PART 3: How Bitcoin’s First Felon Will Help Make Cryptocurrency a Trillion-Dollar Market
Shrem, who was partnering with a 23-year-old Welsh coder named Gareth Nelson, handled the business end. He raised $10,000 from his mom and $120,000 from an angel investor named Roger Ver. But one person who declined to invest warned him that BitInstant had no safeguards to prevent money laundering.
That was fine with Shrem. It was fine, too, with a substantial portion of BitInstant’s clientele, users of Silk Road, who needed to exchange dollars for Bitcoins in order to buy drugs on the underground market. There was even a middleman, Robert Faiella, a plumber in Florida who had a sideline obtaining Bitcoins for Silk Road users.
Shrem soon figured out what Faiella was up to. But rather than shut him down, Shrem helped Faiella source money for drug transactions. BitInstant’s cash-processing company and Shrem’s partner wanted to put a stop to it. But Shrem simply encouraged Faiella to disguise his identity with a new username and email address.The flow of money went on unimpeded. By the time Shrem finally cut him off, in late 2012, Faiella—who later pleaded guilty to operating an unlicensed money-transmitting business and was sentenced to four years in prison—had laundered nearly a million dollars through BitInstant.
The libertarian defense for Shrem’s conduct—which he himself has advanced at times—has two parts: first, that individuals have the right to do what they want with their money and their bodies as long as they aren’t harming anyone else; second, that at the time he began helping Faiella, the U.S. government hadn’t determined how to classify or regulate Bitcoin. If the government hadn’t even decided whether it viewed Bitcoin as money, the argument goes, how could one be laundering it?
The Bitcoin community in those days was united in its sense of righteous mission. Because the digital currency abjured central banks and other authorities, many of its first devotees were libertarians, anarchists, and black marketeers who wanted to do business away from the government’s watchful eye. They were gleeful at any sign of Bitcoin’s impending triumph over the financial system, enraged by any show of incompetence or malice by the government or big banks.
The free flow of capital, community members believed, is a human right. Shrem embraced the outlaw stance. When a payment processor, under pressure from partner banks and, cut all ties with Bitcoin companies, leaving customer funds stranded, it was BitInstant that hacked together a solution to let them withdraw their money.