Two Bitcoin-Exchange Operators Arrested for Money Laundering on Silk Road

A pile of Bitcoins are shown here after Software engineer Mike Caldwell minted them in his shop on April 26, 2013 in Sandy, Utah. Bitcoin is an experimental digital currency used over the Internet that is gaining in popularity worldwide. 
National Journal
Dustin Volz
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Dustin Volz
Jan. 27, 2014, 7:39 a.m.

The In­tern­al Rev­en­ue Ser­vice might not be sure how to treat bit­coins, but the Justice De­part­ment, for now, is con­tinu­ing to treat the crypto­cur­rency like old-fash­ioned green­backs.

Au­thor­it­ies an­nounced Monday the ar­rest of two op­er­at­ors of bit­coin ex­changes on charges of laun­der­ing more than $1 mil­lion for the pur­poses of drug traf­fick­ing on the now-de­funct un­der­ground drug site Silk Road.

Agents ar­res­ted Charlie Shr­em, CEO of New York-based BitIn­stant, which is now off­line, and Robert Fai­ella, bet­ter known by his on­line nom de plume “BTCK­ing.” Schr­em was nabbed Sunday by au­thor­it­ies at the John F. Kennedy In­ter­na­tion­al Air­port in New York. Fai­ella was ar­res­ted Monday at his home in Cape Cor­al, Fla.

Shr­em and Failla are al­leged to have “schemed to sell over $1 mil­lion in bit­coins to crim­in­als bent on traf­fick­ing nar­cot­ics on the dark web drug site, Silk Road,” ac­cord­ing to Justice’s state­ment. The two are al­leged to have funneled money to Silk Road users who would in turn use that money to an­onym­ously pur­chase drugs and oth­er il­li­cit goods.

“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,” Man­hat­tan U.S. At­tor­ney Preet Bhar­ara of the South­ern Dis­trict of New York said. “We will ag­gress­ively pur­sue those who would co-opt new forms of cur­rency for il­li­cit pur­poses.”

Last week, Bhar­ara an­nounced the for­feit­ure of $28 mil­lion worth of bit­coins that were seized from Silk Road.

James Hunt, a spe­cial agent with the Drug En­force­ment Agency, ad­ded: “Hid­ing be­hind their com­puters, both de­fend­ants are charged with know­ingly con­trib­ut­ing to and fa­cil­it­at­ing an­onym­ous drug sales, earn­ing sub­stan­tial profits along the way.”

Fai­ella is charged with hav­ing op­er­ated an un­der­ground bit­coin ex­change from late 2011 to late 2013 via the now in­fam­ous Silk Road, de­scribed by au­thor­it­ies as “a sprawl­ing and an­onym­ous black-mar­ket bazaar where il­leg­al drugs of vir­tu­ally every vari­ety were bought and sold reg­u­larly by the site’s users.”

The charges are part of an on­go­ing string of busts against al­leged sus­pec­ted ex­changers who sur­repti­tiously nav­ig­ated Silk Road from its launch in Feb­ru­ary 2011 un­til it was shut down by the FBI in Oc­to­ber 2013. Silk Road copycats have emerged in the ashes of the fallen site, which was be­lieved to have traded up­ward of $1 mil­lion dol­lars a month.

Camer­on and Tyler Winkle­voss, whose pre­vi­ous leg­al spars with Face­book founder Mark Zuck­er­berg were fam­ously chron­icled in the The So­cial Net­work, were among BitIn­stant’s ori­gin­al in­vestors. The twins raised $1.5 mil­lion in seed fund­ing for the start-up.

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