Bitcoin Exchange BitInstant CEO Arrested on Money Laundering Charges

The U.S. continues to be a less and less friendly place to do Bitcoin related business, with this awful report from Business Insider this morning:

The CEO of BitInstant, a Bitcoin exchange, has been arrested at JFK airport and charged with money laundering.

Charlie Shrem, along with a co-conspirator, is accused of selling over $1 million in bitcoins to Silk Road users, who would then use them to buy drugs and other illicit items.

According to the criminal complaint, Shrem himself bought drugs on Silk Road.

"Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way," DEA agent James Hunt said in a release. 

Shrem is a vice chairman at the Bitcoin Foundation. He is listed as a speaker at a Bitcoin conference in Miami that ended Sunday.

Shrem is believed to own a substantial amount of bitcoins.

BitInstant, which is backed by the Winklevoss twins, is currently offline. It was recently the subject of a class-action suit alleging misrepresentation of its services.

The Business Insider story contains a full press release from the Justice Department.

I wrote back in May about how, although there is no way for the government to destroy the decentralized Bitcoin network, it can certainly do its worst to hobble those trying to use the digital currency. And it is, alas.

I blogged about Shrem himself last month.

Comments

[Hyperion]

Governments have a monopoly on money laundering. They don't like it when some 2 bit player tries to infringe on their turf.

[Tonio]

+11

[ConstitutionFirst]

End the FED.

[timbo]

"Looks like heroin Gene"

[Jon Lester]

I signed up for a Bitcoin payment processor last night, and should have my online store ready to go in a matter of days. I'll only be selling records and downloads, though.

[mad libertarian guy]

Records?

What ya got?

[CampingInYourPark]

OT:

A top House Democrat slammed Obamacare's inability "to work" ? but only after he announced his impending retirement from Congress.

First of many, hopefully.

http://dailycaller.com/2014/01.....z2rcVf56mR

[Brett L]

Its Moran, just because he happened to stumble across an acorn don't make him eagle-eyed.

[Malkavian]

"Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way,"

Finally, someone is holding Federal Reserve accountable... Oh wait.

[Steve G]

Or the DEA...or the ATF...etc

[Rhywun]

Am I supposed to see something wrong in that sentence...?

[kmc212]

What about all of the US dollars that are being used for illegal purposes? Are any of the bankers being implicated in circulating money used in criminal activity?

[anon]

Goddamnit, that's what I get for not reading before I post.

[kmc212]

You don't know about US banks laundering drug money for the CIA?

http://www.globalresearch.ca/f.....-cia/20475

http://www.aljazeera.com/indep.....28181.html

[ConstitutionFirst]

...and all the profits from that Afghanistan opium flooding this country...

[Anonymous Coward]

Banks in Colorado are leery of taking legal FunPot money for precisely this reason.

[The Last American Hero]

But it doesn't matter because Obama ended the war on drugs last week, right?

[Zeb]

I thought the drug czar ended it years ago.

[Anonymous Coward]

Obama would, but those damn Republicans like Tom Tancredo keep getting in the way.

Drone strike all Republicans now!

[LynchPin1477]

accused of selling over $1 million in bitcoins to Silk Road users

I'm not that familiar on how Bitcoin works, but I was under the impression that there really was no way of knowing who was buying your Bitcoins or what they were going to be used for. So how in the world can this charge ever stick?

[MJGreen]

If the judge and jury don't understand it, then they'll just have to take the prosecutor's word for it.

[sarcasmic]

Yep.

[CE]

DA: "These BitCoin swindlers printed billions in digital currency, digital currency they knew would be untraceable and would allow drug dealers to evade detection. Now that our heroic DEA first responders have traced these untraceable transactions and discovered that some of these bitcoins were indeed used to subvert the law and society itself, we need you to lock them away for a long, long time."

Jury Foreman: "Isn't that the same as using cash though? You don't arrest bankers if the money they dispense is used in criminal activity."

Judge: "Jurors aren't allowed to ask questions. I will instruct you in the law before your deliberations, and in your duty to find the defendants guilty."

[Rhywun]

Fantasy. People like that don't become jurors.

[LynchPin1477]

No, but hopefully they become defense attorneys.

And now we see just how twisted the world has become, when I look to defense attorneys as paragons of reason and justice.

[sarcasmic]

Defense attorneys don't work for free.

When someone is busted for something like this, their assets are all frozen or stolen.

So instead of being able to hire an honest defense attorney, they get stuck with a public pretender. Now they can accept a plea or watch their pretender pretend to defend.

[LynchPin1477]

Is that true? If so, how is it Constitutional? They're impeding some one's ability to defend themselves and they haven't even been convicted of a crime.

[sarcasmic]

If so, how is it Constitutional?

Since when did the Constitution matter? Seriously.

They're impeding some one's ability to defend themselves and they haven't even been convicted of a crime.

Their assets have been charged with being obtained through criminal activity, and are property of the government until the owner can prove otherwise. Which of course the owner can't do, since they have no means of hiring a lawyer.

Next thing you know the department is handing out bonuses and everyone gets a new car! And we're not talking about Fords!

[Alan]

Defendants frequently are prevented from defending themselves, regardless of whether they have a lawyer or not. Judges routinely prevent defendants from introducing relevant facts or laws.

The Constitution means nothing when the judges don't allow it into their courts.

[Zeb]

Unless they were smart and arranged for the services of an attorney beforehand.

[CampingInYourPark]

I'm not that familiar on how Bitcoin works, but I was under the impression that there really was no way of knowing who was buying your Bitcoins or what they were going to be used for.

The gist of the charges is that "Silk Road" was a site known by the suspects to be used for illegal drug sales and the suspects facilitated using the site by converting dollars/bitcoins. So, they wouldn't need to know who was buying what, since anybody buying anything there would be buying illegal stuff.

[LynchPin1477]

But did the accused convert bitcoins for known Silk Road users? If the whole thing is anonymous, how could they have known where the Bitcoins were coming from/going?

[CampingInYourPark]

But did the accused convert bitcoins for known Silk Road users?

That is what they are being charged with.

Operating under the username "BTCKing," FAIELLA sold Bitcoins ? the only form of payment accepted on Silk Road ? to users seeking to buy illegal drugs on the site.

Upon receiving orders for Bitcoins from Silk Road users, he filled the orders through a company based in New York, New York (the "Company"). The Company 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. FAIELLA obtained Bitcoins with the Company's assistance, and then sold the Bitcoins to Silk Road users at a markup.

http://www.scribd.com/fullscre.....ode=scroll

[SweatingGin]

As someone who anonymously exchanged cash for bitcoins this weekend... 🙂

[LynchPin1477]

What I am still not clear on is if he sold them to people who he KNEW were using them on Silk Road, or if he just sold them to anyone who came along and then those people happened to use them on Silk Road.

[CampingInYourPark]

Operating under the username "BTCKing," FAIELLA sold Bitcoins ? the only form of payment accepted on Silk Road ? to users seeking to buy illegal drugs on the site.

Maybe reading past the "-" there will help you out.

[Juice]

So the Bank of America CEO will soon be charged for facilitating drug purchases by allowing drug users to take cash out of his ATMs because Doug the heroin dealer only takes cash.

[CampingInYourPark]

So the Bank of America CEO will soon be charged for facilitating drug purchases by allowing drug users to take cash out of his ATMs because Doug the heroin dealer only takes cash.

Umm...no. IF the BOA CEO hangs out on dougtheheroindealer.com and processes his CC transactions, he might though.

[LynchPin1477]

That sentence can just as easily be parsed as "FAIELLA sold Bitcoins. Bitcoins are the only form of payment accepted on Silk Road. People who bought Bitcoins from FAIELLA used Bitcoins to buy illegal drugs on Silk Road." None of which implies that Schrem knew the Bitcoins he was selling were being used to buy drugs on Silk Road.

My confusion in all of this stems from the fact my (possibly mistaken) understanding that Bitcoin transactions are anonymous. So I don't understand how, from a technical point of view, they can claim that Schrem knew who was selling to and how that money was being used. Unless BitInstant was officially affiliated with Silk Road somehow?

[CampingInYourPark]

Faiella was apparently a middle man for Silk Road users and Shrem to convert dollars to bitcoins, and Shrem knew his customers were from Silk Road

It's really more of a WOD issue than about currency. Although there were other things sold on Silk Road, so they might be able to use that as a defense, but I doubt the ignorance claim is going to fly.

[LynchPin1477]

OK, thanks for clearing that up. I'm still not sure how that (supposedly) worked in practice, but it at least makes a little more sense of the charges.

[anon]

So... When are these same charges going to be levied against the Federal Reserve?

[John]

RICO laws need to go. RICO makes it a crime to accept any money that are the proceeds of a crime. We went from "commit a crime go to jail" to "benefit from someone else committing a crime and go to jail". It is a shift in rational that is sadly to subtle for most people to understand. But subtle or not, it is a completely disastrous and oppressive change.

[MP]

But then, how else could you prosecute the Sons of Anarchy?

[John]

Or the mafia. That is how they got the mafia dons. The mafia dons never did any criminal activity themselves. They just provided protection to people who did in return for a piece of the profits. All the mafia ever was was a protection racket.

So unless they got lucky and caught a mafia don on tape telling one of his minions to kill someone, which almost never happened, they never could pin much on them beyond the odd tax evasion or perjury charge. But when RICO came along, the government only had to prove the don got some of the money and that was enough.

I am not sorry to see the mafia go. But I think the price we paid for convicting them was way too high. RICO is a monster.

[sarcasmic]

Mens rea is so quaint.

[Hyperion]

The mafia didn't go anywhere. They just changed their name to congress.

[John]

Vito always wanted Micheal to be a Senator.

[Pelosi's Rabbit]

Now who's being naive, Kay.

[Mainer2]

Vito always wanted Micheal to be a Senator

another pezzonovante

[Homple]

Who among us didn't expect this sort of thing to happen?

[Fist of Etiquette]

The Business Insider story contains a full press release from the Justice Department.

Knowing Business Insider as I do, I suspect their story is a press release from the Justice Department.

[Fr?ulein Nikki]

Then I see you know them quite well indeed.

[Paul.]

Never underestimate the government's ability to yadda yadda.

[Paul.]

On 20 December it was announced three alleged Silk Road admins had been arrested;[33] two of these suspects, Andrew Michael Jones and Gary Davis, were named as the admins "Inigo" and "Libertas" who had continued their work on Silk Road 2.0.[34] Around this time the new Dread Pirate Roberts abruptly gave up control of the site and froze its activity, including its escrow system. A new temporary administrator under the screenname "Defcon" took over and promised to bring the site back to working order.[35]

[Francisco d Anconia]

The more you tighten your grip, Holder, the more star systems will slip through your fingers.

[Paul.]

But the more lives destroyed in the process.

[CE]

Charlie Shrem, along with a co-conspirator, is accused of selling over $1 million in bitcoins to Silk Road users, who would then use them to buy drugs and other illicit items.

"Along with a co-conspirator"? What happened to the presumption of innocence? Shouldn't that be "alleged" co-conspirator? And why do licensed bankers get a pass for providing cash which is later used for nefarious or banned purposes?

"Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way,"

Sounds like Merck, Pfizer, etc. executives.

[sarcasmic]

And why do licensed bankers get a pass for providing cash which is later used for nefarious or banned purposes?

I imagine because they've paid upfront in the form of taxes and licenses and insurance and so forth.

[John]

Their crime is accepting money from people they knew were committing criminal acts. This is where RICO leads you. You go from using it to get John Gotti to using it against anyone who happens to run any business whose services someone uses to commit a crime.

If rental car companies were knowingly letting people rent their cars to deal drugs, they could go after them too. It is insane.

[sarcasmic]

So if you rent out apartments and refuse to rent to someone you suspect is a drug dealer, it's discrimination. When it turns out they are dealing drugs, the government can put you in prison and take your apartment building.

Sounds like a win-win. For government.

[John]

You won't rent to black and poor people. You are a racist bastard.

You are renting to people who are selling drugs. You are benefiting from criminal activity. We are going to take your apartment building and you better thank us that we didn't throw you in jail.

Yeah, that about sums up what it means to own rental property in the ghetto.

[CampingInYourPark]

So if you rent out apartments and refuse to rent to someone you suspect is a drug dealer, it's discrimination. When it turns out they are dealing drugs, the government can put you in prison and take your apartment building.

The main charge is not that they failed to "suspect" drug dealing, but that they knowingly facilitated it. There is however, one charge of failing to file an "unusual activity" report.

[CampingInYourPark]

According to the criminal complaint, Shrem himself bought drugs on Silk Road.

That's why they add this little tidbit in the charges.

[John]

Remember, they don't have to charge you with anything to take your property.

[sarcasmic]

Once they do bring charges they will freeze all your assets, rendering you dependent upon a public pretender. At this point you can take a plea or hope that the prosecutor's golfing buddy will put up a decent defense.

[John]

But that is hard. In most cases, you just take the stuff and never bring the charges.

[sarcasmic]

You're the former prosecutor. You would know.

[John]

Never worked for DOJ. But I know how they think.

[Swiss Servator, Befehl!]

We had some grabby local cops - but the State's Attorney I worked for was not very enthusiastic about the whole thing. The municipal attorney types were quite happy to seize away...went into the city coffers to pay for overtime, etc.

[TerminusEst]

Also note that this is yet another overreach due to the 'war on drugs'.

[Warren]

BitInstant is last year's news.
Never was a meaningful player in the world of BitCoin.

[Paul.]

Wow, imagine had they actually been a meaningful player. Summary execution?

[John]

http://newsbusters.org/blogs/j.....z2rZ167RcB

CBS Sunday Morning edits out Ted Cruz's comments on Obama's abusive DOJ. We wouldn't want anyone outside the evil Wing Nuts who read the evil Right Wing Media, which we are going to finally shut down one of these days, to hear such accusations.

[SweatingGin]

That explains why he missed his talk at the conference.

[SweatingGin]

"He is listed as a speaker at a Bitcoin conference in Miami that ended Sunday."

So, I went down to the conference. Interesting event -- massively more people than were expected (500 expected, 1200+ there.) Very crowded.

Shrem was one of the scheduled speakers, they let us know that it was trouble with his flight.

Speakers were a mix of VC, angel investors, legal thoughts on regulation, technical projects, and various libertarian/an-cap/goldbug/anti-government types. The overlap with the goldbug world was quite evident, and it was a bit odd to see that many libertarians in the wild. Most of the people there certainly seemed to at least lean libertarian, and there were plenty of an-caps around. I wasn't the most extreme.

The beginning of it had a bit of a feeling of despair, for the state of regulations (are you a money transmitter? If so, you need massive funding (big insurance bonds, 48 separate state licenses, etc), and 18 months (or more) of waiting for licenses before you can do anything). If not, and they decide you are, prison. Big focus on people starting companies outside of the US. One panel had a Panama, a Singapore, two British Virgin Islands, and one California company.

Some of the ways of avoiding the regulation (decentralization) were very interesting, though.

[Paul.]

All while one of the scheduled speakers is being whisked away in cuffs.

[SweatingGin]

At the airport, of course, not at the conference (that would have been a shitshow if the feds tried something like that).

Of course, if anyone was going to be whisked away in cuffs from the conference, you'd expect it to be him. He's in an interesting spot. Convicted in 2011, but still not sentenced.

[LynchPin1477]

Interesting. I wonder if I'm technically breaking the law by mixing U.S. and Canadian nickels, dimes, and quarters when I pay for stuff at the gas station.

[Ted S.]

and it was a bit odd to see that many libertarians in the wild.

Any women? 😉

[SweatingGin]

3 or 4?

Actually, a bit better than that (and better than expected), probably 3% or 4% or so. Quite the sausage fest, still.

[np]

One panel had a Panama

Was it Eric Voorhees (coinapult)? Was a freestater too, but he moved to Panama.

His previous bitcoin gambling business satoshidice was incorporated in Costa Rica and they eventually had to ban American IPs.

[SweatingGin]

I don't think it was Erik Vorhies (don't think he was there, I could be wrong). I'd have to look up who it was in my notes. It was startups that I didn't really recognize (goes to show that they're popping up fast, *not* in the US.)

[SweatingGin]

I hadn't realized satoshi dice blocked US IPs. Hadn't looked at it in a while. There's always TOR, although I don't feel much need to gamble with them at the moment.

[Cytotoxic]

ban American IPs.

This is what mirror IPs are for.