Bitcoin Foundation’s Shrem charged in drug-trafficking case

The vice chairman of the Bitcoin Foundation was charged by federal prosecutors with conspiring to launder more than $1 million in the virtual currency, the latest in a series of charges and forfeitures tied to the illicit online bazaar Silk Road.

Charlie Shrem, 24, was arrested Sunday at John F. Kennedy International Airport in New York. Shrem, of Cape Coral, Fla., was also chief executive officer of BitInstant, a Bitcoin exchange company. The Bitcoin Foundation was formed to oversee the currency’s software protocol and represents the industry before regulators.

Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority, and uses a public ledger to verify encrypted transactions. It has gained traction with some merchants, including

“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 said Monday in a statement.

Shrem has been a prominent Bitcoin evangelist in New York. His company ceased operations around July 2013. Cameron and Tyler Winklevoss, who are currently seeking regulatory approval for a Bitcoin exchange-traded fund, invested $1 million in BitInstant. An e-mail to Winklevoss Capital Management wasn’t immediately returned.

Also charged was Robert Faiella, accused of being an underground Bitcoin exchanger tied to Silk Road. The two men are accused of engaging in a scheme to sell bitcoins to Silk Road users, allowing them to buy and sell illegal drugs anonymously and beyond the reach of law enforcement authorities.

They are charged with conspiring to commit money laundering and operating an unlicensed money-transmitting business. Shrem is also charged with willfully failing to file suspicious activity reports about Faiella’s transactions through his company, in violation of the Bank Secrecy Act.

“Working together, Shrem and Faiella exchanged over $1 million in cash for bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road,” Bharara said.

Earlier this month, about 29,600 bitcoins worth $28 million were seized from Silk Road.

The forfeiture order, signed Jan. 15 by U.S. District Judge J. Paul Oetken, was the largest forfeiture of bitcoins, according to the government.