The Bitcoin community faces a major publicity crisis this week with the arrest of BitInstant CEO Charlie Shrem on charges of money laundering for users of the digital black market known as Silk Road.
Shrem, though only 24, is considered an important figure in the Bitcoin community.
In less than three years, he went from being a college senior investing in a silly bubble, to one of the publicly known “Bitcoin millionaires” — a face for a concept just hitting the mainstream public’s interest. With this week’s arrest, he’s now also a public face for the darker side of Bitcoin.
In 2011, while still a student at Brooklyn College, Shrem bought into Bitcoin while it was still selling for less than $US5 each — and then again when it hit $US20.
A double major in economics and finance, Shrem looked at his returns and saw an opportunity to start something new. Borrowing $US10,000 from family, Shrem founded BitInstant, a service that let users quickly buy into Bitcoin.
Those who have spoken to Shrem in a professional context note that he was a great founder to talk to and deal with.
“[He’s] smart, to the point, seemed down to earth, relevant, not a name dropper or annoying bullshitter,” a source who had spoken with Shrem multiple times about his business told Business Insider. “He genuinely wanted to be — and was — helpful.”
As the service expanded and the price of Bitcoin continued to skyrocket, Shrem’s ties and name recognition within the community grew in kind.
In December 2011, two months after its public launch, BitInstant received its first round of funding. With an investment from angel Roger Ver, a Bitcoin evangelist sometimes referred to by the community as “Bitcoin Jesus,” BitInstant was able to hire a designer and another programmer. It had already processed over $US500,000 in transactions.
In 2012, Shrem made some moves that drew curious glances from the Bitcoin community. That August, MasterCard denied that it was talking to BitInstant about doing a Bitcoin-based debit card. BitInstant responded by announcing that it would launch its own prepaid debit card (accepted anywhere MasterCard is taken) in a matter of weeks. The card never materialised.
Eight months later, Businessweek featured Shrem in a glowing profile of the “Bitcoin Millionaires,” about young entrepreneurs who had gotten in on Bitcoin years before it was in the mainstream news.
One fun anecdote from the interview: Shrem wears a ring engraved with the code that gives him access to the Bitcoin “wallet” on his computer.
“They started calling me four-finger Charlie,” he told Businessweek reporter Max Raskin, joking about the fact that a thief in-the-know could think to actually cut off his finger.
The excitement around BitInstant’s success came to a halt only three months later, as Shrem and his company hit their first big legal battles.
We know from Shrem himself that he foresaw legal troubles as far back as last spring. In a trailer released last May (embedded below — skip to 1:23) for the Bitcoin documentary
“The Rise and Rise of Bitcoin,” Shrem states: “I spend thousands of dollars on lawyers every day just to make sure that I’m not gonna go to jail.”
In July, the company was hit with a class-action lawsuit in federal court in the Southern District of New York. The plaintiffs claimed that the company falsely represented its service and failed to refund fees to customers who had faced transactions that took far longer than promised to complete. BitInstant has filed a motion to dismiss the class action, which is pending before the court.
Several days later, BitInstant suspended its service. According to a post on its blog (which is no longer available but is cached here), they took it down “to improve the code based on trends they noticed” in some 17,300 support tickets they had received in one month.
BitInstant’s setbacks didn’t immediately end Shrem’s involvement in the Bitcoin community. After all, his rise didn’t only have to do with his company’s success; he was an influential force among the many voices trying to shape the currency’s future.
Shrem was a founding member of the Bitcoin Foundation and served as vice chairman of the board. Until today, the Bitcoin Foundation’s leadership page said that Shrem helped “pave the way for the Bitcoin economy to emerge in early 2011.”
Shrem is not commenting on the arrest of the charges against him. “Thank you for your inquiry, however, as I’m sure you can understand, we are not able to comment on Mr. Shrem’s arrest at this time,” said hiw lawyer, Keith Miller.
The Bitcoin Foundation distanced itself in its official comment yesterday. “We are surprised and shocked by the news today. As a foundation, we take these allegations seriously and do not condone illegal activity,” said a spokesperson for the Bitcoin Foundation.
This morning Shrem submitted his resignation to the Board of Directors of the Bitcoin Foundation, effective immediately.
Bitcoin Foundation Executive Director Jon Matonis said in a press release:
As a foundation, we need to remain focused on our core mission to standardize, protect, and promote the Bitcoin core protocol. While Charlie has contributed a great deal of personal effort and resources to enhance the adoption of Bitcoin worldwide, a prolonged legal dispute would inevitably detract from advancing that core mission. Therefore, in order to focus on his pending trial, it has been mutually decided that Charlie Shrem resign from the Board of Directors, effective immediately. The Board accepted that resignation today.
The Bitcoin Foundation’s board members aren’t the only ones distancing themselves from Shrem in the wake of his arrest. Cameron and Tyler Winklevoss, who invested in Bitcoin in 2012, had this to say after word got out about the arrest:
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. Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his 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.
Of those we spoke to who are close to Shrem, BitInstant angel investor Roger Ver was the one who was willing to comment on the arrest. A devoted Libertarian, Ver addressed the fact that the charges against Shrem stem from the allegation that he knowingly facilitated the exchange of Bitcoins for buying drugs and allegedly bought drugs from the digital black market, Silk Road:
People own their own bodies, and have the absolute right to put anything they want into it. People like the FBI, and DEA agents who want to lock people in cages for buying, selling, or using drugs are the ones committing evil, and they need to stop. I look forward to the day when they see the error of their ways, and stop committing evil acts in the name of “law enforcement.”
Unfortunately for Shrem, it’s unlikely that he’s going to get very far fighting the government’s case by questioning the ethics of the drug war in our country. With that said, it should prove to be an interesting case to watch, and Shrem and BitInstant will likely become an example of the kinds of things that can happen if the Bitcoin ecosystem actually became the unregulated market that some of its techno-libertarian supporters want it to be.