By Julian Hattem - 01/27/14 11:58 AM EST
Federal officials have arrested the head of a bitcoin exchange on charges of conspiring to launder money.
Charlie Shrem, 24, chief executive of the bitcoin exchange BitInstant and vice chairman of the Bitcoin Foundation, was arrested at New York’s John F. Kennedy International Airport on Sunday, the Justice Department announced Monday morning.
According to the government’s charges, he helped to sell more than $1 million worth of bitcoins to users of the online marketplace Silk Road, which allowed people to buy and sell drugs and illicit goods anonymously.
Shrem is also being charged with running an unlicensed money-transmitting business and failing to notify authorities that another man, Robert Faiella, had used BitInstant for illegal transactions. Faiella, 52, was arrested in Cape Coral, Fla., on Monday.
“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. We will aggressively pursue those who would coopt new forms of currency for illicit purposes.”
Bitcoins only exist online but can be cashed in for other forms of currency at online exchanges or used to buy goods and services at some businesses.
Some regulators have been skeptical of the currency, which allows users to operate largely anonymously. They fear bitcoins give a license to criminals and terrorists to launder money though websites like Silk Road, which was shut down last year but has since been reconstituted.
Bitcoin exchange sites are required to register with the government as money transmitting businesses like other currency exchanges.
Cameron and Tyler Winklevoss, the twin brothers famous for their battles with Facebook chief Mark Zuckerberg, raised $1.5 million for BitInstant last year.
According to the Justice Department, through last year, Faiella acted as a middleman for people on Silk Road who wanted to buy bitcoins. He received orders on the website and filled them through Shrem’s exchange.
Shrem personally bought drugs on Silk Road and knowingly helped Faiella buy bitcoins, officials alleged.
“Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way,” said James Hunt, acting special agent in charge with the Drug Enforcement Administration, in a statement.
Shrem faces up to 30 years in prison if convicted.
In a statement sent to The Hill, a spokesperson with the Bitcoin Foundation said that the group was “surprised and shocked by the news today.”
“As a foundation, we take these allegations seriously and do not condone illegal activity,” the spokesperson added.
--This report was updated at 2:27 p.m.