Did you miss a session from the Future of Work Summit? Head over to our Future of Work Summit on-demand library to stream.

The founder of a Bitcoin startup and a Bitcoin “king” are accused of colluding to sell the alternative currency to buyers of illegal drugs.

BitInstant CEO Charlie Shrem was arrested this morning at JFK airport in New York and charged with money laundering, operating an unlicensed money transmitting business, and willfully failing to file any suspicious activity.

Robert Faiella, known as the “BTCKing,” was also charged with money laundering and operating an unlicensed money transmitting business. The two are accused of “engaging in a scheme” to sell over $1 million in Bitcoins to Silk Road users.

“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 in a statement. “Truly innovative business models don’t need to resort to old-fashioned law-breaking, and when Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act. We will aggressively pursue those who would co-opt new forms of currency for illicit purposes.”

The complaint said that from December 2011 to October, Faiella sold Bitcoins to people seeking to buy illegal drugs on the Silk Road, a “sprawling and anonymous black market bazaar where illegal drugs of virtually every variety were bought and sold regularly by the site’s users.”

Faiella would receive Bitcoin orders and then procure them through the “Company,” a New York-based exchange where he could buy Bitcoin anonymously for cash without providing any identifying information.

Shrem was the man behind the “company.” He is the CEO of BitInstant, a service that let people quickly transfer funds to Bitcoin exchanges, and a well-known Bitcoin evangelist in New York City.

When he wasn’t running a startup and preaching the merits of Bitcoin, it seems this 24-year-old was raking in the crypto-dough on the side.

The criminal complaint reads:

“Shrem, who personally bought drugs on Silk Road, 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. Nevertheless, Shrem knowingly facilitated Faiella’s business with the Company in order to maintain Faiella’s business as a lucrative source of Company revenue. Shrem knowingly allowed Faiella to use the Company’s services to buy Bitcoins for his Silk Road customers; personally processed Faiella’s orders; gave Faiella discounts on his high-volume transactions; failed to file a single suspicious activity report with the United States Treasury Department about FAIELLA’s illicit activity, as he was otherwise required to do in his role as the Company’s Compliance Officer […].”

Bitcoin and the Silk Road saga have brought an air of mafia-style crime drama to the tech community.

The Silk Road is an online marketplace where people can use Bitcoin to buy and sell a number of illegal goods. The FBI seized the Silk Road in October after a lengthy investigation and brought charges against Ross Ulbricht, otherwise known as “Dread Pirate Roberts,” for narcotics trafficking conspiracy, computer hacking conspiracy, and money-laundering conspiracy.

Ulbricht is said to have made $79.8 million in commissions from the website while Silk Road overall did $1.2 billion in sales.

Bitcoin was relegated to the dark corners of the Internet for years, and 2013 was the year the crypto-currency began to make its way towards the mainstream.

It experienced several legitimizing moments, such as a U.S. Senate hearing that was described as a “Bitcoin lovefest,” a $25 million investment in Bitcoin wallet startup Coinbase, a Bank of America analyst saying Bitcoin could become “major means of payment for e-commerce,” and large corporations like Overstock accepting it. 

Many of Bitcoin’s biggest believers emphasize the importance of distancing Bitcoin from unsavory activity and proving it has value beyond buying drugs.

The news of Shrem’s arrest is certainly a blow to those efforts, particularly as Tyler and Cameron Winklevoss are investors in BitInstant. 

The Winklevosses are perhaps best known for their scuffle with Mark Zuckerberg over who really founded Facebook. However, they recently came out as major Bitcoin supporters and created a trust to begin publicly trading Bitcoins.

Bitcoin continues and will continue to be controversial, but it seemed to be making some real headway with people who aren’t drug dealers or tech nerds.

Venture capitalist Marc Andreesseen recently said in the New York Times that “I’d like to address the claim made by some critics that Bitcoin is a haven for bad behavior, for criminals and terrorists to transfer money anonymously with impunity. This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology.”

While it may be true that Bitcoin opens up incredible possibilities for money transferring, micro-payments, and the unbanked, it is also true that criminals love it And perhaps even worse, criminals masquerading as legitimate businessmen.

VentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative enterprise technology and transact. Learn More