Charles Shrem, CEO of the New York–based digital currency peer to peer payment system, Bitcoin exchange, was arrested on Monday at JFK airport in Queens, New York. Shrem is charged with money laundering conspiracy for assisting Robert Faiella, an alleged Silk Road drug trafficker operating on the "Dark Web" under the name BTCKing.
Faiella's activities included narcotics trafficking and the sale of other illegal goods. According to the complaint, Faiella fielded Bitcoin purchase orders from users of Silk Road which Shrem then filled. The transactions worked via use of a Japanese third-party Bitcoin exchange. Together the two allegedly sold over $1 million in bitcoins to Silk Road users, who then used those bitcoins to attempt to anonymously purchase drugs and other illegal goods from the "Dark Web" black market. Shrem is alleged to have bought illegal drugs through Silk Road and to have advised Failella, including on how to avoid detection.
Silk Road is a well-known black market for narcotics on the "Dark Web." This sting is typical of the current federal approach; law enforcement believes that it is easier to target the money-laundering side of the illegal operations than the drug sale side, particularly on the "Dark Web." Shrem was not the owner of the Silk Road vendor profile, but the U.S. Attorney's Office will argue that Shrem's connections to Faiella were numerous and close, and that he had knowledge of Faiella's activities and profited from them. Shrem is also charged with failing to report Faiella's illegal activities even though he had a duty to do so under the law.
The FBI dismantled Silk Road in October of 2013 after its life of more than two years. During that time its exclusively Bitcoin financial history was worth more than $1.2 billion according to prosecutors. The FBI called Silk Road "the most sophisticated and extensive criminal marketplace on the Internet," at the time of the shut down. Notably, however, at the time of this writing an almost identical black market called "Silk Road 2.0" is operating on the "Dark Web."
Shrem is not only the CEO of Bitcoin exchange, but also a vice chairman at the Bitcoin Foundation and was a listed speaker at a Miami Bitcoin conference this past weekend. Perhaps not surprisingly, he is thought by authorities to own a significant amount of bitcoins. BitInstant, the exchange for Bitcoin, is currently offline. This debacle comes on the heels of a class-action suit alleging misrepresentation of BitInstant's services and as a two-day New York State hearing about the future of Bitcoin is poised to begin.
Find the full text of the Justice Department press release and complaint here.