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

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Tags internetlegale-commerceInternet-based applications and servicesCriminalBitcoin FoundationBitInstant

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Zach Miners

IDG News Service
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