Feds Arrest Operators of Silk Road Bitcoin Exchange

LOS ANGELES—The Manhattan U.S. Attorney’s office today announced the arrest of two men who operated a Bitcoin exchange on Silk Road, the so-called “dark web drug site” that was closed by the FBI in October of last year.

Charlie Shrem, 24, of New York City, and Robert Faiella, 52, of Cape Coral, Florida, both of whom are alleged to be executives of an underground Bitcoin exchange called BitInstant, have each been charged with “one count of conspiracy to commit money laundering, which carries a maximum sentence of 20 years in prison, and one count of operating an unlicensed money transmitting business, which carries a maximum sentence of five years in prison. Shrem is also charged with one count of willful failure to file a suspicious activity report, which carries a maximum sentence of five years in prison,” according to a statement issued by the U.S. Attorney’s office today.

The allegations against Shrem and Faiella were laid out today by the three men overseeing the ongoing investigation: Preet Bharara, the United States Attorney for the Southern District of New York; James J. Hunt, the Acting Special-Agent-in-Charge of the New York Field Division of the Drug Enforcement Administration (“DEA”); and Toni Weirauch, the Special Agent-in-Charge of the New York Field Office of the Internal Revenue Service, Criminal Investigation (“IRS-CI”).

They allege, in part:

“From about December 2011 to October 2013, FAIELLA ran an underground Bitcoin exchange on the Silk Road website, a website that served as a sprawling and anonymous black market bazaar where illegal drugs of virtually every variety were bought and sold regularly by the site’s users. Operating under the username “BTCKing,” FAIELLA sold Bitcoins—the only form of payment accepted on Silk Road—to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he filled the orders through a company based in New York, New York (the “Company”). The Company was designed to enable customers to exchange cash for Bitcoins anonymously, that is, without providing any personal identifying information, and it charged a fee for its service. FAIELLA obtained Bitcoins with the Company’s assistance, and then sold the Bitcoins to Silk Road users at a markup.

“SHREM is the Chief Executive Officer of the Company, and from about August 2011 until about July 2013, when the Company ceased operating, he was also its Compliance Officer, in charge of ensuring the Company’s compliance with federal and other anti-money laundering (“AML”) laws. SHREM is also the Vice Chairman of a foundation dedicated to promoting the Bitcoin virtual currency system.”

The charges also allege that Shrem personally bought drugs on Silk Road, and that he was “fully aware that Silk Road was a drug-trafficking website, and through his communications with Faiella, Shrem also knew that Faiella was operating a Bitcoin exchange service for Silk Road users.”

The feds further allege that over $1million in Bitcoin exchanges was made by the pair “so that the users could, in turn, make illegal purchases on Silk Road.” Faiella also allegedly manage more Bitcoin exchanges after BitInstant ceased operations on Silk Road in April 2013, according to the indictment, which also states that Faiella “continued to exchange tens of thousands of dollars a week in Bitcoins until the Silk Road website was shut down by law enforcement in October 2013.”

The announcement states that “Shrem was arrested yesterday at John F. Kennedy International Airport in New York, and is expected to be presented in Manhattan federal court later today before U.S. Magistrate Judge Henry Pitman. Faiella was arrested today at his residence in Cape Coral, Florida, and is expected to be presented in federal court in the Middle District of Florida.”