The CEO of BitInstant, a bitcoin exchange services provider, was arrested and charged on Monday for an alleged money-laundering scheme. Charlie Shrem, who founded the New York-based bitcoin startup, is accused of selling more than $1 million in bitcoins to Silk Road users who would in turn use the electronic currency to purchase narcotics on the site.


Charlie Shrem


Shrem, along with co-conspirator Robert Faiella, is charged with operating an unlicensed money transmitting business and conspiracy to commit money laundering. Shrem is also charged willful failure to file a suspicious activity report. He was arrested on Sunday at New York’s John F. Kennedy International Airport. He is expected in a Manhattan court later today.


In the federal criminal complaint filed by the Southern District of New York, Shrem is accused of knowingly allowing Faiella to use BitInstant’s services to buy bitcoins for his Silk Road customers. Shrem, who is also BitInstant’s Compliance Officer, failed to report Faiella’s activity to the U.S. Treasury Department and deliberately helped Faiella circumvent anti-money laundering rules, the complaint alleges. Having registered BitInstant with the Treasury Department as a money services business, Shrem is obligated to report suspected money laundering. For neglecting to do so, Shrem received the additional charge of willful failure to file suspicious a activity report, according to the Southern District of New York.



“The charges announced today depict law enforcement's commitment to identifying those who promote the sale of illegal drugs throughout the world,” said DEA Acting Special-Agent-in-Charge James J. Hunt. “Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way. Drug law enforcement’s job is to investigate and identify those who abet the illicit drug trade at all levels of production and distribution including those lining their own pockets by feigning ignorance of any wrong doing and turning a blind eye.”


Silk Road is an online black market where users can browse and purchase illicit items and services anonymously. All transactions are made with bitcoins, furthering the degree of anonymity that Silk Road provides its users. The site was shut down in October 2013 by the FBI but by November, Silk Road 2.0 was online.


Silk Road Seized


The site operates in the “deep web” and is accessible through the Tor anonymity network. Tor conceals users' activity and location and is resistant to censorship, which has garnered the network much criticism for its enabling of the deep web, where narcotics dealers, arms traders, and child pornographers can lurk securely.


The criminal complaint against Charlie Shrem opens the door to a completely new world of law enforcement – one where the deliberately unfettered world of cryptocurrencies meets the heavy hand of the Justice Department and the Treasury Department.


To read the complete criminal complaint against Charlie Shrem and Robert Faiella, click here


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