The founder of a prominent Bitcoin exchange company has been arrested and charged with running an illegal scheme to sell the digital currency to customers trafficking narcotics on the now-defunct drug website Silk Road, prosecutors said Monday.
Charlie Shrem, 24, chief executive of BitInstant, was arrested Sunday at John F. Kennedy International Airport in New York on charges of conspiring to commit money laundering and operating an unlicensed money transmitting business, prosecutors said. He is scheduled to appear in court on Monday.
Robert Faiella, an underground Bitcoin exchanger, faces the same charges for allegedly obtaining Bitcoins with help from Shrem's company and then selling the digital currency to users of Silk Road, which only accepts Bitcoin as payment.
“Robert Faiella and Charlie Shrem schemed to sell over $1 million in Bitcoins to criminals bent on trafficking narcotics on the dark web drug site, Silk Road," Manhattan U.S. Attorney Preet Bharara said Monday. "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.”
Shrem's company recently received $1.5 million in a funding round led by Winklevoss Capital. The venture capital firm is led by twin brothers Tyler and Cameron Winklevoss, who are famous for claiming that Mark Zuckerberg stole their idea for Facebook.
"Charlie has been in the space for a very long time, and he has an impeccable reputation among Bitcoiners," Cameron Winklevoss told TechCrunch at the time. "He knows everyone in the space and everyone in the space knows him."
In response to the allegations, the Winklevoss duo issued a statement saying they are "obviously deeply concerned" about Shrem's arrest and "fully support any and all governmental efforts to ensure that money laundering requirements are enforced." They added that while BitInstant wasn't part of the arrest, the company's management had committed to "abide by all applicable laws -- including money laundering laws."
Bitcoin has generated growing interest from investors and the media in recent months as its value has fluctuated wildly. A single Bitcoin is currently worth about $800. But the digital currency has also been used by many illegal underground websites because it is nearly impossible to trace.
In a BusinessWeek story last April with the headline "Meet the Bitcoin Millionaires," Shrem told the magazine he began buying Bitcoins in 2011 while still a senior at Brooklyn College. He started BitInstant, which serves as an online platform for exchanging cash for Bitcoins, with a $10,000 loan from his family, he told The Daily Dot.
Shrem is also vice chairman of the Bitcoin Foundation, an organization dedicated to promoting the digital currency, according to the foundation's website. “We are surprised and shocked by the news today. As a foundation, we take these allegations seriously and do not condone illegal activity,” said a spokesperson for the Bitcoin Foundation.
Shrem also owns a bar in Midtown Manhattan called Evr that last year became the first bar in New York City to accept Bitcoins.
"Bitcoin has grown so much now it’s scary," Shrem told The Daily Dot last April. "I used to have a hold over this thing, now there are people coming out of the woodwork.”
A story last year in TechCrunch said BitInstant had facilitated 30,000 Bitcoin transactions in a single month and become "a key player in the nascent Bitcoin market."
Under the nickname "BTCKing" Faiella sold Bitcoins to customers seeking to buy illegal drugs by filling their orders through BitInstant, prosecutors allege. Prosecutors say Shrem facilitated Faiella's business by allowing him to use BitInstant's services and allegedly even offering him discounts.
According to prosecutors, Shrem personally bought drugs on Silk Road and "was fully aware" that Silk Road was a drug-trafficking website.
In early October, federal authorities shut down Silk Road, which was considered one of the most popular places on the Internet for buying drugs and other illicit goods and services. They also charged Ross William Ulbricht, who they say was known as "Dread Pirate Roberts," with operating the site.
Shrem and Faiella face up to 20 years in prison on the charges of conspiring to commit money laundering, and up to five years in prison on the charges of operating an unlicensed money transmitting business.
Schrem has also been charged with failing to file a suspicious activity report with the Treasury Department about Faiella's activity, which carries a maximum sentence of five years in prison, prosecutors said.
This story has been updated with statements from the Winklevoss brothers and the Bitcoin Foundation.