Two Executives of Bitcoin Businesses Are Arrested

According to the allegations contained in the Criminal Complaint unsealed today in Manhattan federal court:

From about December 2011 to October 2013, FAIELLA ran an underground Bitcoin exchange on the Silk Road website, a website that served as a sprawling and anonymous black market bazaar where illegal drugs of virtually every variety were bought and sold regularly by the site?s users.

Operating under the username ?BTCKing,? FAIELLA sold Bitcoins ? the only form of payment accepted on Silk Road ? to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he filled the orders through a company based in New York, New York (the ?Company?).

The Company was designed to enable customers to exchange cash for Bitcoins anonymously, that is, without providing any personal identifying information, and it charged a fee for its service. FAIELLA obtained Bitcoins with the Company?s assistance, and then sold the Bitcoins to Silk Road users at a markup.

SHREM is the Chief Executive Officer of the Company, and from about August 2011 until about July 2013, when the Company ceased operating, he was also its Compliance Officer, in charge of ensuring the Company?s compliance with federal and other anti-money laundering (?AML?) laws. SHREM is also the Vice Chairman of a foundation dedicated to promoting the Bitcoin virtual currency system.

SHREM, who personally bought drugs on Silk Road, was fully aware that Silk Road was a drug-trafficking website, and through his communications with FAIELLA, SHREM also knew that FAIELLA was operating a Bitcoin exchange service for Silk Road users.

Nevertheless, SHREM knowingly facilitated FAIELLA?s business with the Company in order to maintain FAIELLA?s business as a lucrative source of Company revenue.

SHREM knowingly allowed FAIELLA to use the Company?s services to buy Bitcoins for his Silk Road customers; personally processed FAIELLA?s orders; gave FAIELLA discounts on his high-volume transactions; failed to file a single suspicious activity report with the United States Treasury Department about FAIELLA?s illicit activity, as he was otherwise required to do in his role as the Company?s Compliance Officer; and deliberately helped FAIELLA circumvent the Company?s AML restrictions, even though it was SHREM?s job to enforce them and even though the Company had registered with the Treasury Department as a money services business.

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.

NEW YORK — The federal government has arrested one of the biggest names in the bitcoin community in the latest crackdown on digital currencies and their illicit use.

Charlie Shrem, chief executive of digital currency exchange BitInstant, stands accused with a Florida man of laundering money through a notorious drug-trafficking website.

Shrem is also vice chairman of the Bitcoin Foundation, a nonprofit group aimed at promoting the digital currency.

Not only is Shrem prominent in the digital currency world, but so are two backers of his company: Cameron and Tyler Winklevoss, the twins famous for alleging that Facebook was their idea.

The Winklevosses have also been trying to win regulatory approval for a financial vehicle that would enable ordinary investors to cash in on bitcoins, whose value has skyrocketed over the last year.

Federal prosecutors also accused Shrem and Faiella of sidestepping regulations aimed at keeping criminal proceeds out of the financial system.

Shrem, also the chief compliance officer of BitInstant, allegedly knew the purpose of Faiella's exchanges. In addition, the government says, Shrem himself bought drugs on Silk Road.

Shrem was also charged with alleged willful failure to file a suspicious activity report with regulators related to Faiella's numerous bitcoin purchases conducted through his exchange.

"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," said Preet Bharara, the U.S. attorney in Manhattan, whose office brought the case. "We will aggressively pursue those who would co-opt new forms of currency for illicit purposes."