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Summary:

Bitcoin’s ongoing quest for legitimacy suffered a setback this week when the federal government arrested one of the currency’s chief advocates — right before New York regulators hear testimony about the currency.

The virtual currency Bitcoin has come a long way in shedding its early reputation as a tool for crime, and now enjoys the support of many respected investors and mainstream businesses. On Monday, however, that reputation suffered a setback as the federal government announced criminal charges against two men who ran the online exchange BitInstant, one of whom is a senior figure in a trade group that lobbies for Bitcoin’s legitimacy.

In a press release, the Manhattan U.S. Attorney’s Office said it is charging Robert Faiella and Charlie Shrem with conspiracy to commit money laundering in relation to their activities on Silk Road, a notorious online bazaar for drugs and other criminal services.

The release said that Shrem was arrested at JFK Airport in New York yesterday and Faiella at his residence in Florida. Both men are expected to attend court hearings today. Shrem’s name is notable because not only was he CEO of BitInstant, but also Vice Chairman and one of five board members of the Bitcoin Foundation, an umbrella group that has testified before Congress about the virtual currency. Shrem’s profile is still up on the Foundation’s website, but here is a screenshot in case it disappears:

Charlie Shrem bitcoin foundation

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

As Forbes notes, Shrem’s company is backed by the Winklevoss twins, who invested $1.5 million last year and who are major players in the Bitcoin world.

The criminal compliant itself claims that Shrem and Faiella took in over $1 million in cash Silk Road users in exchange for supplying them with bitcoins that the government alleges were used to engage in illegal transactions.

While Silk Road, which the FBI shut in dramatic fashion last summer, was a well-known criminal forum, that doesn’t mean that there is anything inherently criminal about Bitcoin. As supporters of the currency point out, drug dealers favor U.S. dollars to conduct their business — and there is nothing illegal about using cash.

Shrem’s arrest, however, comes at a bad time: Bitcoin supporters are gathering in New York City this week for hearings at which they will testify before state regulators about the currency’s benefits.

The Shrem incident is unlikely to do permanent damage to Bitcoin as an idea, but it does undermine the credibility of the Bitcoin Foundation at a time when the mainstream media and financial industries are starting to pay serious attention to the currency. (Others like my colleague David Meyer remain skeptical about the point of Bitcoin in the first place).

If convicted, both Shrem and Faiella face a maximum of twenty years for the conspiracy charges plus an additional five for operating an unlicensed money-changing business. Shrem faces an additional five years for “willful failure to file a suspicious activity report.”

This story was updated at 11pm ET to include a statement from the Bitcoin Foundation.

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  1. Please keep in mind that many more “respected investors” also bought and sold subprime mortages bundled with other mortgages (aka toxic assets ) which effectively led to the financial crisis of 2008. Whether or not investors with more money than your average retail investor get involved doesn’t have a whole lot of bearing on whether it is a good or safe investment. Democratic governments, by their nature, fundamentally try to work for their people’s best interest.

    1. Which democratic government are you referring to?

      1. emre, I love your comment! Please show me in history (not public school propaganda), but in history where governments “fundamentally try to work for their people’s best interest”. They work for the elites, banksters, global corps of the world. Cheers! =P

  2. I was looking for more articles on the most laundered and forged currency on the planet but apparently you do not cover the US Dollar.

  3. Robert Genito Monday, January 27, 2014

    This article sounds extremely misleading, and it appears information is missing DELIBERATELY. How did he “help” Silk Road people? Were they simply using his website just like everyone else? If that’s the case, then this is all bogus, and a deliberate tactic against an American citizen. And you should be ashamed of writing this article.

    And if that isn’t the case, get more of those pertinent facts in here, like the actions the CEO deliberately made. For now, it leads readers to believe skewed information.

  4. “Bitcoin supporters are gathering in New York City this week for hearings at which they will testify before state regulators about the currency’s benefits”. As Jerry Brito stated in the “Senate Committee on Homeland Security and Governmental Affairs” information gathering hearing, the U.S. government can criminalize the use of Bitcoin or regulate it heavily at the marketplace level – this will only cause business and the benefits of Bitcoin to leave the U.S. and grow in a more “free” economy. The government and central banks will attack anything that can take power of money away from them – Shrem and Faiella were “low hanging fruit” for the government to grab and make an example of. The U.S. government knows the power of Bitcoin – it is un-centralized so they attack anything “centralized” they can get their hands on – Shrem and Faiella. There will be more “grabs” to come but, Bitcoin cannot be stopped without stopping the internet – the U.S. Gov. knows it.

  5. Anthony Alfidi Monday, January 27, 2014

    The latest Bitcoin saga of Silk Road arrests fills out The Haiku of Finance for 01/27/14: http://tinyurl.com/keo3npv Bitcoin enables money laundering and other illicit activities.

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