On January 27, 2014, the Department of Justice publicly announced it had filed criminal charges against Charles Shrem for operating an unlicensed money transmitting business, conspiracy to commit money laundering, and failure to file suspicious activity reports.
Charles Shrem was the former CEO and Compliance Officer of BitInstant, a Bitcoin exchange in which users could exchange cash for Bitcoins, and the Vice President of the Bitcoin Foundation. However, in July 2013, BitInstant ceased operations citing various reasons.
The Bank Secrecy Act (BSA) and its implementing regulations require institutions to maintain appropriate records and file certain reports — namely suspicious activity reports that might suggest money laundering or other criminal activities — involving currency transactions and customer relationships. The BSA also makes it unlawful to operate a money service business without being licensed.
The criminal charges stem from Shrem’s relationship with the operator of the anonymous marketplace for drugs, Silk Road. The DOJ contended that Shrem not only “knowingly allow[ed] [the co-defendant] to use [BitInstant]’s services to buy Bitcoins for his Silk Road customers,” but “personally processed” the co-defendant’s transactions, gave the co-defendant discounts on high-volume orders, “willfully failed to file suspicious activity reports,” and “deliberately helped [the co-defendant] circumvent” BitInstant’s anti-money laundering restrictions.
The criminal charges against Shrem follow hearings conducted by the New York Department of Financial Institutions in January 2014 on the appropriate regulatory guidelines for virtual currencies. The Financial Crimes Enforcement Network (FinCEN) also issued guidance in March 2013 on the application of the BSA regulations on “exchangers,” “users,” and “administrators” of virtual currency.
While “users” — persons that obtain virtual currency to purchase goods or services — are not considered money service businesses under the BSA regulations and, therefore, not subject to registration, “exchangers” — persons engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency — and “administrators” — persons engaged as a business in issuing (i.e., putting into circulation) virtual currency and having the authority to redeem virtual currency — are money services businesses and are generally subject to registration. FinCEN also issued two administrative rulings in January 2014 on the application of the BSA regulations to mining operations and certain investment activity.