Charlie Shrem, who became a tycoon at 24 in the virtual currency Bitcoin, was arrested Monday and charged with money laundering in connection with a scheme to sell more than $1 million in Bitcoins to people trafficking drugs on the Silk Road website.
Shrem’s arrest at Kennedy International Airport in New York comes less than a year after he raised $1.5 million for his start-up, a Bitcoin exchange known as BitInstant, which suspended operations last summer.
His arrest marked a setback in the currency’s bid for legitimacy. But federal prosecutors appeared to signal that they have no intention of targeting the currency itself.
“Truly innovative business models don’t need to resort to old-fashioned lawbreaking,” Manhattan U.S. Attorney Preet Bharara said in a statement. “When Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act.”
A spokesman for the Bitcoin Foundation said the group was “surprised and shocked by the news today. As a foundation, we take these allegations seriously and do not condone illegal activity.”
Shrem discovered Bitcoin while a senior at Brooklyn College in 2011, bought thousands of Bitcoins when they were worth a few cents apiece and is now probably worth millions of dollars. Before graduation, he started BitInstant, a company that helps people purchase the digital currency.
According to a criminal complaint filed Monday in U.S. District Court, Shrem quickly made the acquaintance by e-mail of a Florida man, Robert Faiella, 52, who was seeking to convert large sums of cash into Bitcoins, the only currency accepted on Silk Road.
Silk Road, which was shutdown by the FBI in October, allowed users to buy everything from heroin to fake IDs.