Bitcoin CEO, along with drug Web site kingpin arrested on money laundering charges
Narcotic Web site 'Silk Road,' worked with Bitcoins exclusively
The CEO of Bitcoin exchange BitInstant Charlie Shrem, along with the man behind an illicit narcotic Web site called "Silk Road" have been arrested by U.S. federal agents on suspicion of money laundering.
Shrem was arrested at John F. Kennedy International Airport in New York this weekend. Faiella was arrested at his home in Cape Coral, Florida on Monday. Both men are charged with conspiracy to launder money and operating an unlicensed money transmitting business. Shrem faces an additional charge for not alerting federal agents to what was allegedly going on.
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The 24-year-old Shrem is a major player in the Bitcoin world. Based in New York City, the BitInstant exchange lets people buy bitcoins locally at more than 700,000 locations in the United States, as well as Brazil, Russia and elsewhere.
BitInstant received a $1.5 million investment last year from Cameron and Tyler Winklevoss. Shrem is also vice chairman of the Bitcoin Foundation, one of the currency's biggest advocates.
The Winklevoss twins said that they are "deeply concerned" about Shrem's arrest in an email message.
"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," they said.
Faiella first appeared on Silk Road as BTCKing in late 2011. The black market Web site only lets people buy and sell goods with bitcoins. Faiella made a business of exchanging cash for bitcoins . and that's where Shrem's bitcoin exchange came in handy.
According to an investigation by the Internal Revenue Service, Shrem sold Faiella the bitcoins that eventually made their way to drug buyers and sellers. Shrem knew full well where the money wound up and never reported it to the Treasury Department, according to the U.S. attorney.
Federal documents cite email exchanges between Shrem and Faiella that show how close they worked together. Although Shrem only knew Faiella by his pseudonym BTCKing, Shrem help keep Faiella from the long arm of the law. In one of several instances, when Faiella's frequent and large cash deposits raised eyebrows at a cash processing company, Shrem advised Faiella on how to "lay low."
To gather evidence against Shrem and Faiella, federal agents posed as Silk Road users and bought bitcoins from Faiella. According to the court documents, agents then traced the money they paid, which led them to Faiella and eventually Shrem.
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