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BitInstant CEO Charlie Shrem was arrested by federal authorities over the weekend for allegedly laundering money, failing to report suspicious activity and operating an unlicensed money transmitting business.
Authorities also arrested Shrem's business associate, Roger Faiella, in connection with the case.
According to the criminal complaint, Shrem allowed Robert Faiella to use the Bitcoint trading site to purchase large amounts of Bitcoins knowing full well that Faiella was then reselling those Bitcoins for cash to users of the now defunct online marketplace Silk Road, to anonymously buy illegal drugs.
Silk Road, which was closed down by federal agents last October, only allowed transactions to be paid for by Bitcoin. Authorities say that between December 2011 and October 2013, Shrem and Faiella's actions resulted in the sale of over US$ 1 million in Bitcoins.
Shrem's actions, said federal authorities, were done knowingly and contributed to and facilitated the anonymous sales of drugs. While not specifically charged for purchasing drugs, the complaint does mention that evidence exists also linking Shrem to the purchase of drugs on Silk Road.
Shrem is regarded positively as a forceful Bitcoin currency advocate. In addition to being the chief of BitInstant, Shrem is the co-chairman of the Bitcoin Foundation and the co-owner of a bar that accepts Bitcoin for payments. BitInstant was also well regarded in Silicon Valley, receiving investment from well-known investors Cameron and Tyler Winklevoss.
Authorities were able to get evidence on Shrem via an e-mail account he used for his BitInstant transactions. That e-mail account apparently reveals how Shrem taught Faiella how to get around BitInstant security measures and daily deposit limits.
Shrem was arrested on Sunday at New York's Kennedy International Airport. Faiella was arrested on Monday in Cape Coral, Florida. BitInstant has been closed since July 2013.
