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Bitcoin goes to jail

A dispatch from Bitinstant CEO Charlie Shrem’s sentencing.


Daniel Stuckey

Internet Culture

Posted on Dec 20, 2014   Updated on May 29, 2021, 10:40 pm CDT

Friday afternoon, in U.S. federal court for New York’s Southern District, the 25-year-old former CEO and compliance officer of a defunct New York-based bitcoin exchange, Charlie Shrem, was sentenced to two years prison time followed by three years supervised release.

In January, Shrem was arrested by DEA agents at JFK upon his arrival home from Amsterdam, but spent 11 months leading up to Friday’s sentencing under house arrest at his parents’ Brooklyn home.

Shrem, and an online associate, Robert Faiella, the operator of another exchange, BTCKing, in April faced money-laundering charges tied to $1 million allegedly used on the Silk Road for drug purchases. Shrem pleaded to superseding information in September.

Minutes after the hearing was scheduled to begin, a gallery composed of no more than 30 people sat behind the bar, waiting for the Bill Clinton-appointed Senior Judge, Jed S. Rakoff. Shrem’s mother wept in the quiet courtroom.

Shrem, who founded Bitinstant in 2011, crouched his head between his attorneys.

Left to Right: Attorney Marco Agnifilo, Charlie Shrem, and attorney Jacob Kaplan.

Left to Right: Attorney Marco Agnifilo, Charlie Shrem, and attorney Jacob Kaplan.

Illustration by Daniel Stuckey

About 30 minutes into waiting for Rakoff, I took the elevator down to make a call and smoke a cigarette. Upon returning back upstairs to the courtroom on the federal courthouse’s 14th floor, Marco Agnifilo, Shrem’s lead attorney, had begun delivering his argument for a sentencing of probation to Rakoff.

Philosophizing back and forth with Judge Rakoff on the use of sentencing in establishing deterrents to would-be criminal offenders, Agnifilo invoked Immanuel Kant’s categorical imperative, and explained that it’s disobeyed in using people like his client as a means.

“Shrem was essentially helping someone who was helping someone who was buying illegal drugs. The law recognizes a difference between people who buy drugs versus those who sell drugs.” Agnifilo continued to explain Shrem, his client, had acted as an intermediate to Robert Faiella, operator of the bitcoin exchange, BTCKing, who was facilitating drug purchases through Shrem. “As law professionals, we know all the mistakes we’ve made, and that’s how we learn and get better.”

Agnifilo said that, upon receiving contact from the Department of Homeland Security, his client responded and did what he could to help. As a young man, he conceded, Shrem had made impulsive decisions at a time when he was living out his bitcoin fantasies. (Shrem at one point purchased a plane—albeit a low-cost craft-plane—with some bitcoins.)

Looking out the window, Brooklyn sat above a glimmering East River in the distance.

U.S. attorney Serrin Turner—who’s representing the government against Ross Ulbricht in the Silk Road case—went back and forth on the purpose of establishing deterrents in proceeding with the judge’s sentencing of such cases.

Turner claimed to be “more of a J.S. Mill man,” and argued that sparing the government from focusing on numbers, the U.S. Attorney would prefer to focus on an adjectives: “Serious crimes.” Turner appeared tongue-tied at times, and in a tiresome back-and-forth with the slow-spoken Rakoff, stumbled in his polemics concerning the differences between “sending a message” and the use of deterrents for would-be criminals.

After the drawing room-style exchange between the U.S. judge and prosecutor, Charlie Shrem, the young digital finance entrepreneur was asked if he’d address the court:

“I screwed up, your honor. I failed my community, my family; I failed the bitcoin community.” Shrem quoted Spiderman, in relating he’d been thinking about it as an analogy to his circumstances. “With great power, comes great responsibility… What does that come from…—”

“I believe it was Marvel Comics,” said Rakoff.

“I failed that idea, I was young and I was 22. I knew what we were doing was wrong… and realized along the way—wanting to help after I knew I’d already done negative things; I tried really hard to help institute policies to make bitcoin compliant… All of my former employees, I helped them get jobs. I helped New York State design the bit-license…”

 “Bitcoin is my baby. Bitcoin is my life and it’s what I do. It’s all I have.” 

Soon after Shrem gave his statement, the judge went into deliberating the sentence, at one point demonstrating his disdain for actions he attributed to the “arrogance of youth.” He then handed down his decision: two years prison followed by three years supervised release—much lower than the 30 he’d faced previous to the plea bargain he signed in Preet Bharara’s office. I darted out of the courtroom as Rakoff continued, counting out federal fees.

 “Bitcoin is my baby. Bitcoin is my life and it’s what I do. It’s all I have.”  

Supporters from both inside and outside the courtroom shared loathe for the financial and justice systems in response to the news of Shrem’s punishment. Shrem, upon exiting the courtroom tweeted, nearly signaling delight in learning he’d be spending the next two years behind bars. So much for establishing deterrents.

“It is ridiculous that HSBC knowingly makes unfathomable amounts of money laundering for terrorists and cartels, while Charlie loses years of his life for a transaction that netted him nearly nothing,” said friend and supporter of Charlie Shrem, Andrew Auernheimer, also known by his online alias, “weev.”

“This indictment is not only an affront to justice and decency, it is an assault on the liberties that Bitcoin brings us. This case is all about an agenda Charlie has been needlessly abused for. #CharlieDidNothingWrong.”

Below, I’ve pasted excerpts from a previously unpublished transcript I took of Shrem discussing criminal activity and bitcoin on a panel at Brooklyn’s NeXT festival last year:

Shrem: “Who are the first type of people to use any kind of new technology? The ones that need to use it the most, right? Who are the ones that need to use any financial system the most? The ones that are being pushed out of the current financial system, in order to try and use it for illicit purposes. So obviously, when this new software comes out, these are the first guys that run to it. In the beginning, there were no startups like mine where that know the customer and follow the rules. So in the beginning you have a lot of negative things and negative stigmas around bitcoin. Bitcoin is not anonymous. However, using certain tools, there is a possibility that you can try to be anonymous. At the same time, every single bitcoin transaction can be traced back to the first bitcoin transaction that was ever placed three or four years ago. And there’s a public record that shows it. So, there are people that have actually gotten caught, because they weren’t anonymous. You have to be careful. Money laundering, terrorism, mafia, things like that are not going to succeed.”

“We decided early on that we wanted to make sure that we were compliant. In 2011, we registered with FINCEN, and we said ‘Here is our company, here is what we’re trying to do.’ At the same time, no one really knew what bitcoin was, they still don’t know what bitcoin is, and many people still don’t know whether you need to know your customers or follow these laws, but you do. Whether or not bitcoin is money, or a commodity, or a currency, you’re still accepting dollars from your customers, so you have to know who they are. But at the same time, regulation was largely built to stop crimes, or to be able to follow the paper trail, and over the years what happened was—if you opened a bitcoin account and were doing anything related to money, you were treated like a criminal, you were treated like you needed to prove your innocence. So one of the reasons that people love bitcoin is not because it’s anonymous; it’s a misconception. Bitcoin is not anonymous, it’s private. It’s the same as that cash transaction that you do at the store. So, if you can build a compliance system allowing your customers to still be private, and give them the privacy that they want, and not jeopardize their anonymity, and do it really well–well that’s what we did with bitinstant. We built a four-tiered customer program where it is, ‘Hey, you don’t want to give us your social security number? That’s fine. You don’t want to give us a copy of your ID? That’s fine. We need to collect some basic information about you, to verify you, and we’ll start you off with a smaller account, with a certain amount of limits per day and transactions you can do. And the more information you give us, the more you trust us, we’ll raise your limits and give you better discounts. You trust us, we trust you.’ You get the point.”

Photo via Jonathan Dawkins/Flickr (CC BY 2.0)

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*First Published: Dec 20, 2014, 3:29 am CST