The CEO of Bitcoin exchanger BitInstant has been arrested and charged with money laundering over allegations that he and another man sold more than $1 million in Bitcoins to buyers and sellers of drugs on the underground drug site Silk Road.
But authorities say Shrem then contacted Faiella privately and instructed him in how he could continue to use BitInstant surreptitiously. Although Faiella’s email address was banned from being used to conduct transactions at BitInstant, Shrem told him to simply use a different email address to secretly bypass the ban.
To purchase Bitcoins for use on Silk Road, Faiella submitted orders to BitInstant specifying the number of Bitcoins he wanted to purchase and provided an email address. A third company, which handled the cash transactions, replied with an email instructing where to deposit the cash. The latter included a handling fee attached to it that was designed to help the company identify each transaction to the proper purchaser.
The cash processor isn’t identified in the complaint against Shrem and Faiella, but it’s believed to be Tcash Ads, Inc, which was charged last March with operating an unlicensed money services business.
Despite these caveats, authorities say that Faeilla violated the terms of service by exceeding the daily limit, and Shrem failed to file any reports of suspicious activity.
According to BitInstant’s web site, its customers were limited to depositing $1,000 in cash a day.
Authorities assert that Shrem knew about Faiella’s activities and even personally processed his orders, giving Faiella a discount on high-volume trades of Bitcoins that he purchased for Silk Road buyers. Shrem also availed himself of Silk Road’s drug services, according to court documents, though he is not charged with buying drugs.
In late 2012 when BitInstant stopped accepting cash payments for Bitcoins, Faiella halted his own exchange business on the Silk Road site, but resumed it in April 2013, continuing to exchange tens of thousands of Bitcoins a week for Silk Road users until the site was closed.
For example, one handling fee might be .32 cents, another would be .45 cents. Customers would be told to pay $200.32 or $200.45, with no customer being given the same handling fee on the same day so that the company could deposit the Bitcoins into the proper anonymous account.
Even as Bitcoin is making its way into mainstream use — with prominent venture capitalists and even U.S. Federal Reserve Chairman Ben Bernanke endorsing it in theory — Bitcoin remains controversial and a focus of law enforcement interest because of its popularity among criminals who prize its anonymity and ease-of-use for illegal transactions.
Shrem is also known for having engraved the private key for one of his Bitcoin stashes on a ring that his jeweler father made.
Faiella, operating under the user name BTCking, allegedly obtained Bitcoins through BitInstant, then sold them at a profit to Silk Road users.
Authorities gathered evidence for the case against Shrem and Faiella in part by obtaining access, via a search warrant, to email accounts that Shrem used for BitInstant. In March 2013, authorities also gained access to the email account used by a company that processed the cash payments for BitInstant.
According to court documents, from December 2011 until October 2013 when Silk Road was seized by federal agents, Faiella, 52, operated a Bitcoin exchange on the Silk Road site that allowed drug buyers and sellers to anonymously exchange cash for Bitcoins — the only currency used on the Silk Road site to buy drugs and other paraphernalia marketed through the site.
Customers would then deposit the cash in person at the specified local bank, directing the money to a bank account owned by the cash-processing firm. Once the cash deposit was verified, the Bitcoins were transferred to the customer’s Bitcoin account of choice.
Shrem, a well-known figure in the Bitcoin community, is also the co-owner of a bar in New York called EVR, that takes Bitcoin payments and is co-chairman of the Bitcoin Foundation, which promotes Bitcoin as a currency.
In email accounts for the cash processing firm, authorities found about 3,000 transactions that they believe belonged to Faiella. All of them involved correspondence with safe-mail accounts they believe were used by him, including BTCKing@safe-mail.net.
Faiella promised in an advertisement for his service that Bitcoins would be deposited so fast that they would likely be in the buyer’s Bitcoin account before they returned from the bank.
Shrem and Faiella began doing business directly in December 2011, when Shrem contacted Faiella about an order he had submitted, court documents show. One of the deposits for Bitcoin had been made with a check instead of cash. When Shrem contacted Faiella and realized he was responsible for a number of orders BitInstant was receiving and further realized Faeilla was reselling Bitcoins on Silk Road, he sent Faeilla an email banning him from using BitInstant, and copied the cash processor on the email.
Faiella, concerned that BitInstant planned to keep $4,000 he had already deposited to purchase Bitcoins, threatened to contact the feds to report BitInstant. Shrem wrote back threatening to report Faiella for operating an unlicensed money exchange on Silk Road.
Charlie Shrem, 24, who ran BitInstant out of New York, is charged, along with Robert Faiella, with conspiracy to commit money laundering and operating an unlicensed money transmitting business, according to the complaint (.pdf), filed in the Southern District of New York. The charges come three months after the underground drug emporium was shuttered by law enforcement and its alleged founder, Ross Ulbricht, arrested.
The company informed customers on its web site that “[W]e are simply not allowed by law to handle extremely large amounts of money for a single user without conducting a lot of background checks and having paperwork on file. VERY large transactions would even require us to file notices for the use of law enforcement in tracking money laundering or other criminal activity . . . ”
In the meantime, BitInstant closed in July 2013, citing plans to revamp the business, but never re-opened.
Shrem, who was also compliance officer for BitInstant, was arrested on Sunday at New York’s JFK airport, while Faiella was arrested today in Florida. In addition to the other counts, Shrem was charged with failing to file suspicious activity reports in accordance with a federal anti-money laundering law for the transactions that he allegedly helped Faiella facilitate through BitInstant.
Jiang Zhuoer: BTC.Top Will Support the Camp Favored by a Majority of Hash Power in the Bitcoin Cash Hash War
Jiang Zhuo’er and his BTC.TOP , a major Chinese mining pool, will not take side in the upcoming Bitcoin Cash’s hash war between two competing camps, Bitcoin ABC and Bitcoin SV. Zhuo’er shared h
F2Pool Will Support the Mining of BCHABC and BCHSV after Bitcoin Cash Hard Fork
F2Pool, the sixth largest bitcoin mining pool in the world, announced on Tuesday that it will allow miners to mine both coins generated from the upcoming Bitcoin Cash hard fork after the chain split
IBM Says Blockchain Can Power 'Open Scientific Research' in New Patent Filing
A patent application published Thursday claims the process of conducting scientific research can benefit from the blockchain.
Led by a team at IBM's Watson Research Center, the patent application p
CFTC Fines Bitcoin Trader $1.1 Million for Crypto Fraud
The U.S. Commodity Futures Trading Commission (CFTC) has jailed a bitcoin trader and fined him over $1 million for running a fraudulent bitcoin and litecoin scheme.
According to a press release iss
Japanese Firms Claim Success in Marine Insurance Blockchain Trial
One of Japan's largest insurance companies, Tokio Marine & Nichido Fire Insurance, and IT firm NTT DATA have completed a trial that put the paperwork for marine cargo insurance claims on a blockchain.
Accenture Puts Software License Management on a Blockchain Platform
Global professional services giant Accenture has rolled out a new software license management application built with tech from distributed ledger startup Digital Asset.
Accenture announced in a pre
Singapore's Central Bank, SGX Develop Blockchain Settlement System
The Monetary Authority of Singapore (MAS) and the country's stock exchange, Singapore Exchange (SGX), have developed a settlement system for tokenized assets that can work across different blockchains
Colorado Regulators Crack Down on Four More ICOs
Colorado regulators took action against four ICOs Thursday, bringing the state's total number of cease-and-desist orders against crypto startups to 12.
The state's "ICO Task Force" rebuked Bitcoin