Feds charge Bitcoin start-up founder with money laundering (2024)

"Upon receiving orders for Bitcoins from Silk Road users," the government said, Faiella filled the orders through BitInstant, which "was designed to enable customers to exchange cash for Bitcoins anonymously, that is, without providing any personal identifying information, and it charged a fee for its service."

According to the government, that runs afoul of U.S. money laundering laws, which require payment companies like BitInstant to collect information about their customers, monitor their transactions, and report "suspicious" transactions to the government. Shrem failed to do this, the government says. Faiella is also facing charges.

Efforts to reach Shrem or his lawyer for comment were unsuccessful.

The charges against Shrem represent the latest setback for BitInstant, which was once a high-flying start-up. Just nine months ago, BitInstant raised $1.5 million from a group led by Tyler and Cameron Winklevoss, brothers who have earned tens of millions of dollars in profits by investing in bitcoins.

But a few weeks after taking "Winklevii" cash, BitInstant announced it was suspending operations. That triggered a class action lawsuit from BitInstant customers.

Shrem serves on the board of the Bitcoin Foundation, the closest thing the payment technology has to an official voice. Stories tying Bitcoin with illicit activity are never good for the online payment technology, but the government's announcement included signs that the government continues to view Bitcoin itself as legitimate.

"Truly innovative business models don’t need to resort to old-fashioned law-breaking,"Manhattan U.S. Attorney Preet Bharara said. "When Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act."

Bharara's statement suggests that Bitcoin exchange services that color within the lines of U.S. law — collecting information about their customers and reporting evidence of illegal transactions to the authorities — don't need to worry about running afoul of money laundering laws.

Jerry Brito, a researcher at the libertarian Mercatus Center at George Mason Uniersity, argued that Shrem is part of "a first generation of exchanges and other Bitcoin-related businesses. When Bitcoin took off, they sort of found themselves at the center. A lot of these people who were technologists, and very young, found themselves at the center of a new disruptive technology that came under a lot of regulatory scrutiny."

But while some of these early firms allegedly failed to comply with regulatory requirements, Brito said a new generation of Bitcoin exchanges, including Coinbase and Circle, are more sophisticated. "Their boards are replete with folks who understand compliance and understand what they have to do," Brito said.

As this post was being published, the BitInstant Web site was down.

Update: The Winklevoss brothers commented by email:

“We are surprised and shocked by the news today," said a
spokesperson for the Bitcoin Foundation. "As a foundation, we take these allegations seriously and do not condone illegal activity.”

Disclosure: In 2012 I contributed a chapter to a book on copyright policy that was edited by Brito and published by Mercatus.