BitInstant CEO Charlie Shrem Arrest Shocks Winklevosses, Bitcoin Community

Posted: Jan 28 2014, 3:25am CST | by , Updated: Jan 28 2014, 3:31am CST, in News | Technology News

 BitInstant CEO Charlie Shrem Arrest shocks Winklevosses, Bitcoin Community
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This morning, the Bitcoin community was rocked by the news that a vaunted start-up CEO had been arrested for money laundering. BitInstant CEO Charlie Shrem, 24, has been the subject of fawning profiles for his Bitcoin entrepreneurship. Bloomberg introduced him to the world as a Bitcoin millionaire last year. When Tyler and Cameron Winklevoss invested $1.5 million in his company, they made specific reference to his “impeccable reputation.” On Monday, that reputation took a big hit when the feds arrested him at JFK airport in New York, alleging that he helped a man in Florida convert over a million dollars worth of Bitcoin for use on the drug bazaar Silk Road.

BitInstant which was in operation from 2011 to 2013, before shutting down in July, was a site that allowed users to buy and sell Bitcoin. The indictment cites emails exchanged between Shrem and Robert Faiella of Cape Coral, Florida, in which Shrem advises Faiella on how to avoid getting flagged by BitInstant for potentially illegal activity. Shrem says he knows Faiella is running a money exchange on Silk Road as BTCKing, where he charged Silk Road users a hefty 9% fee for Bitcoins that he was getting through BitInstant. Shrem told him, for example, to use different email addresses for different transactions so that company monitors — including BitInstant co-founder Gareth Nelson — wouldn’t realize BTCKing was changing thousands of dollars of Bitcoin daily. That kind of activity would require the company to file a “suspicious activity report” with the government as required by FinCEN, with which it was registered as a money services business. Shrem was responsible for filing those reports as the compliance officer for BitInstant, according to the Southern District of New York’s Attorney’s Office.

Nelson, who is named in the indictment only as a co-founder and described as deceived by Shrem, is based in the U.K. and says he is withholding comment until he speaks with legal counsel.

People in the Bitcoin community were shocked by the news. There has been a divide in the Bitcoin world between the digital coin’s dark side as a tool for assassination websites and online drug bazaars, and its light side as a “payment disrupter” that attracted legitimate entrepreneurs and venture capitalists eager to capitalize on the Internet’s hottest new innovation. The arrest of Shrem, who holds a high-profile ‘light side’ position as vice chairman of the Bitcoin Foundation, for alleged dealings with BTCKing who was in touch with the Silk Road’s Dread Pirate Roberts and running an anonymous Bitcoin exchange on the drug bazaar, pulls that divide down.

In December 2012, a year after he allegedly started working with BTCKing, Schrem wrote on Reddit, “No longer are we considered juvenile hacker kids looking to launder money and buy drugs online.”

“This is a big surprise. I hope the news isn’t true,” says Jered Kenna, another Bitcoin entrepreneur who also ran a Bitcoin exchange that’s been shuttered for the past few months. “Charlie’s put more effort into legitimizing Bitcoin and moving it forward than most people.”

BitInstant investors the Winklevosses issued this statement:

“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. Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest. We were passive investors in BitInstant and will do everything we can to help law enforcement officials. We fully support any and all governmental efforts to ensure that money laundering requirements are enforced, and look forward to clearer regulation being implemented on the purchase and sale of bitcoins.”

Meanwhile, Bitcoin advocate Roger Ver, an early angel investor nicknamed “Bitcoin Jesus” for his efforts evangelizing the currency, had a libertarian take on the news. He doesn’t think the feds should be going after Silk Road or any of the services that support it. “People own their own bodies, and have the absolute right to put anything they want into it,” wrote Ver by email. “People like the FBI, and DEA agents who want to lock people in cages for buying, selling, or using drugs are the ones committing evil, and they need to stop. I look forward to the day when they see the error of their ways, and stop committing evil acts in the name of ‘law enforcement’.”

When I interviewed Charlie Shrem last year for a story about Bitcoin businesses having trouble getting bank accounts, he told me he’d been kicked out of every bank in New York. “The hardest obstacles for Bitcoin companies are banking and regulation,” he said.

A woman who answered the phone at the house of a relative of Shrem’s said, “This is a false rumor.”

Source: Forbes

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