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Bitcoin leader’s surprise arrest shows the digital currency has yet to shake its criminal ties

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Charlie Shrem speaks at a Quartz panel in May 2013.Quartz/Mia Mabanta

Charlie Shrem, the vice chair of the Bitcoin Foundation and CEO of BitInstant, once an exchange for the popular digital currency, was arrested at New York’s JFK Airport last night for violating money transmission rules.

At first, the news was a surprise: Many payments start-ups, including bitcoin companies, run afoul of money transmission laws, and typically face legal expenses, business challenges and bad press—but not arrest.

Then the US Department of Justice issued a press release announcing charges against Shrem and a co-conspirator, and the picture became a lot more interesting. The government alleges Shrem was using his legitimate bitcoin business as a front while knowingly supplying bitcoins for illegal purposes at Silk Road, the erstwhile online drug and contraband market that first brought the crypto-currency to wide repute.

BitInstant, Shrem’s bitcoin exchange, allowed users to exchange bitcoins for dollars and vice versa. It was one of the premiere bitcoin start-ups—Quartz hosted Shrem for a panel on bitcoin where he predicted good relations between the government and bitcoin users. The company even raised a $1.5 million investment round led by the venture-capitalist twins Cameron and Tyler Winklevoss; we’ll let you write the jokes about that one.

While BitInstant was growing as a company, authorities allege that Shrem was using its resources for less savory purposes at the same time. According to the complaint, Shrem personally sold bitcoin to a man named Robert Faiella, who went by the online handle BTCKing. Faiella, in turn, sold the bitcoin to users on Silk Road, who could then purchase that market’s products, illegal and legal. The Department of Justice alleges that Shrem knew that the bitcoin in question were being used by Faiella and others to purchase drugs—in part because he bought some himself through Silk Road—but continued providing the service without alerting authorities, as is required by state and federal law, to protect a key source of revenue.

The potential for bitcoin to succeed widely as a payments technology, as venture capitalist Marc Andreessen recently described, largely depends on the end of criminal bitcoin—otherwise, police officers and financial regulators will likely relegate it to the fringes of the internet economy. The arrest of Shrem, who is associated with efforts to clean up bitcoin’s image, isn’t a good sign for those who want to separate bitcoin from its sometimes unsavory reputation—but then, we knew that would be hard anyway.

The other test here is for the government, which let HSBC executives simply pay fines for money laundering violations far more serious and wide-ranging than Shrem’s alleged crimes. If sophisticated financiers can launder billions of dollars for drug cartels and not go to jail, a double standard for start-up financiers using new technology to launder perhaps a million dollars for drug buyers would confirm a lot of unfortunate suspicions about the influence of the financial industry in the halls of power.

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