United States: Bitcoins And Liability In The Wake Of Recent Silk Road Arrests

Last week's arrests1 of Robert Faiella, an alleged seller on online marketplace Silk Road, and Charlie Shrem, the CEO of the startup BitInstant, marked a recent round in a series of law enforcement actions against what the government characterizes as a "rise in criminal activity"2 by people using the cryptographically-controlled digital currency, Bitcoin.3  The arrests of Shrem and Faiella occurred nearly contemporaneously with hearings by the New York Department of Financial Services to determine how to regulate Bitcoin in the State of New York.  More than one source has suggested the timing of the arrests may have cast at least some cloud on the New York hearings on regulation of Bitcoin.

The government has not yet convinced a grand jury to return an indictment against Faiella or Shrem and a preliminary hearing is set in the Southern District of New York for February 26, 2014.4 Faiella and Shrem's cases may raise issues about how to apply federal statutes, including money laundering statutes5 and money transmitting statutes[6, to new forms of digital currency.

At issue in Faiella's case appears to be the liability of those accepting payment for illegal items with Bitcoin.  If Faiella's case is to proceed, the government will likely have to show that Faiella had knowledge that bitcoins were intended to promote and support sales of narcotics over Silk Road.  The government may have to address similar issues in various other actions alleging illegal sales of narcotics7, firearms and weapons8, stolen credit cards and personal information9, and other illegal items.  Prosecutions of people shown to have known they have anything of value representing the proceeds of illegal conduct may not appear too troubling.  More specifically, most would agree conventional theories of money laundering allow the government to bring criminal charges for processing Bitcoin transactions that a seller knows involve the proceeds of illegal activity.  As a result, the charges against Faiella may not appear too surprising or troubling to most.

Shrem's case, however, presents the more difficult issues of liability of Bitcoin exchangers who are charged with knowledge about suspicious activities of sellers.  A criminal prosecution simply for providing a digital currency exchange that could potentially be misused is more problematic than a criminal prosecution against a seller, because any form of exchange is potentially subject to abuse.  Such prosecutions may potentially subject all digital currency providers to prosecution.

Past decisions involving the pseudonymous digital currency e-Gold provide limited guidance about these issues.  In 2008, the DOJ indicted E-Gold for violations of federal money laundering and money regulation statutes.  In response to a motion to dismiss the indictment, the court held digital currencies are not exempt from the federal money laundering statutes10, as those statutes were intended to apply to transfers of funds, not solely currency11.  The court further denied the defendant's due process challenges under the doctrines of vagueness and lenity12.  Ultimately, the E-Gold defendants pled guilty and did not receive prison sentences.

Although E-Gold may provide reasoning that is instructive to Shrem's case, the precedential value of E-Gold is limited.  E-Gold involved a decision by the Federal District Court for the District of Columbia.  As a result, E-Gold is not binding on other jurisdictions.  Further, E-Gold involved a decision at a preliminary stage of trial.  As a result, the analysis of E-Gold may be limited to interpretive issues that may not be relevant at more advanced stages of a case.

Further complicating the issue of Shrem's liability are the particular allegations against Shrem.  The Complaint against him alleges several general aspects of Shrem's conduct, including:  that Shrem was aware Silk Road was a drug trafficking website, that BitInstant fulfilled Faiella's orders, that Shrem gave Faiella discounts on high-volume orders, and that Shrem did not file suspicious activity reports regarding Faiella13.  These general allegations, even if proven true, may not appear extremely suspicious to most, as these allegations could apply to other Bitcoin exchangers whose participants engage in illegal activities.

However, also present in the Complaint are more particular allegations regarding Shrem's conduct.  The Complaint alleges Shrem personally processed Faiella's transactions, and that Shrem deliberately helped Faiella circumvent BitInstant's Anti Money Laundering provisions.  Such allegations, if proven true, may muddy the lines between Shrem's liability as an exchanger and Shrem's liability as a participant in Faiella's activities.  Moreover, such allegations, if proven true, may make Shrem's case difficult to use as a precedent to draw any clear legal lines for Bitcoin exchangers that are the subject of future actions by law enforcement.

While Faiella and Shrem's cases are still in their early stages, the government's investigation in these cases is at least a year old.  These cases are likely to have a significant impact on the legal climate affecting digital currency providers, because precedents in the area are so scarce.  The cases may also lead to further regulation of Bitcoin and other digital currencies.


1. See complaint here.

2. Statement of Mythili Raman, Acting Assistant Attorney General, DOJ Office of Public Affairs, release dated November 18, 2013 (available online here).

3. Bitcoin is a form of digital currency characterized by what many call "pseudo anonymous" transfers between users. Often, transfers of bitcoins are facilitated through "Bitcoin wallets."  As discussed in a Wiki article about Bitcoin anonymity:

[E]very transaction is publicly logged.  Anyone can see the flow of Bitcoins from address to address (see first image).  Alone, this information can't identify anyone because the addresses are just random numbers.  However, if any of the addresses in a transaction's past or future can be tied to an actual identity, it might be possible to work from that point and guess who may own[] all of the other addresses.  This identity information might come from network analysis, surveillance, or just Googling the address.  The officially-encouraged practice of using a new address for every transaction is designed to make this attack more difficult.

https://en.bitcoin.it/wiki/Anonymity (last accessed February 3, 2014 (archived version available here)).  In adhering with developer conventions, the capitalized and singular word, "Bitcoin," refers to the technology and network of exchange, while the lowercase and plural word, "bitcoins," refers to the actual digital currency.

4. See USA v. Shrem, 14 Crim. 00164, docket entry 5 (S.D.N.Y. filed Jan. 24, 2014).

5. See, e.g.,  18 U.S.C. §§ 1960 and 1956.

6. See, e.g., 31 U.S.C. §§ 5318(g) and 5322(a).

7. See, e.g., prosecution of Ross Ulbricht, the alleged operator of Silk Road.  In Ulbricht's case, an order was entered January 16, 2014 authorizing forfeiture of all Silk Road assets, including nearly $28 Million in Bitcoin, and all property traceable to Silk Road servers.  See also:  arrest of Dr. Olivia Bolles, who allegedly sold controlled substances over Silk Road using the alias "MDPRO."

8. See, e.g., arrest of Mathew Crisafi, who allegedly trafficked firearms over Black Market Reloaded, a site that allegedly facilitated sale of items using Bitcoin; see also arrest of Jesse Korff, who allegedly sold toxins through Black Market Reloaded.

9. See, e.g., arrest of Sean Robinson, allegedly associated with site Fake Plastic.  Fake Plastic allegedly allowed people to purchase credit card data and other data from individuals known as "skimmers."

10. See U.S. v. E-Gold, 550 F. Supp. 2d 82, 85 (D.D.C. 2008).

11. See E-Gold, 550 F. Supp. 2d at 88-97.

12. See E-Gold. 550 F. Supp. 2d at 98-101.

13. See Complaint at 4, para. 11.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
31 Jan 2019, Other, Los Angeles, United States

Invites you to join us for a private cooking class hosted by Parties that Cook!

31 Jan 2019, Conference, Los Angeles, United States

The Southern California Association of Corporate Counsel's In-House Counsel Conference

6 Feb 2019, Other, Los Angeles, United States

Please join Sheppard Mullin for cocktails & hors d'oeuvres during The Wind Power Finance & Investment Summit 2019

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions