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 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 marijuana-infused
brownies.
"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 exchange MtGox.
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 exchange-traded fund.
"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 officials."
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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."
(Reporting by Emily Flitter in New York;
additional reporting by Nate Raymond in New York and Brett Wolf in
St. Louis; editing by Leslie Adler)
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