By Emily Flitter
NEW YORK Jan 27 The vice chairman of the
Bitcoin Foundation, a trade group promoting the adoption of the
digital currency, has been charged by U.S. prosecutors with
conspiring to commit money laundering by helping to funnel cash
to illicit online drugs bazaar Silk Road.
Charlie Shrem, who had financial backing from the Winklevoss
twins and is well known as one of the bitcoin's biggest global
promoters, was arrested on Sunday at John. F. Kennedy
International Airport in New York, the U.S. Attorney's Office in
Manhattan said on Monday.
Shrem, who was also charged with operating an unlicensed
money transmitting business, appeared in U.S. District Court in
Manhattan on Monday and was released on $1 million bond.
"At this point the allegations in the complaint are simply
allegations, and Mr. Shrem is presumed innocent," his lawyer
Keith Miller said.
The 24-year-old entrepreneur, who lives above a bar he
jointly owns in Manhattan that accepts bitcoins as payment, was
CEO of BitInstant, a bitcoin exchange company that closed last
summer. According to prosecutors, Shrem conspired with a Florida
resident, Robert Faiella, who ran an illegal exchange, to sell
more than $1 million in bitcoins to users of Silk Road, which
was shuttered by authorities last year.
Faiella, 52, is also charged in the complaint filed in U.S.
District Court in Manhattan with conspiring to commit money
laundering and operating an unlicensed money transmitting
business. He was arrested at his home in Coral Gables, Florida.
At his court hearing on Monday in federal court in Florida,
Faiella consented to detention until Wednesday, at which point
there will be a bail hearing.
Shrem could not be reached for comment. A person who
answered the phone at Faiella's house and declined to be
identified said, "Nobody wants to talk."
Bitcoin is a digital currency that is not backed by a
government or central bank and whose value fluctuates according
to demand by users. Users can transfer bitcoins to each other
over the Internet and store the currency in digital "wallets."
The criminal complaint says that Shrem, in addition to
knowing that Faiella's business was funneling money into Silk
Road, also used Silk Road himself to buy drugs, including
"When Bitcoins, like any traditional currency, are laundered
and used to fuel criminal activity, law enforcement has no
choice but to act," Preet Bharara, the U.S. attorney for
Manhattan, said in a statement emailed to the press on Monday.
"We will aggressively pursue those who would co-opt new forms of
currency for illicit purposes."
Bharara has said recently that prosecutors are not going
after Bitcoin itself and view it as they view any other currency
in which transactions are sometimes made illegally.
U.S. law enforcement officials have vowed to pursue any
criminal activity in the nascent Bitcoin world as regulators try
to formulate their approach to the digital currency.
The charging of a prominent Bitcoin Foundation official may
be a blow to Bitcoin's prospects, though it did not have a huge
immediate impact on trading. Bitcoins were exchanging hands at
$970 late on Monday, down from prices above $1,000 earlier this
month but up from around $150 four months ago on the Tokyo-based
Winklevoss Capital, which is run by twin brothers Cameron
and Tyler Winklevoss, invested in BitInstant in 2012 and led a
capital-raising effort last May that raised $1.5 million. The
twins, who are best known for their failed lawsuit against
Facebook founder Mark Zuckerberg in which they had claimed he
had stolen their idea for an online social networking platform
at Harvard, have been seeking regulatory approval for a bitcoin
"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," the Winkelvoss twins said in a
statement. "Although BitInstant is not named in today's
indictment of Charlie Shrem, we are obviously deeply concerned
about his arrest," they said. "We were passive investors in
BitInstant and will do everything we can to help law enforcement
As part of the conditions of his bail, Shrem will be
confined to his parents' home in the Marine Park section of
Brooklyn. A report prepared by the court for his bail hearing
listed his net worth at $6 million, according to U.S. Magistrate
Judge Henry Pitman. Serrin Turner, an assistant U.S. attorney,
opposed bail, saying Shrem had a "strong incentive to flee" and
the means to do so.
Bitcoin insiders said Shrem's arrest showed just how hard it
is to get away with illegal activity using Bitcoin, which has an
ownership chain built into its software so that each unit can be
tied to the users who have acquired or spent it.
"Using bitcoin for illicit transactions is really, really
dumb," said Patrick Murck, the Bitcoin Foundation's general
counsel. "Bitcoins are so easy to track."
"THE ART OF HIDING"
According to the charges, Faiella, going by "BTCKing"
online, sold bitcoins to Silk Road users and passed on purchase
orders he received from the site to Shrem, who filled them,
transferring funds to Faiella's account at an unidentified
bitcoin exchange service based in Japan.
The charging document says that Shrem failed to report
suspicious activity to regulators "with respect to numerous
Bitcoin purchases" Faiella made from BitInstant.
The document contains email conversations between Shrem and
BitInstant's co-founder, who is not identified in the charges
but is listed on BitInstant's website as Gareth Nelson, in which
Shrem tried to hide his dealings with Faiella by pretending to
ban him from BitInstant's exchange platform.
"You are hereby banned from our services," he wrote in an
email to BTCKing that he copied to Nelson.
According to the complaint, Shrem then privately wrote to
BTCKing, without including Nelson. "Your email address is
banned," Shrem wrote, "but you can use a different one."
Bitcoins have been gaining wider acceptance recently. The
Sacramento Kings basketball team earlier this month became the
first professional sports franchise to say it would allow
purchases using bitcoins. Last month, ecommerce site
Overstock.com announced its plan to become the first major U.S.
retailer to accept the digital currency.
Created in 2009 by a developer or team of developers going
by the name Satoshi Nakamoto, whose true identity remains
unknown, the bitcoin's earliest adopters have included people
expressing a desire to conduct their affairs in a realm outside
of government-sanctioned commercial spaces.
Some of that sentiment is visible in the charges against
Shrem and Faiella. In one online interaction, Shrem tried to
assure Faiella he was being discreet.
"The art of hiding is making people think you are someone
else," he wrote. Faiella replied: "You must understand that the
people that we pay taxes to have a long reach and I like to stay
away from that."