On Jan. 27, U.S. law enforcement agents arrested Robert Faiella, also known as “BTCKing,” at his home in Cape Coral, Fla. They also arrested Charlie Shrem, chief executive officer and compliance officer at the Bitcoin exchange company BitInstant.com, at John F. Kennedy International Airport in New York City on Jan. 26. Both have been charged with money laundering and operating an unlicensed money transmitting business. Shrem is also facing charges of violating the Bank Secrecy Act by failing to file reports of suspicious activity with the federal government concerning Faiella's transactions on BitInstant.
The charges of money laundering come from Shrem allegedly knowingly allowing Faiella to use the BitInstant exchange to purchase more than $1 million worth of Bitcoins to sell to users of Silk Road, the anonymous Internet marketplace on the Tor encrypted network which was shut down by the U.S. government in October 2013. Silk Road had been in operation since 2011, and had grown to a size of 957,000 users transacting a total of 9.5 million Bitcoins, then the equivalent of over $1 billion (currently $7 billion). The criminal complaint also alleges that Shrem used Silk Road to buy illegal drugs.
“At this point the allegations in the complaint are simply allegations, and Mr. Shrem is presumed innocent,” said Keith Miller, Shrem's lawyer.
“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.”
BitInstant was one of the first Bitcoin exchanges, and had managed to draw interest and investment from the Winklevoss twins, whose Winklevoss Capital invested $1.5 million in the business.
“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. We were passive investors in BitInstant and will do everything we can to help law enforcement officials. We fully support any and all governmental efforts to ensure that money laundering requirements are enforced, and look forward to clearer regulation being implemented on the purchase and sale of Bitcoins.”
Bitcoin markets dropped significantly in reaction to the news, and have been turbulent since. On BTC-e, the exchange rate between Bitcoins and US dollars gradually dropped from 830 to a low of 727, and on MtGox, the exchange rate dropped from 1,022 to a low of 938. As of this writing, the exchange rates have partially recovered from these lows, but have not returned to their former levels.