Executives at Bitcoin startup face money-laundering charges

Two defendants were charged with using Bitcoin to facilitate illegal drug sales

Two operators of BitInstant, an online Bitcoin exchange business, were arrested for money laundering tied to the sale of illegal drugs using Bitcoin, facing 25 years or longer in prison, the Manhattan U.S. attorney said Monday.

Charlie Shrem, CEO at BitInstant, and Robert Faiella, the site's compliance officer, were charged with scheming to sell more than $US1 million worth of bitcoins to users of "Silk Road," an online black market designed to facilitate the sale of items like drugs and guns anonymously.

The two knowingly contributed to facilitating the drug sales on Silk Road, earning substantial profits along the way, according to a statement released Monday by the U.S. Attorney's Office for the Southern District of New York.

Between 2011 and 2013, Faiella ran an underground Bitcoin exchange on the Silk Road site, operating under the pseudonym "BTCKing," the U.S. attorney said. Faiella sold bitcoins to users seeking to buy illegal drugs on the site, the U.S. attorney said, and the orders were filled through a company based in New York.

In its announcement, the U.S. attorney's office did not specifically name New York-based BitInstant.

Meanwhile, Shrem bought his own drugs on Silk Road, the U.S. attorney said, and knowingly assisted Faiella's efforts "as a lucrative source of company revenue," the office said.

Shrem and Faiella were both charged with conspiring to commit money laundering and operating an unlicensed money transmitting business, each carrying a maximum sentence of 25 years in prison, according to the U.S. attorney. Shrem was also charged with one count of willful failure to file a suspicious activity report, which carries a maximum sentence of five years in prison.

Shrem is expected to appear in Manhattan federal court Monday; Faiella is expected in federal court in the middle district of Florida.

Keith Miller, the attorney for Shrem at Perkins Coie, could not be immediately reached for comment. Russell Rosenthal, the federal public defender who represents Faiella, declined to comment, other than to say that a detention hearing would be held Wednesday to determine whether Faiella could be released on bond.

"As alleged, Robert Faiella and Charlie Shrem schemed to sell over $1 million in Bitcoins to criminals bent on trafficking narcotics on the dark web site, Silk Road," said Manhattan U.S. attorney Preet Bharara, in a statement. "We will aggressively pursue those who would coopt new forms of currency for illicit purposes," he said.

The original version of the Silk Road site was shut down by the U.S. Federal Bureau of Investigation this past October, though it later relaunched as "Silk Road 2.0."

Because Bitcoin is designed to facilitate anonymous payments, it has been criticized for helping people to buy and sell illegal drugs for some time now. But with the recent growth of Bitcoin startups like BitInstant, Coinbase and BitPay, more venture capitalists have taken an interest, helping to give the technology an air of legitimacy.

The latest arrests, however, could rekindle some of those questions over the currency's ability to facilitate illegal activity. This week New York financial regulators are likely to mull these concerns during a public hearing on virtual currencies.

BitInstant has a bit of a celebrity pedigree -- its investors include venture capitalists Cameron and Tyler Winklevoss, who engaged in legal battle with Mark Zuckerberg, claiming he stole their social networking idea, called ConnectU, to create Facebook. Their venture arm, Winklevoss Capital, previously made a $1.5 million investment in BitInstant.

In a statement Monday, the Winklevosses called themselves passive investors in BitInstant who "will do everything we can to help law enforcement officials."

"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," they said.

"We fully support any and all governmental efforts to ensure that money laundering requirements are enforced," they said, "and look forward to clearer regulation being implemented on the purchase and sale of bitcoins."

Zach Miners covers social networking, search and general technology news for IDG News Service. Follow Zach on Twitter at @zachminers. Zach's e-mail address is zach_miners@idg.com

Join the Good Gear Guide newsletter!

Error: Please check your email address.

Tags CriminalInternet-based applications and servicese-commerceBitcoin FoundationlegalinternetBitInstant

Our Back to Business guide highlights the best products for you to boost your productivity at home, on the road, at the office, or in the classroom.

Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Zach Miners

IDG News Service
Show Comments

Essentials

Lexar® JumpDrive® S57 USB 3.0 flash drive

Learn more >

Microsoft L5V-00027 Sculpt Ergonomic Keyboard Desktop

Learn more >

Mobile

Lexar® JumpDrive® S45 USB 3.0 flash drive 

Learn more >

Exec

Audio-Technica ATH-ANC70 Noise Cancelling Headphones

Learn more >

Lexar® Professional 1800x microSDHC™/microSDXC™ UHS-II cards 

Learn more >

HD Pan/Tilt Wi-Fi Camera with Night Vision NC450

Learn more >

Lexar® JumpDrive® C20c USB Type-C flash drive 

Learn more >

Budget

Back To Business Guide

Click for more ›

Most Popular Reviews

Latest News Articles

Resources

PCW Evaluation Team

Azadeh Williams

HP OfficeJet Pro 8730

A smarter way to print for busy small business owners, combining speedy printing with scanning and copying, making it easier to produce high quality documents and images at a touch of a button.

Andrew Grant

HP OfficeJet Pro 8730

I've had a multifunction printer in the office going on 10 years now. It was a neat bit of kit back in the day -- print, copy, scan, fax -- when printing over WiFi felt a bit like magic. It’s seen better days though and an upgrade’s well overdue. This HP OfficeJet Pro 8730 looks like it ticks all the same boxes: print, copy, scan, and fax. (Really? Does anyone fax anything any more? I guess it's good to know the facility’s there, just in case.) Printing over WiFi is more-or- less standard these days.

Ed Dawson

HP OfficeJet Pro 8730

As a freelance writer who is always on the go, I like my technology to be both efficient and effective so I can do my job well. The HP OfficeJet Pro 8730 Inkjet Printer ticks all the boxes in terms of form factor, performance and user interface.

Michael Hargreaves

Windows 10 for Business / Dell XPS 13

I’d happily recommend this touchscreen laptop and Windows 10 as a great way to get serious work done at a desk or on the road.

Aysha Strobbe

Windows 10 / HP Spectre x360

Ultimately, I think the Windows 10 environment is excellent for me as it caters for so many different uses. The inclusion of the Xbox app is also great for when you need some downtime too!

Mark Escubio

Windows 10 / Lenovo Yoga 910

For me, the Xbox Play Anywhere is a great new feature as it allows you to play your current Xbox games with higher resolutions and better graphics without forking out extra cash for another copy. Although available titles are still scarce, but I’m sure it will grow in time.

Featured Content

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?