The CEO of a bitcoin exchange and a bitcoin exchanger were arrested this week for their alleged involvement in the black market Internet site Silk Road, the Manhattan U.S. Attorney announced this week.
Charlie Shrem, 24, who ran BitInstant from 2011 to 2013, is charged with running a scheme that provided over $1 million in bitcoins to users of Silk Road, which the feds shut down in October.
Robert M. Faiella, 52, an underground Bitcoin exchanger who went by BTCKing, is accused of running an underground bitcoin exchange on Silk Road from Dec. 2011 to Oct. 2013, selling bitcoins to those looking to buy drugs on the site anonymously.
Shrem was arrested at JFK Airport in New York on Sunday. Faiella was arrested at his home in Cape Coral, Florida on Monday.
According to the feds, Shrem was in charge of compliance at BitInstant and was well aware of illegal activity since he "personally bought drugs on Silk Road." He worked with Faiella and gave him discounts on high-volume transactions.
Faiella and Shrem are charged with one count of conspiracy to commit money laundering, which carries a maximum sentence of 20 years in prison, and one count of operating an unlicensed money transmitting business, which carries a maximum sentence of five years in prison. Shrem is also charged with one count of willful failure to file a suspicious activity report, which carries a maximum sentence of five years in prison.
"Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way," DEA Acting Special-Agent-in-Charge James J. Hunt said in a statement. "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."
Shrem served as vice chairman of the Bitcoin Foundation, but submitted his resignation following his arrest. In a statement, the foundation said it was "surprised and saddened to learn of these allegations."
"As a foundation, we need to remain focused on our core mission to standardize, protect, and promote the Bitcoin core protocol. While Charlie has contributed a great deal of personal effort and resources to enhance the adoption of Bitcoin worldwide, a prolonged legal dispute would inevitably detract from advancing that core mission," Jon Matonis, Executive Director and Board Member, said in a statement. "Therefore, in order to focus on his pending trial, it has been mutually decided that Charlie Shrem resign from the Board of Directors, effective immediately. The Board accepted that resignation today."
Matonis stressed that "the indictment itself is not against Bitcoin or the community at large. Indeed, the complaint acknowledges, 'Bitcoin are not inherently illegal and have known legitimate uses.'"
For more, check out What Was Silk Road and How Did It Work?