By Christoper M. Matthews and Robin Sidel
Charlie Shrem, a prominent 24-year-old advocate for bitcoin, was scheduled to be in Miami over the weekend as one
of the star attractions at a conference for the digital currency. He never made it.
Prosecutors said he was arrested Sunday at John F. Kennedy International Airport in New York and charged in
connection with a money laundering conspiracy that allegedly funneled more than $1 million of the currency to users of
the online black market site Silk Road. Another man, Robert Faiella, was also arrested in what the Manhattan U.S.
Attorney's office said was a conspiracy to help Silk Road customers anonymously purchase everything from narcotics to
The arrests come as prosecutors have escalated their scrutiny of bitcoin, a once esoteric experiment that has
exploded in value and notoriety. While the currency has attracted a wave of interest from investors, including Cameron
and Tyler Winklevoss of Facebook Inc. fame, it also has been trying to shake off a reputation that the virtual currency
is used for illegal activities.
Mr. Shrem runs Bitinstant, a New York exchange for buying and selling bitcoins that was one of the first to
register with the Treasury Department. The company has attracted a high-profile investment from the Winklevoss twins,
who are known for battling Mark Zuckerberg over the ownership of Facebook. Their firm, Winklevoss Capital, last year led
a $1.5 million funding round for Bitinstant.
The criminal complaint against Messrs. Faiella and Shrem, unsealed on Monday, marks the first effort to go after
the alleged online infrastructure that allowed Silk Road to operate.
Mr. Shrem's attorney couldn't immediately be reached for comment. Mr. Shrem was expected to appear in Manhattan
federal court Monday afternoon. Mr. Faiella's attorney couldn't immediately be identified.
Silk Road, which was shut down by prosecutors in October, allegedly dealt entirely in bitcoin. Prosecutors allege
Messrs. Shrem and Faiella sold more than $1 million of the digital currency to users of the online bazaar.
According to the complaint, Mr. Faiella, 52 years old, ran an "underground" bitcoin exchange on the Silk Road
website that sold the currency to users from December 2011 until October 2013.
After receiving an order, Mr. Faiella allegedly obtained the currency from a New York City-based company, where Mr.
Shrem was the chief executive officer, and then sold it back to users at a markup.
The company, which wasn't named in the complaint, allowed users to anonymously exchange cash for bitcoins. Mr.
Shrem was also the chief compliance officer at the company, according to the complaint, and responsible for ensuring the
company was in line with money laundering laws.
According to the complaint, Mr. Shrem filled Mr. Faiella's orders for a fee, despite knowing that currency was
going back to Silk Road users who could then use it buy narcotics and other contraband.
Mr. Shrem gave Mr. Faiella discounts on bulk orders, concealed the orders from the other co-founder of his company
and failed to file suspicious activity reports with authorities as required by federal law, according to the complaint.
Prosecutors also said that Mr. Shrem personally bought drugs on Silk Road.
"Bitcoins are not inherently illegal and have known legitimate uses, but they are also known to be used to
facilitate illicit transactions and to launder criminal proceeds, given the ease with which the can be used to move
money anonymously," an agent of the Internal Revenue Service, which investigated the case, wrote in the complaint
Mr. Shrem is a well-known figure within the bitcoin community. Mr. Faiella, who used the online moniker "BTCKing,"
according to prosecutors, was arrested at his home in Cape Coral, Fla., on Monday.
Both men are charged with one count of conspiracy to commit money laundering and one count of operating an
unlicensed money transmitting business. Mr. Shrem is also charged with one count of willful failure to file a suspicious
"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," Manhattan U.S. Attorney Preet Bharara said. "Truly
innovative business models don't need to resort to old-fashioned lawbreaking, and when Bitcoins, like any traditional
currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act."
Mr. Faiella faces up to 25 years in prison, while Mr. Shrem faces up to 30 years in prison.
Speakers at the weekend conference repeatedly complained that the cases related to Silk Road had disproportionately
tarnished the digital currency's reputation even though allegedly illicit activity represented a very small part of
bitcoin's rapidly growing flow of transactions.
In particular, they said, it added to banks' reluctance to forge relationships with bitcoin-linked businesses, a
challenge that is proving an obstacle for individuals to easily acquire and use the digital currency.
"An anti-money-laundering person in a bank that has to process new customers is going to say, 'bitcoin, that's bad
stuff,'" Carol Van Cleef, a financial services lawyer from Patton Boggs LLP, told the conference. "That's what you're
dealing with--a perception/image problem over the use of bitcoin."
Federal prosecutors earlier this month said Silk Road forfeited $28 million of bitcoins, in connection with a civil
action and criminal complaint against the online marketplace and its owner and operator.
In December, prosecutors unsealed an indictment against three men who allegedly helped run Silk Road. The U.S.
previously charged the alleged mastermind of Silk Road, Ross Ulbricht, accusing him of running the site as well as
plotting to have six people killed to prevent them from acting as witnesses against him.
Michael Casey and Danny Yadron contributed to this article
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
Copyright (c) 2014 Dow Jones & Company, Inc.