Bitcoin Dealers Charged in $1M Cash Launder Scheme

Sold Digital Currency to Silk Road Users

By Reuters

Published January 27, 2014.
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Two men who operate bitcoin exchange businesses have been charged with money laundering for helping drug merchants exchange $1 million in cash for bitcoins, the digital currency, U.S. prosecutors said on Monday.

Federal prosecutors in New York announced charges against Charlie Shrem and Robert Faiella, both operators of bitcoin exchange businesses, for attempting to sell $1 million in the digital currency to users of the underground black market website Silk Road, which was shut down by authorities in September.

According to the charging document, Shrem, 24, chief executive officer of the exchange BitInstant.com, changed cash into bitcoins for Faiella, 52, who ran an underground bitcoin exchange through the username BTCKing on Silk Road’s website. 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.

Shrem attended the Yeshiva of Flatbush in Brooklyn.

“Wow, Silk Road actually works,” Shrem told an acquaintance in an online chat, according to the complaint.

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.

“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.

The U.S. Attorney’s office in Manhattan said in the statement that authorities arrested Shrem on Sunday at New York’s John F. Kennedy International Airport. Faiella was arrested on Monday at his home in Cape Coral, Florida.

The tech investors Cameron and Tyler Winklevoss invested $1.5 million in BitInstant last year.

“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.”

The case against Shrem is likely to deal a blow to the burgeoning community of bitcoin businesses because Shrem is a high-profile advocate for the technology. In addition to running BitInstant, he is vice president of the main bitcoin-focused trade group, the Bitcoin Foundation, according to the foundation’s website and Shrem’s LinkedIn profile.

A spokeswoman for the foundation declined to immediately comment on Shrem’s arrest.

“THE ART OF HIDING”

Shrem and Faiella were charged with conspiring to commit money laundering and operating an unlicensed money transmitting business.

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 another bitcoin exchange service based in Japan.

The Japan-based exchange business is not named. One of the largest bitcoin exchanges in the world, MtGox, is based in Japan. Its chief executive, Mark Karpeles, did not immediately respond to a request for comment.

The charging document says that Shrem, who also ran BitInstant’s compliance program for a little under two years, 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.

Shrem then privately wrote to BTCKing, without including Nelson, in a message that was “considerably changed,” according to the charges.

“Your email address is banned,” Shrem explained, “but you can use a different one.”

Shrem’s lawyer, Keith Miller at Perkins Coie in New York, was not immediately available for comment. Shrem was to appear in federal court in Manhattan on Monday.

Bitcoin is a digital currency whose value fluctuates according to demand by users. It is currently trading on MtGox at a level of $985 per unit. Users can transfer bitcoins to each other over the internet and store the currency in digital “wallets.”

U.S. regulators, including the U.S. Treasury’s Financial Crimes Enforcement Network and the New York State Department of Financial Services, are just starting to get a handle on how to approach the currency. In March 2013, FinCEN released guidance stating that all digital currency exchanges needed to register as money services businesses.

In their statement on Monday, the Winkelvoss twins said that they “look forward to clearer regulation being implemented on the purchase and sale of bitcoins.”

New York’s Financial Services Department last summer subpoenaed dozens of bitcoin-related businesses for information on their day-to-day conduct. The department is set to hold a hearing on Bitcoin on Wednesday.

“These recent cases underscore the importance of developing smart, tailored rules of the road for virtual currency businesses – which is exactly what our hearings will focus on,” a department spokesman said in an email to Reuters on Monday.

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, and two Las Vegas casino hotels – the co-owned Golden Gate Hotel and Casino and the D Las Vegas Casino Hotel – last week said they will begin accepting bitcoins to pay for hotel rooms and related purchases.

Created in 2009 by a developer or team of developers going by the name Satoshi Nakamoto, whose true identity remains unknown, 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.”

Bitcoin was the currency used on Silk Road, which was allegedly founded and operated by Ross Ulbricht, a libertarian-minded, 29-year-old American, who was arrested during a raid by federal authorities on the site last year.

Ulbricht is being held in a federal detention center in New York and faces charges of money laundering, computer hacking and drug trafficking. He has maintained his innocence through statements by his lawyer.

A spokeswoman for Bharara, said there was no information about legal representation available for Faeilla, who is expected to make his first court appearance in Florida on Monday.

Shrem has a home address in the Brooklyn borough of New York.


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