Prosecutors allege Shrem was involved in a massive money laundering scheme involving Robert Faiella, aka BTCKing. Faiella was the leading provider of bitcoins for users of Silk Road, a defunct online drugs bazaar smashed by the feds last year. Shrem is charged with knowingly laundering over $1 million in bitcoin for Faiella. Furthermore, the charges allege that Shrem was fully aware of the operation - he wasn't just buying and selling bitcoins, he knew Faiella was doing the dirty work behind Silk Road.
"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,” Manhattan US Attorney Preet Bharara said.
Shrem's fall from grace is nothing but spectacular. He was a rising star in the world of digital currencies and he liked exposure - he also ran a New York City bar, notable for being the first bar in the city to accept bitcoins. Bitinstant also received a significant investment from the Winklevoss twins, who are now in damage control mode. A few other Silicon Valley investors were also on board.
It is a rather embarrassing episode for all those involved and it's bad news for proponents of digital currencies in general. At a time when a growing number of reputable retailers are embracing bitcoin payments, this is probably the last thing legit businesses wanted to hear. Digital currencies aren't just for speculators and mining freaks who want to make a quick buck - they have a few interesting advantages over existing payment systems, allowing people to make cheap remittances and cutting down money transfer fees for merchants and consumers alike. However, this case illustrates why many business are reluctant to embrace bitcoin-related services.
Interestingly, Shrem is said to have worn the passwords to his bitcoin account on a ring he carried all the time and his friends joked that someone could cut off his finger to get the keys. He was essentially the Wolf of Bitcoin and greed caught up with him.