The vice chairman of the Bitcoin Foundation was charged by federal prosecutors with conspiring to launder more than $1 million in the virtual currency, the latest charges tied to the illicit online bazaar Silk Road.
Charlie Shrem, 24, was arrested as he arrived at John F. Kennedy International Airport in New York on Jan. 26 after giving a speech in Amsterdam. In addition to his role with the foundation, an industry representative to regulators formed to oversee the currency’s software protocol, he was also chief executive officer of BitInstant, a Bitcoin exchange company.
By charging Shrem, a prominent evangelist for the currency who prosecutors called a “Bitcoin millionaire” at his bail hearing yesterday, the government has reached into the circle of people responsible for the promotion and standardization of the currency. Shrem denied the charges through his lawyer.
“Bitcoin is in the process of getting institutionalized,” said Gil Luria, an analyst at Wedbush Securities Inc. in Los Angeles. “Early on it was exploited by bad guys because it was still very raw and accessible,” he said. “As more investors and businesses get involved, it’s going to get harder and harder to use it for illicit purposes.”
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Shrem, of New York, was freed on $1 million bond, subject to his remaining under house arrest, after prosecutors said he was a flight risk because of his frequent international travels, his claim to have a net worth of $6 million and to own a plane.
Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority, and uses a public ledger to verify encrypted transactions. It has gained traction with merchants selling everything from Sacramento Kings basketball tickets to kitchen mixers on Overstock.com.
Cameron and Tyler Winklevoss, who are seeking regulatory approval for a Bitcoin exchange-traded fund, invested more than $1 million in BitInstant. The Winklevoss brothers aren’t under investigation in the case, a person familiar with the matter said.
In a statement yesterday, the Winklevoss brothers said BitInstant “made a commitment to us that they would abide by all applicable laws,” and that they were passive investors in the company. The brothers are scheduled to participate today in a panel as the New York Department of Financial Services begins an inquiry to determine how to regulate virtual currencies.
“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,” Manhattan U.S. Attorney Preet Bharara said yesterday in a statement. Bitcoin had dropped by 6.4 percent at 5:36 p.m. yesterday, according to the CoinDesk Bitcoin Price Index.
Shrem discovered Bitcoins on a website in early 2011, when he was a senior at Brooklyn College, Bloomberg Businessweek reported in April. While there, he started BitInstant, which allowed its customers to purchase the digital currency via more than 700,000 stores, including Wal-Mart Stores Inc. and Walgreen Co. (WAG:US)’s Duane Reade.
Another of BitInstant’s investors was Roger Ver, who ran for California State Assembly in 2000 as a Libertarian. Shrem called Ver “Bitcoin Jesus” for the way he promoted the currency by giving away coins to anyone who would take them.
Federal prosecutors first charged Ross William Ulbricht, the alleged operator of Silk Road who used the name “Dread Pirate Roberts,” last October for running the online marketplace from January 2011 to last September. In December, Bharara’s office charged three more former Silk Road employees with helping run the website. All of the defendants have pleaded not guilty in Manhattan federal court.
Also charged yesterday was Robert Faiella, accused of being an underground Bitcoin exchanger tied to Silk Road. The two men are accused of engaging in a scheme to sell Bitcoins to Silk Road users, allowing them to buy and sell illegal drugs anonymously and beyond the reach of law enforcement authorities.
They are charged with conspiring to commit money laundering and operating an unlicensed money-transmitting business. Shrem is also charged with willfully failing to file suspicious activity reports about Faiella’s transactions through his company, in violation of the Bank Secrecy Act.
Prosecutors said the men could face more than a decade in prison if convicted.
“Working together, Shrem and Faiella exchanged over $1 million in cash for Bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road,” Bharara said, adding that the probe is “ongoing.”
Shrem was aware Silk Road was being used to buy and sell illegal drugs and said in one e-mail that such sales funded “a decent percentage of the overall Bitcoin economy,” according to the complaint. “Wow, Silk Road actually works,” he said in another e-mail, explaining that he had received a shipment of marijuana brownies, prosecutors said.
Shrem, whose company ceased operations in about July, made his initial court appearance yesterday before U.S. Magistrate Judge Henry Pitman in Manhattan. The judge said he may be freed on bail and remain at his parents’ Brooklyn home under electronic monitoring. Shrem didn’t enter a plea.
With close-cropped hair and a beard, Shrem wore a charcoal gray hooded sweatshirt, jeans and loafers at his bail hearing, with his parents and other relatives in the courtroom.
“These are mere allegations,” Shrem’s lawyer, Keith Miller, said yesterday in court.
“We ask the court for the opportunity for Mr. Shrem to go home with his family,” Miller said. “Mr. Shrem has no prior criminal background. He’s 24 years old. His parents are here and willing to put up their life savings and their homes” as part of his bail package.
Assistant U.S. Attorney Serrin Turner argued that Shrem shouldn’t be freed on bond, calling him a “Bitcoin millionaire” who has “a strong incentive to flee.”
Turner said Shrem had bragged he owned his own plane and told court officials in an interview after his arrest that he had a net worth of more than $6 million. Miller told the judge that the government had miscalculated his client’s wealth.
“Not only does he face a strong incentive to flee, Mr. Shrem has voiced a strong intent to flee,” Serrin told Pitman, and played an October 2012 YouTube.com video in which Shrem discusses the government’s probe of Bitcoin operators.
“The thing is, what the government can also do is try to arrest or take down companies that help push Bitcoin ahead. So our company, which acts as a bridge between Bitcoin and dollars, were it taken out, it’ll be, you know, Bitcoin would take a hit,” Shrem said. “But we have contingency plans,” Shrem tells the interviewer. “I have a plane ticket ready to take me to Singapore. There’s another corporation already set up.”
Turner said Shrem has taken at least 16 international trips since 2007, and has traveled to at least nine countries since 2012, including Turkey, Panama, Aruba, Mexico, the Netherlands, Bahamas and Iceland. The judge ordered Shrem to surrender his passport and other travel documents.
Faiella, who was arrested yesterday at his Florida home, was ordered held in custody until a hearing tomorrow in Fort Myers.
Russell Rosenthal, a federal defender who represented Faiella yesterday, declined to comment about his client’s case.
Faiella, 52, is accused of running his illegal exchange on the Silk Road website. Using the name “BTCKing” he sold the currency to users seeking to buy illegal drugs on the site, the U.S. said. Shrem bought drugs on Silk Road, and was “fully aware that Silk Road was a drug-trafficking website,” the government said.
“Shrem knowingly facilitated Faiella’s business with the company in order to maintain Faiella’s business as a lucrative source of company revenue,” Bharara said.
Shrem was accused of knowingly allowing Faiella to use his company’s services to buy Bitcoins for Silk Road customers, and also of personally processing Faiella’s orders, giving him discounts on his high-volume transactions and failing to file suspicious activity reports.
Shrem and Faiella parted ways after the company stopped accepting cash payments for Bitcoins in late 2012, the U.S. alleged. Faiella temporarily shut his service as a result and later resumed operating on Silk Road in April 2013 without assistance from Shrem’s company, exchanging tens of thousands of dollars a week until Silk Road’s website was shut down by law enforcement authorities in October, prosecutors alleged.
This month, about 29,600 Bitcoins worth $28 million were seized from Silk Road. The forfeiture order, signed Jan. 15 by U.S. District Judge J. Paul Oetken, was the largest forfeiture of Bitcoins, according to the government.
Jinyoung Englund, a spokeswoman for the Bitcoin Foundation, said in an e-mailed statement that the group was “surprised and shocked” by the charges.
“We take these allegations seriously and do not condone illegal activity,” she said.
U.S. Senator Tom Carper, a Democrat from Delaware, said in a statement that the arrests underscore how digital currencies can be used for illegal purposes.
“There are many who believe that digital currencies are an important and valuable new technology, and who want the opportunity to play by the rules in bringing potentially valuable products to the marketplace,” Carper said, calling for the federal government to look at the potential promises and risks.
In a speech yesterday to the Association of Certified Anti-Money Laundering Specialists in New York, Bharara said the “message” of the case was a simple one.
“If you want to develop a virtual currency or a virtual currency exchange business, knock yourself out,” Bharara said. “But you have to follow the rules. All of them. And if you want to invest in such a business, you better kick the tires and make sure compliance there is not a joke.”
The case is U.S. v. Faiella, 14-00164, U.S. District Court, Southern District of New York (Manhattan).
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