CHAINED

The arrest of Charlie Shrem in January 2014 was not merely the downfall of a single entrepreneur: it was a watershed moment that marked the end of Bitcoin’s anarchic era. Shrem, a charismatic and well-connected evangelist for the cryptocurrency, became the industry’s first major figure to face prison time for activities directly linked to the notorious Silk Road marketplace.

The fact that the BitInstant founder had been prosecuted, not for directly profiting from Silk Road, but for failing to perform due diligence on a customer who had, sent shockwaves through the community. If Shrem – the Vice Chairman of the Bitcoin Foundation no less – wasn’t safe, who was?

Like many early adopters, Charlie Shrem was drawn to Bitcoin but quickly encountered problems when it came to purchasing it. This frustration became the catalyst for BitInstant. Launched in September 2011, the company was conceived as a user-friendly on-ramp to the Bitcoin ecosystem. It charged a fee to allow users to purchase bitcoins at over 700,000 locations including major retailers like CVS and Walgreens.

As BitInstant's influence grew, so did Shrem's public profile. He became one of the most visible and vocal advocates for BTC, a Bitcoin purist who believed the technology could empower individuals by allowing them to secure their wealth outside of traditional financial institutions. In hindsight, he was a prime target for prosecutors seeking to shutter Bitcoin through targeting its weak spot – fiat on-ramps.

The End of Anonymity

The actions that led to Charlie Shrem’s arrest revolved around his company's role as a buyer and seller of bitcoins. In 2013, there was a very high prospect that the BTC in your wallet had passed through Silk Road at some stage, whose darknet marketplace played a dominant role in onchain transaction volume. While most of these coins were mere fractions of UTXOs that had been spent and sent multiple times as they were distributed across the Bitcoin blockchain, some came directly from Silk Road and thus carried a stronger patina of criminality.

Many Bitcoin users and companies unwittingly interacted with “dirty coins” in 2013 that had been used for drug purchases on Silk Road. But BitInstant’s interaction was neither accidental nor tangential. Between December 2011 and October 2013, Silk Road user “BTCKing” ran a profitable but unlicensed underground Bitcoin exchange. Later revealed to be 52-year-old Floridian plumber Robert M. Faiella, BTCKing took cash from Silk Road users and provided them with bitcoin which they would then use to purchase narcotics.

Faiella used BitInstant company to fill his customers’ orders, ultimately funnelling over $1 million in cash into BTC destined for Silk Road transactions. The most damning aspect of this arrangement, and the core of the government's case against Charlie Shrem, was the profound conflict between his actions and his official corporate responsibilities. Shrem was not just the CEO of BitInstant – he was also its designated Chief Compliance Officer.

In a later interview, Shrem recounted the naivete with which he assumed this role in the early days: “I remember the scene: I was sitting in my cousin's living room... I'm 20 years old registering for FinCEN... 'Who is the compliance officer?' Well, I'm the only employee, so, 'Charlie Shrem, Chief Compliance Officer.' 'Will you file suspicious activity reports?' 'Yes.' I didn't know what I was doing!”

But the feds did. On January 26, 2014, Charlie Shrem stepped off a flight at New York's John F. Kennedy International Airport and was arrested by federal agents. The BitInstant founder was charged with money laundering and money transmission offences and released on a $1 million bond complete with electronic monitoring that placed him under house arrest.

On September 4, 2014, Shrem pled guilty to aiding and abetting the operation of an unlicensed money transmitting business. He was handed down a sentence of two years in federal prison to be followed by three years of supervised release. He was also ordered to forfeit $950,000.

The conviction of Charlie Shrem was not just a law enforcement victory: it was a political catalyst that provided the perfect justification for a new, aggressive phase of regulatory intervention spearheaded by New York State. His case sent a powerful signal that the perceived anonymity of cryptocurrency would not shield its proponents from the long arm of the law. For the next decade, U.S. blockchain companies especially – even those that attempted to perform due diligence – would be constantly looking over their shoulder.