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Bitcoin's Star Entrepreneur Was Arrested by the Feds for Silk Road Money Laundering

Winklevoss Capital, a major backer in BitInstant, has distanced itself from the company's indicted CEO.
Image: Wikipedia

The Silk Road claimed its latest victim Sunday, this time in the form of Charlie Shrem, CEO of BitInstant, a Bitcoin startup that boasted the Winklevoss twins among its major investors and allowed customers to quickly and conveniently acquire bitcoins.

Federal authorities arrested the 24-year-old Shrem at John F. Kennedy airport, and charged him with “conspiring to commit money laundering and operating an unlicensed money transmitting business" that's connected to the deep web bazaar.


Also included in the federal criminal complaint was a co-conspirator, Robert Faiella. The 54-year-old Bitcoin broker, who operated under the alias “BTCKing” on the Silk Road, was picked up in Cape Coral, Florida.

Shrem, who is also a founding member and vice chairman of the Bitcoin Foundation, and Faiella are alleged to have taken high-volume orders of the anonymous cryptocurrency from Silk Road users.

“As alleged, Robert Faiella and Charlie Shrem schemed to sell over $1 million in Bitcoins to criminals bent on trafficking narcotics on the dark web drug site, Silk Road,” said Manhattan US Attorney Preet Bharara in a press release.

Prosecutors claim that Shrem “personally bought drugs” off the Silk Road and was “fully aware” of the implications of the black market site. The criminal investigation is ongoing.

“We are surprised and shocked by the news today,” a spokesperson at the Bitcoin Foundation told Motherboard over email. “As a foundation, we take these allegations seriously and do not condone illegal activity.”

BitInstant, where Shrem was also the compliance officer, had reached legendary status in the early days of Bitcoin as one of the first startups that truly made the then underground virtual currency easy-to-use for average folks in the real world. A slew of notable community alumni emerged from the three-year old company, including Erik Voorhees, the creator of Satoshi Dice and co-founder of Coinapult, and Roger Ver, the prominent evangelist known affectionately as “Bitcoin Jesus.”


“I want Bitcoin to be my legacy." — Charlie Shrem

Last May, Tyler and Cameron Winklevoss, the twin Harvard graduates of Facebook fame, announced that they had made a $1.5 million investment in the firm through their VC firm Winklevoss Capital. The pair hopes to make BitInstant the premier destination for buying and selling bitcoins online.

Instead, those dreams were dashed when regulators closed in on the burgeoning cryptocurrency. In June, the New York State Department of Financial Services issued a warning letter to BitInstant, requesting what by then was essentially a Bitcoin exchange to comply with regulations governing money transmission businesses.

BitInstant suspended its services in July, just days after a class action lawsuit was filed that claimed the company made "false representation about its services and the inflated fees that it failed to refund as promised.” The company has remained offline since.

By then, Shrem had become somewhat of a Bitcoin celebrity, having been featured in publications like Bloomberg Businessweek and was making regular media appearances including Good Morning America.

“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,” a spokesperson at Winklevoss Capital told Motherboard over email. “Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest.”


If the Winklevoss twins were unaware of potential ongoing criminal activity, rumors quietly circulated for months among some Bitcoin community members that something might be amiss. One insider who wished to remain anonymous tipped me off as early as June that he suspected BitInstant might get busted, citing issues with licenses and improper accounting.

“I knew he’d get busted,” the insider told me today over chat. “But to be honest, I didn’t think it would be so soon.” The source also speculated that “they have chat logs by the sound of it," because "how else they gonna make the connection between BTCKing and Charlie?"

Having founded BitInstant with a $10,000 loan from his mother, Shrem made millions on his venture, profits he used to purchase a brand new BMW and more recently a small plane. He moved from the basement of his parents’ home in Brooklyn, where he’d started the company, into a spacious apartment in Manhattan, and became known as a “proud stoner.” The residence was located directly above EVR, a posh nightclub where Shrem is a part-owner and met his current girlfriend, Courtney, who works as a bartender. The venue, located in Midtown, became a local destination for crypto-partiers because it accepts BTC.

Even as BitInstant shuttered its doors, presumably temporarily, Shrem spent his time jet-setting the world to conferences and speaking opportunities as a Bitcoin evangelist.

“I want Bitcoin to be my legacy,” Shrem told me last April in an interview when I visited BitInstant’s former offices near Madison Square Park. “And I think it will be.”