Officials arrested the CEO of a Bitcoin exchange at New York City's JFK Airport on Sunday on charges of laundering more than $1 million in Bitcoins through the dark-web drug marketplace known as the Silk Road, prosecutors announced Monday.
The announcement comes one day before New York's Office of Financial Services is slated to hold hearings on the regulation of virtual currencies such as Bitcoin, and casts some doubt on the uneasy relationship between regulators and the growing alternative payment system.
The arrested CEO, Charlie Schrem, is the founder of BitInstant, a currently inactive Bitcoin exchange that has received support from the Winklevoss twins, who are scheduled to testify at this week's hearings.
Preet Bharara, the U.S. Attorney for the Southern District of New York, announced that he was charging Schrem for money laundering, operating an unlicensed money transmitting business, and violating the Bank Secrecy Act for failing to disclose that a business contact was facilitating illegal sales of drugs through the Silk Road, which used Bitcoin for transactions.
Bharara said that the 24 year-old Schrem and his counterpart "exchanged over $1 million in cash for Bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road."
Federal law enforcement shut down the Silk Road in October for dealing in drugs and illegal services and arrested its administrator, Ross William Ulbricht, who went by the pseudonym "Dread Pirate Roberts."
It is not clear what the ramifications of Schrem's arrest will be for other Bitcoin exchanges. Bharara said in his statement that the crime for which Schrem was charged was an instance of "old-fashioned law-breaking" and declared that "law enforcement has no choice but to act" when alternative currencies are used for money laundering.