8 ms·

Bitcoin Exchange CEO Pleads Guilty to Enabling Silk Road Drug Deals

63 points by kloncks 12y ago

anigbrowl 12y ago
To make matters worse, while Shrem was CEO he was simultaneously BitInstant’s compliance officer, responsible for ensuring that his company followed the law. Impressive amount of hubris there.
- DINKDINK 12y ago
  more likely that they were under staffed and didn't have funding to hire a compliance officer
  - IkmoIkmo 12y ago
    Likely but it doesn't take a trained compliance officer to not do the things Shrem did choose to do. Look I'm not against drugs (born & raised in Amsterdam, never used but understanding of it) and Silk Road was mostly a voluntary marketplace without victims that reduced violence and crime involved with drugs being sold at night illegally on every streetcorner instead of anonymously online. It's a product of a system that ignores research and examples (like my country) that legalized markets provide more oversight, opportunity for regulation, for consumer safety, usage-limits, child-free zones etc, than a completely illegal unregulated market. And all Shrem did was enable people to participate in this market (which a priori is not illegal, as it traded baseball caps and hamburgers, too, Shrem was agnostic about what the bitcoins were used for, and did not even sell them to Silk Road users, but to someone who resold them to Silk Road users). So I'm not against Shrem. BUT, he broke laws. And he did it knowingly and willingly. All the emails released by the court show he sent emails telling this guy of whom he knew was selling on the SR, to use different email addresses so that he wouldn't have to ban him (as his cofounder didn't like it), limit bank deposits to X amount per time (so that he wouldn't have to file a report to Fincen) etc etc. And then he didn't report anything even though in the emails he spoke of the need to do these reports, and told his cofounder of this responsibility. He literally instructed a customer how to avoid and evade the law over email secretly from his co-founder, and then chose not to do the due diligence he's legally required to do in terms of reporting large orders, despite communicating he was aware of this duty. My point is, had nothing to do with being under staffed or having too little money to hire competence. Every 15 year old could have not made these mistakes. (if that is even true, they raised quite a bit of money and generated significant revenues very quickly, too) Still, got nothing against the guy. The whole case is rooted on a non-sense drug policy.
- patio11 12y ago
  With respect: I know you're a professional at this, but I work with many startups who need named compliance officers for HIPAA or AML purposes, and it is the CEO virtually everywhere. This decision is generally made less out of hubris and more because a) the position has a very high ratio of requiredness to actual duties and b) legal advisors recommended that naming the CEO as opposed to a summer intern would suggest enthusiastic compliance. Who gets tapped for this sort of thing in your world?
  - anigbrowl 12y ago
    Oh, I didn't mean it was hubristic being the compliance officer! I meant shoveling all the BTC around while knowing he didn't have even a figleaf of deniability (eg blaming an internal miscommunication with someone else who was in charge of compliance). He had to know it was enormously risky.
    - patio11 12y ago
      Oh, my bad. Yep, total agreement. Did you read the complaint? Comedy gold abounded.
      - anigbrowl 12y ago
        Not yet but I will now :D
transfire 12y ago
When will the law stop violating the rights of free men?
- meowface 12y ago
  When people decide to change the law. If you think drugs should be illegal, then justice was served here. If you don't think drugs should be illegal, then it wasn't. Either way, Shrem's behavior seems pretty idiotic to me, from start to finish.
  - cal2 12y ago
    I agree. Regardless of one's stance on drugs and their respective online black markets (the latter of which I had a sizable knowledge), I don't really see what Shrem's expected outcome of this could have been other than, well, what happened.
  - MCRed 12y ago
    There is no provision in the constitution for the federal government to regulate money exchange. Thus the law he was convicted under is itself a criminal act (and under USC 18-242 everyone enforcing it is a felon). The constitution is the highest law of the land. If you think this guy belongs in jail, then you need to amend it. The supreme court has already ruled that unconstitutional laws are null and void the moment they are passed. They do not need to be struck down by the supreme court. Remember the legislature, executive and judicial branches all derive their power from the constitution, thus none of them have the power to exceed the power it gives them, by definition. The real problem here is not that people haven't changed the law (which they can't since the people are not in power). The problem is we have a criminal syndicate for a government. This is why there are no prosecutions for spying on the NSA's part, despite breaking the law. This is why the TSA violates the fourth amendment with impunity (again, a violation of USC 18-242) without ever there being charges filed. Hell, the TSA is violating state criminal statutes in most states when they molest minors who opt out of having their nude photos taken (which itself is child pornography). No charges have been filed. Why is that? So, we can't really say we have the "rule of law" here. The law only is used against people like Charlie, never against the rulers.
cridenour 12y ago
It's interesting that Bitcoin is not classified as a currency by some parts of the government but it was considered a money-transmitting business.
- deleted 12y ago
  [deleted]
- corpselord420 12y ago
  not really. liberty reserve got shut down without any hitches for the same reason
- stepstep 12y ago
  For a bitcoin exchange, only half of the business is in bitcoin. The other half is in fiat, and I think that's why exchanges need a money transmitter license.
  - IkmoIkmo 12y ago
    Nah, a business that's 100% bitcoin-based with no fiat on or off-ramps will still need a money transmitter license. For example an exchange to trade one cryptocurrency for another (bitcoin to litecoin). So even a non-fiat company can indeed be a MSB. It's completely true to say that the IRS deems it property, not currency, and Fincen deems it a money-like product or a money-substitute. It doesn't outright call it currency though, but the implication is there.
- jdong 12y ago
  Why should courts and IRS share the same definition of "currency"?
  - IkmoIkmo 12y ago
    Well imagine the police arrests you because it says drugs are illegal, but the courts say they're not. But you still go to jail, because the police says it's illegal. That would be pretty strange. Similarly, it's strange for the IRS to say you need to pay X taxes because the IRS says it's not a currency, but the courts say it is. But you still need to pay the taxes. There are reasons for why this might make sense, sure, but it's also easy to see why some people find it strange or confusing.
codeshaman 12y ago
I'd argue that Bitcoin owns it's meteoric rise to SilkRoad and drugs in general. Many people 'got into' bitcoin in order to be able to purchase stuff on SilkRoad or similar. I know I'm one of them and I'm really thankful for those 3 hits of acid which cost me 3.3 BTC at the time. The transaction worked so I've decided to invest a lot more in Bitcoin. Up to this day I'm living off that investment and able to work on my dream projects. And the acid was very good as well ;).
- dmm 12y ago
  It's hard to say yet how much of an effect MtGox price manipulation had too. Have you seen this report? http://willyreport.wordpress.com/2014/05/25/the-willy-report-proof-of-massive-fraudulent-trading-activity-at-mt-gox-and-how-it-has-affected-the-price-of-bitcoin/ http://willyreport.wordpress.com/2014/05/25/the-willy-report...
  - IkmoIkmo 12y ago
    It's a very contested report, see for example a post in a broader discussion on it here: http://www.reddit.com/r/Bitcoin/comments/26g46e/the_willy_report_proof_of_massive_fraudulent/chqs6ef http://www.reddit.com/r/Bitcoin/comments/26g46e/the_willy_re...
- IkmoIkmo 12y ago
  Absolutely. Silk Road was a mostly (not completely) illicit marketplace and the characteristics of illicit markets is that money transfer has tons of friction. You can't use regular bank accounts, cash works but sending cash around the country or the world is problematic, risky, expensive, slow. So bitcoin was a perfect solution to that problem. It naturally gravitated towards a market with very little competition and shitty alternatives. Of course it thrived. Bitcoin could never have taken off if it had tried to become a currency in stores first. It needed a proof-of-concept. And the only market it could do that in, was a market with no competition. So bitcoin blew up there, and now it's slowly making the transition into the mainstream where it faces much more elegant, entrenched, competitive players like debit/credit/ach/cash etc. Despite these being far from perfect, it's a big battle. But without Silk Road, bitcoin would never have had the momentum, the interest, userbase, hype or infrastructure to even think about competing for mainstream use.

63 points by kloncks 12y ago

To make matters worse, while Shrem was CEO he was simultaneously BitInstant’s compliance officer, responsible for ensuring that his company followed the law. Impressive amount of hubris there.

DINKDINK 12y ago
more likely that they were under staffed and didn't have funding to hire a compliance officer
- IkmoIkmo 12y ago
  Likely but it doesn't take a trained compliance officer to not do the things Shrem did choose to do. Look I'm not against drugs (born & raised in Amsterdam, never used but understanding of it) and Silk Road was mostly a voluntary marketplace without victims that reduced violence and crime involved with drugs being sold at night illegally on every streetcorner instead of anonymously online. It's a product of a system that ignores research and examples (like my country) that legalized markets provide more oversight, opportunity for regulation, for consumer safety, usage-limits, child-free zones etc, than a completely illegal unregulated market. And all Shrem did was enable people to participate in this market (which a priori is not illegal, as it traded baseball caps and hamburgers, too, Shrem was agnostic about what the bitcoins were used for, and did not even sell them to Silk Road users, but to someone who resold them to Silk Road users). So I'm not against Shrem. BUT, he broke laws. And he did it knowingly and willingly. All the emails released by the court show he sent emails telling this guy of whom he knew was selling on the SR, to use different email addresses so that he wouldn't have to ban him (as his cofounder didn't like it), limit bank deposits to X amount per time (so that he wouldn't have to file a report to Fincen) etc etc. And then he didn't report anything even though in the emails he spoke of the need to do these reports, and told his cofounder of this responsibility. He literally instructed a customer how to avoid and evade the law over email secretly from his co-founder, and then chose not to do the due diligence he's legally required to do in terms of reporting large orders, despite communicating he was aware of this duty. My point is, had nothing to do with being under staffed or having too little money to hire competence. Every 15 year old could have not made these mistakes. (if that is even true, they raised quite a bit of money and generated significant revenues very quickly, too) Still, got nothing against the guy. The whole case is rooted on a non-sense drug policy.
patio11 12y ago
With respect: I know you're a professional at this, but I work with many startups who need named compliance officers for HIPAA or AML purposes, and it is the CEO virtually everywhere. This decision is generally made less out of hubris and more because a) the position has a very high ratio of requiredness to actual duties and b) legal advisors recommended that naming the CEO as opposed to a summer intern would suggest enthusiastic compliance. Who gets tapped for this sort of thing in your world?
- anigbrowl 12y ago
  Oh, I didn't mean it was hubristic being the compliance officer! I meant shoveling all the BTC around while knowing he didn't have even a figleaf of deniability (eg blaming an internal miscommunication with someone else who was in charge of compliance). He had to know it was enormously risky.
  - patio11 12y ago
    Oh, my bad. Yep, total agreement. Did you read the complaint? Comedy gold abounded.
    - anigbrowl 12y ago
      Not yet but I will now :D

transfire 12y ago

When will the law stop violating the rights of free men?

meowface 12y ago
When people decide to change the law. If you think drugs should be illegal, then justice was served here. If you don't think drugs should be illegal, then it wasn't. Either way, Shrem's behavior seems pretty idiotic to me, from start to finish.
- cal2 12y ago
  I agree. Regardless of one's stance on drugs and their respective online black markets (the latter of which I had a sizable knowledge), I don't really see what Shrem's expected outcome of this could have been other than, well, what happened.
- MCRed 12y ago
  There is no provision in the constitution for the federal government to regulate money exchange. Thus the law he was convicted under is itself a criminal act (and under USC 18-242 everyone enforcing it is a felon). The constitution is the highest law of the land. If you think this guy belongs in jail, then you need to amend it. The supreme court has already ruled that unconstitutional laws are null and void the moment they are passed. They do not need to be struck down by the supreme court. Remember the legislature, executive and judicial branches all derive their power from the constitution, thus none of them have the power to exceed the power it gives them, by definition. The real problem here is not that people haven't changed the law (which they can't since the people are not in power). The problem is we have a criminal syndicate for a government. This is why there are no prosecutions for spying on the NSA's part, despite breaking the law. This is why the TSA violates the fourth amendment with impunity (again, a violation of USC 18-242) without ever there being charges filed. Hell, the TSA is violating state criminal statutes in most states when they molest minors who opt out of having their nude photos taken (which itself is child pornography). No charges have been filed. Why is that? So, we can't really say we have the "rule of law" here. The law only is used against people like Charlie, never against the rulers.

cridenour 12y ago

It's interesting that Bitcoin is not classified as a currency by some parts of the government but it was considered a money-transmitting business.

deleted 12y ago
[deleted]
corpselord420 12y ago
not really. liberty reserve got shut down without any hitches for the same reason
stepstep 12y ago
For a bitcoin exchange, only half of the business is in bitcoin. The other half is in fiat, and I think that's why exchanges need a money transmitter license.
- IkmoIkmo 12y ago
  Nah, a business that's 100% bitcoin-based with no fiat on or off-ramps will still need a money transmitter license. For example an exchange to trade one cryptocurrency for another (bitcoin to litecoin). So even a non-fiat company can indeed be a MSB. It's completely true to say that the IRS deems it property, not currency, and Fincen deems it a money-like product or a money-substitute. It doesn't outright call it currency though, but the implication is there.
jdong 12y ago
Why should courts and IRS share the same definition of "currency"?
- IkmoIkmo 12y ago
  Well imagine the police arrests you because it says drugs are illegal, but the courts say they're not. But you still go to jail, because the police says it's illegal. That would be pretty strange. Similarly, it's strange for the IRS to say you need to pay X taxes because the IRS says it's not a currency, but the courts say it is. But you still need to pay the taxes. There are reasons for why this might make sense, sure, but it's also easy to see why some people find it strange or confusing.

codeshaman 12y ago

I'd argue that Bitcoin owns it's meteoric rise to SilkRoad and drugs in general. Many people 'got into' bitcoin in order to be able to purchase stuff on SilkRoad or similar. I know I'm one of them and I'm really thankful for those 3 hits of acid which cost me 3.3 BTC at the time. The transaction worked so I've decided to invest a lot more in Bitcoin. Up to this day I'm living off that investment and able to work on my dream projects. And the acid was very good as well ;).

dmm 12y ago
It's hard to say yet how much of an effect MtGox price manipulation had too. Have you seen this report? http://willyreport.wordpress.com/2014/05/25/the-willy-report-proof-of-massive-fraudulent-trading-activity-at-mt-gox-and-how-it-has-affected-the-price-of-bitcoin/ http://willyreport.wordpress.com/2014/05/25/the-willy-report...
- IkmoIkmo 12y ago
  It's a very contested report, see for example a post in a broader discussion on it here: http://www.reddit.com/r/Bitcoin/comments/26g46e/the_willy_report_proof_of_massive_fraudulent/chqs6ef http://www.reddit.com/r/Bitcoin/comments/26g46e/the_willy_re...
IkmoIkmo 12y ago
Absolutely. Silk Road was a mostly (not completely) illicit marketplace and the characteristics of illicit markets is that money transfer has tons of friction. You can't use regular bank accounts, cash works but sending cash around the country or the world is problematic, risky, expensive, slow. So bitcoin was a perfect solution to that problem. It naturally gravitated towards a market with very little competition and shitty alternatives. Of course it thrived. Bitcoin could never have taken off if it had tried to become a currency in stores first. It needed a proof-of-concept. And the only market it could do that in, was a market with no competition. So bitcoin blew up there, and now it's slowly making the transition into the mainstream where it faces much more elegant, entrenched, competitive players like debit/credit/ach/cash etc. Despite these being far from perfect, it's a big battle. But without Silk Road, bitcoin would never have had the momentum, the interest, userbase, hype or infrastructure to even think about competing for mainstream use.