Many people in the Bitcoin community were shocked when they heard Charlie Shrem was arrested for allegedly laundering money for drug dealers from the Silk Road, but the moral, and perhaps even the legal, case against him is rather weak. While the US Government will definitely try to make an example out of Charlie, it's unclear as to whether or not the average person on the street would agree that he should be thrown in jail for decades. While you could make the argument that Charlie should have known what was going on behind the scenes in BTCKing's reselling operation, it's plausible that Charlie thought he was working within the regulatory confines of a money services business. After reading through the entire criminal complaint against Charlie Shrem, it seems that he is guilty of nothing more than ordering some pot brownies off the Internet.
Some people have pointed out that FinCEN did not release their official guidance on Bitcoin until March of 2013, but the fact of the matter is BitInstant, Charlie's Bitcoin exchange, went ahead and registered as a money services businesses in 2011. Since BitInstant was registered as an MSB, they had to follow KYC and AML requirements. One of those requirements is to make sure that you collect identifying information from your customers when they make a "series of payments" of $3,000 or more. BitInstant's method of handling this problem was to only allow customers to purchase $1,000 worth of bitcoins per day. The main claim that Special Agent Gary Alford makes in the criminal complaint is that Shrem was allowing BTCKing to purchase more than $1,000 worth of bitcoins per day. The only problem with this accusation is that Charlie viewed BTCKing as a reseller. This reality is even admitted in the criminal complaint. How did they know Charlie viewed BTCKing as a reseller and not a customer? They got a warrant for his email accounts.
BTCKing was not actually purchasing bitcoins from BitInstant for himself. He was a reseller. BTCKing's customers were making direct deposits to BitInstant bank accounts, and all of those deposits were in amounts less than $1,000 per day. You may be thinking that BTCKing would just have his customers make many smaller deposits of less than $1,000 at different bank branches every day, but the problem with this theory is that BitInstant can't stop this kind of activity anyway. Since they don't need to ask for personal identification on purchases of $1,000 or less worth of bitcoins, there was no way for them to know if a single customer was actually making multiple purchases that amounted to more than $1,000 per day. If Charlie is guilty of money laundering in this case, then the entire company was not legitimate. This was the likely reason that they had to move away from accepting cash deposits at banks and switch to Western Union and MoneyGram remittances. You'd think that change would be enough to keep the regulators happy, but apparently they've decided to go after Charlie over a year after this new policy was implemented by BitInstant.
The Silk Road was Not Illegal
While there were illegal activities that took place on Silk Road, the reality is that there were also legal goods and services sold on the online marketplace. Silk Road was an illegal business for a variety of reasons, but individuals who operated as a buyer or seller on the hidden website weren't necessarily breaking the law. Some users of Silk Road actually wanted to see if they could get their seized bitcoins back from the government at one point, but it's likely that those coins will be auctioned off in the near future. It also seems that BTCKing was operating in Silk Road's forum rather than the actual marketplace. BTCKing would not have been able to operate as a Silk Road merchant because he was selling bitcoins to people and they were sending him cash. It would actually be more correct to say that his customers were sending cash to BitInstant. The bitcoins would then be sent to BTCKing, so he was basically acting as a middleman between his clients and BitInstant. This could not work on the actual Silk Road marketplace because the market only allowed bitcoins to be used for purchases.
It's possible that many of BTCKing's clients did not actually operate on the Silk Road marketplace because they could use his services without actually being a Silk Road user. BTCKing was really just using Silk Road as a platform to find new people who wanted to buy bitcoins. While BTCKing was operating on a forum with legally-questionable origins, there is no explicit evidence that his clients were buying more than $1,000 worth of bitcoins through his BitInstant reselling service per day. There is proof that this happened after his relationship with BitInstant ended, but that has nothing to do with Charlie Shrem. As far as Charlie knew, this was a guy getting legal customers on a forum who were not breaking the policy of purchasing more than $1,000 worth of bitcoins per day.
Breaking Up with BTCKing
Charlie did the right thing. BTCKing was prevented from using BitInstant services in October of 2012 because Charlie's partners at BitInstant did not want to work with this shady character. Charlie told BTCKing that he would have to provide a utility bill and ID if he was going to continue to have his clients purchase bitcoins through BitInstant. Perhaps this step should have been taken sooner, but the fact is that BitInstant stopped working with BTCKing on their own. They basically wanted to over-comply with the law to make sure legal issues didn't pop up in the future. So much for that. BTCKing had to operate his business with his own bank account in 2013 because Charlie and BitInstant did not want to work with him.
The fact that Charlie and BitInstant broke off their relationship with BTCKing shows that they were clearly trying to follow the law. Sure, Charlie was going to the edge of the law to turn a profit, but he pulled out of it once he realized he could be operating in a legal gray area. Charlie was actually seen as a leader when it came to making sure that everyone became compliant with AML regulations after FinCEN released their recommendations for Bitcoin exchanges. He gave a talk at the first Bitcoin Conference in San Jose where he repeatedly emphasized the importance of AML and KYC compliance.
Why Not Go After Bigger Fish?
What Charlie was doing could definitely be considered legally questionable at worst. Having said that, he's a small fish compared to the kind of stuff that happens in the banking and investment industry on a regular basis. If Charlie is going to jail, then shouldn't there be a long list of bankers keeping him company? After all, plenty of banks have been caught laundering money for drug cartels, terrorists, countries who are under trade sanctions, and more. In total, the criminal complaint against Charlie Shrem estimate that he helped BTCKing "launder" around $1 million. Compare this to the billions of dollars that has been laundered by traditional banks over the years. People like Charlie Shrem and the owners of Liberty Reserve get jail time while the "too big to jail" banks get fined a few weeks' profits. As Andreas Antonopoulos mentioned on The Joe Rogan Experience last night, a lot of Wall Street bankers should be in jail if what Charlie Shrem did is a serious crime.
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Morals Trump the Law
Even if you want to go ahead and say Charlie broke the law, most people in the United States don't agree with the War on Drugs anyway. Charlie co-founded BitInstant and was at the heart of the financial innovations around this new Bitcoin technology, and his reward from society may end up being a few decades in prison. Do we really want to ruin a young, promising entrepreneur's entire life based on laws that most people don't even think should exist in the first place? Does everyone realize the insanity of the situation? Even when you follow the rule of law, the government can still come after you whenever it wants. The problem of putting too much power in the hands of the kinds of people who want to put Charlie in jail is one of the many issues that Bitcoin and other decentralized structures are trying to solve. If Charlie Shrem spends 20 to 30 years in prison, then it's just more evidence of a broken legal system than anything else. A legal system that protects the well-connected and imprisons the competition. Perhaps this legal system will also be disrupted by technology in the near future. You have to wonder why Charlie has been targeted in this investigation. It almost seems as if law enforcement agents were searching for any possible way to connect Silk Road to the aboveboard members of the Bitcoin community, and this was the best thing they could find. I'll stop myself from getting too conspiratorial on that point.