The Internal Revenue Service might not be sure how to treat bitcoins, but the Justice Department, for now, is continuing to treat the cryptocurrency like old-fashioned greenbacks.
Authorities announced Monday the arrest of two operators of bitcoin exchanges on charges of laundering more than $1 million for the purposes of drug trafficking on the now-defunct underground drug site Silk Road.
Agents arrested Charlie Shrem, CEO of New York-based BitInstant, which is now offline, and Robert Faiella, better known by his online nom de plume "BTCKing." Schrem was nabbed Sunday by authorities at the John F. Kennedy International Airport in New York. Faiella was arrested Monday at his home in Cape Coral, Fla.
Shrem and Failla are alleged to have "schemed to sell over $1 million in bitcoins to criminals bent on trafficking narcotics on the dark web drug site, Silk Road," according to Justice's statement. The two are alleged to have funneled money to Silk Road users who would in turn use that money to anonymously purchase drugs and other illicit goods.
"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," Manhattan U.S. Attorney Preet Bharara of the Southern District of New York said. "We will aggressively pursue those who would co-opt new forms of currency for illicit purposes."
Last week, Bharara announced the forfeiture of $28 million worth of bitcoins that were seized from Silk Road.
James Hunt, a special agent with the Drug Enforcement Agency, added: "Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way."
Faiella is charged with having operated an underground bitcoin exchange from late 2011 to late 2013 via the now infamous Silk Road, described by authorities 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."
The charges are part of an ongoing string of busts against alleged suspected exchangers who surreptitiously navigated Silk Road from its launch in February 2011 until it was shut down by the FBI in October 2013. Silk Road copycats have emerged in the ashes of the fallen site, which was believed to have traded upward of $1 million dollars a month.
Cameron and Tyler Winklevoss, whose previous legal spars with Facebook founder Mark Zuckerberg were famously chronicled in the The Social Network, were among BitInstant's original investors. The twins raised $1.5 million in seed funding for the start-up.