US makes Bitcoin exchange arrests after Silk Road closure

The operators of two exchanges for the virtual currency Bitcoin have been arrested in the US.

The Department of Justice said Robert Faiella, known as BTCKing, and Charlie Shrem from BitInstant.com have both been charged with money laundering.

The authorities said the pair were engaged in a scheme to sell more than $1m (£603,000) in bitcoins to users of online drug marketplace the Silk Road.

The site was shut down last year and its alleged owner was arrested.

Mr Shrem, 24, was arrested on Sunday at New York's JFK airport. He was expected to appear in court on Monday, prosecutors said.

Mr Faiella, 52, was arrested on Monday at his home in Cape Coral, Florida.

Bitcoin exchanges are services that allow users to trade bitcoins for traditional currencies.

Mr Shrem is accused of allowing Mr Faiella to use BitInstant to purchase large quantities of bitcoins to sell on to Silk Road users who wanted to anonymously buy drugs.

The authorities said Mr Shrem was aware that the bitcoins were being used for such purchases, and therefore he was in violation of the Bank Secrecy Act.

The Act requires financial institutions in the US to alert authorities to any suspicious activity that may suggest money laundering is taking place.

Emily Spaven, managing editor of news site Coindesk, told the BBC: "Since the closure of Silk Road and arrest of alleged owner Ross Ulbricht, we always knew more arrests would follow.

"It is unfortunate Silk Road continues to make the headlines in association with Bitcoin - this is the dark side of Bitcoin, which the vast majority of digital currency users have no association with."

Following the arrests, James Hunt, from the US Drug Enforcement Agency, said in a statement: "Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way.

"Drug law enforcement's job is to investigate and identify those who abet the illicit drug trade at all levels of production and distribution, including those lining their own pockets by feigning ignorance of any wrong doing and turning a blind eye."

Mr Shrem was a founding member and vice chairman of the Bitcoin Foundation, a trade group set up to promote Bitcoin as an alternative currency - but following his arrest he has since resigned.

"We are surprised and shocked by the news," said a spokesman for the organisation.

"As a foundation, we take these allegations seriously and do not condone illegal activity."

BitInstant was one of the largest Bitcoin exchanges on the internet.

However, the service has been inaccessible for some time, explained Mike Hearn, another member of the Bitcoin Foundation.

"Charlie's impact on the Bitcoin community has been hovering near zero for a long time now," Mr Hearn told the BBC via email.

"If the allegations are true, it's part of a phase of Bitcoin's life that the project is rapidly leaving behind (and good riddance)."

BitInstant's investors include Tyler and Cameron Winklevoss - the twins who previously sued Mark Zuckerberg claiming he had stolen their idea for Facebook.

In a statement issued to the BBC, the twins said: "When we invested in BitInstant in the fall of 2012, its management made a commitment to us that they would abide by all applicable laws - including money laundering laws - and we expected nothing less.

"We are obviously deeply concerned about [Mr Shrem's] arrest. We were passive investors in BitInstant and will do everything we can to help law enforcement officials.

"We fully support any and all governmental efforts to ensure that money laundering requirements are enforced, and look forward to clearer regulation being implemented on the purchase and sale of bitcoins."

Follow Dave Lee on Twitter @DaveLeeBBC