Charlie Shrem, who ran bitcoin (BTC) exchange BitInstant, has been arrested. It looks like he’s one of the bonus busts from the feds’ shutdown of the Silk Road website.
He’s charged, in effect, with not spying enthusiastically enough for the government. Formally, of course, he’s charged under money-laundering laws—which is a nice way to imply he was doing something nasty. Then again, BTC offers competition with the State’s currency, and if there’s one thing the State can’t abide, it’s competition.
So maybe it makes sense they’d be grandstanding: "Truly innovative business models don't need to resort to old-fashioned law-breaking,” said Preet Bharara, the U.S. attorney in Manhattan, according to The Los Angeles Times.
But Bharara and company aren’t just concerned with delivering lectures. "We will aggressively pursue those who would co-opt new forms of currency for illicit purposes." So really, they’re taking care of this fledgling young currency until it grows up big and strong and can stand on its own two feet.
The chain of reasoning goes like this: People used the Silk Road to buy things that the State does not want them to—“everything from heroin to fake IDs,” says The Washington Post, just in case you weren’t sure the Silk Road were big baddies. They had to use BTC to make those purchases. Shrem and another man, Robert Faiella, struck a deal to supply BTC at a profit. They didn’t ask a lot of questions. Therefore, they were laundering money.
Here’s the Post spelling it all out:
According to the government, that runs afoul of U.S. money laundering laws, which require payment companies like BitInstant to collect information about their customers, monitor their transactions, and report "suspicious" transactions to the government. Shrem failed to do this, the government says. Faiella is also facing charges.
Incidentally, getting regular citizens to do your surveillance for you is one of the oldest authoritarian tricks in the book. I’m not going to name names here, for the sake of avoiding histrionics and obscuring the point: Nobody here is accused of doing anything violent or fraudulent. They aren’t even accused of anything morally ambiguous—unless you take the know-nothing view that if the gubmint has it on the books somewhere, the right thing is always to comply.
Shrem gets an extra dose, says the Times. Why? He “was also charged with alleged willful failure to file a suspicious activity report with regulators related to Faiella's numerous bitcoin purchases conducted through his exchange.”
That is to say, he’s guilty of not having the right gut feeling.
I’ll leave the security concerns this might raise about BTC to those better qualified to discuss them. But I will say this case makes everyone less free for at least three reasons: First, it reinforces the whole, “If you aren’t doing anything wrong, you have nothing to fear” line of reasoning that always comes up when we find out the police and the spies are violating a lot more of our privacy than we expected or than they copped to. The exact charge here is that Shrem should have looked at these BTC transactions and assumed Faiella was up to no good. If 30 percent of the goods and services on offer were legal, too bad. That leaves 70 percent illegal. Even if he didn’t believe that drugs should be illegal, he was supposed to rat out his counterparty some other way.
Then again, there’s that word “willful.” Maybe he approved of undermining the drug war and went ahead with the transactions. Which makes this case sound like a political prosecution.
Second, look at the incentives this arrest sets up: If you process payments or exchange currencies and don’t report the right guys, you could wind up in the pokey yourself. At the very least, you’ll have your name dragged through the mud and incur a lot of legal fees. So the incentive is to overreport, meaning bringing even more people under surveillance lest you get punished.
Third, there’s a crony capitalist angle here. The Winklevoss twins, famous for their role in the movie The Social Network (or something like that), were investors in BitInstant. They’ve also got some other BTC-related businesses cooking.
Here’s what they had to say:
We fully support any and all governmental efforts to ensure that money laundering requirements are enforced, and look forward to clearer regulation being implemented on the purchase and sale of bitcoins.
But of course: If they want to make money this way (and there’s a lot to be made), they have to submit to federal monitoring.
The Post story includes this chilling little tidbit: “Bharara's statement suggests that Bitcoin exchange services that color within the lines of U.S. law—collecting information about their customers and reporting evidence of illegal transactions to the authorities—don't need to worry about running afoul of money laundering laws.”
This is straight-up extortion, essentially saying that BTC is fine so long as there is no anonymity associated with it. You’d have to have been pretty slipshod with your research to think they offered perfect anonymity, but at least there was some protection there.
If the feds can weaken it further—say, below the level of anonymity offered by a sack of dollar bills—then all that’s left is to decree that it build a flexible inflation rate to be monitored by the Open Market Committee of the Federal Reserve, and there goes your currency competition.
Important disclaimer: I’m not arguing this is what Bharara is up to here. But I do believe the primary motive is to reassert State authority, plain and simple. Nothing threatens that like people devising ways to peacefully go about their business free of State sanction. The only thing that comes close is people discovering there are far more efficient ways to deliver “services” we’re told that only the State can deliver.