The CEO of Bitinstant, the Bitcoin startup backed by the Winklevoss twins, has been arrested and charged with money laundering.
Charlie Shrem, who is also a vice chairman at the Bitcoin Foundation, was arrested at JFK airport for allegedly selling more than $1 million in Bitcoins to users of Silk Road, an underground drug market, Business Insider reported.
Selling the Bitcoins to Silk Road users allowed them to use the virtual currency to purchase drugs.
"Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way," DEA agent James Hunt said in a statement provided to Business Insider.
Even more unfortunate for the Winklevoss twins and other investors, Shrem's arrest comes right before a two-day state hearing about the future of Bitcoin in New York.
The Bitinstant site was offline as of late afternoon Monday, only coming up as a blank page.
According to ValleyWag, the Winklevoss twins, who are famous for their many lawsuits against Facebook creator Mark Zuckerberg, have invested $1.5 million into Bitinstant.
When the Winklevosses announced their investment in Bitinstant in May, one brother had high praise for Shrem, according to TechCrunch.
"Charlie has been in the space for a very long time, and he has an impeccable reputation among Bitcoiners. He knows everyone in the space and everyone in the space knows him," Cameron Winklevoss said.
Around the same time, the Winklevosses said Bitinstant was processing around 30 percent of the money going in and out of Bitcoin, arranging some 30,000 exchanges in just a month.
The startup, which is an online platform to buy and sell Bitcoins, was also recently the defendant in a class-action lawsuit that accused Bitinstant of misrepresenting its services.
Said to be the owner of a substantial number of Bitcoins, Shrem is additionally charged with "willfully failing to file any suspicious activity report" concerning Robert M. Faiella, his alleged partner in crime and underground Bitcoin exchanger.
Laundering virtual money could result in very real jail time for the suspects.
"Truly innovative business models don't need to resort to old-fashioned law-breaking," Manhattan U.S. Attorney Preet Bharara said in a statement. "[W]hen 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 coopt new forms of currency for illicit purposes."
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