundreds of thousands of users, billions of dollars worth of exchanges, and intense scrutiny from regulators and law enforcement officials.

On Tuesday and Wednesday, the New York Department of Financial Services will hold public hearings on the regulation of virtual currencies, including Bitcoin. High-profile Silicon Valley venture capitalists Cameron and Tyler Winklevoss, who have emerged as Bitcoin evangelists and invested$1.5 million in BitInstant last year, are scheduled to appear, as are state and federal prosecutors from New York.

“Charlie has been in the space for a very long time, and he has an impeccable reputation among Bitcoiners. He knows everyone in the space and everyone in the space knows him,” Cameron Winklevoss toldTechCrunch last year.

New York and California are both drafting rules for virtual currencies that will play a large role in determining whether Bitcoin – advertised as a more frictionless method of exchanging funds with no middleman – can challenge established banks, credit card companies and online providers such as PayPal.

When bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act.

U.S. Attorney Preet Bharara

Southern District of New York

Jinyoung Englund, a spokeswoman for the Bitcoin Foundation, said members first found out about Shrem’s arrest on Monday and would “need some time to responsibly respond to the situation” in accordance with the board’s bylaws.

“We are surprised and shocked by the news today. As a foundation, we take these allegations seriously and do not condone illegal activity,” she said.

In the federal complaint, unsealed on Monday, Special Agent Gary Alford of the Internal Revenue Service alleged that Faiella, who went by the name BTCKing on Silk Road, took orders from Silk Road users to buy bitcoins from Shrem’s company, which allowed customers to exchange cash for bitcoins anonymously. Faiella then sold the bitcoins back to Silk Road users at a profit.

Shrem first noticed Faiella’s transactions in late December 2011 and within weeks knew Faiella was reselling the bitcoins on Silk Road, the complaint alleged. He emailed Faiella, copying his co-founder, to tell him he had been barred from making exchanges, but then privately contacted Faiella and told him that he could continue doing business secretly as long as he switched among multiple email addresses, the only form of identification BitInstant needed, according to the complaint.

“Let’s just ban the guy already,” Shrem’s unnamed co-founder wrote to him in late January 2012.

“Let’s focus on resolving this issue (then) worry about banning him. He brings us a lot of business and we won’t be able to ban him anyways, he can change all his details,” Shrem responded.

The complaint contains emails allegedly sent between Shrem and other associates discussing Silk Road and its illegal businesses. In one dated Feb. 1, 2012, Shrem wrote that he had just received a shipment of marijuana brownies from the site.

“Wow, Silk Road actually works,” he wrote, according to the complaint.

In March the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, instructed virtual currency exchangers like BitInstant to register as money-services businesses, requiring them to draft anti-money-laundering policies and report suspicious activity. Shrem, though he served as BitInstant’s anti-money-laundering compliance officer, allowed Faiella to move more than $1 million through the company using multiple email addresses and advised him on how to deposit cash in multiple bank branches to avoid scrutiny and never filed a suspicious-activity complaint to FinCEN, the complaint stated.

“If I were you, I’d spread it out over 2-3 branches to play it safe,” he advised Faiella, according to the complaint. “It should process fine, but better be safe (than) sorry. Feel me?”

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