By the Blouin News Technology staff

Another roadblock for Bitcoin’s legitimacy

by in Personal Tech.

The screen of a Bitpay Bitcoin ATM is seen at the North American Bitcoin Conference being held in the Miami, Florida. Joe Raedle/Getty Images

Joe Raedle/Getty Images

The debate around Bitcoin’s viability as a legitimate currency will likely be ongoing for many years as the software behind the digital money doles out Bitcoins at its predetermined rate, and consumers use it to buy things like beer and basketball tickets. But Bitcoin will also likely find itself — on a routine basis — scrutinized for its users’ ability to easily trade it for illegal substances, as highlighted by yesterday’s arrest of BitInstant CEO Charlie Shrem.

Shrem heads up the New York-based company that allows people to buy Bitcoins at physical locations, and was arrested and charged with money laundering in a case that links him to the Silk Road — the online black market website that was shut down by U.S. feds in October 2013, only to have it resurrected in November. A person named Robert Faiella, who reportedly runs an underground Bitcoin exchange going by the name of BTCKing and assists in the selling of Bitcoins to Silk Road customers, collaborated with Shrem in a $1 million sale.

While Shrem’s arrest may not undermine the long-term legitimacy of Bitcoin — after all, there are plenty of people who use Bitcoin for purposes within the law — it does shed light on the precarious legal existence of a digital currency that is decentralized enough to be the best way for criminals to process it in exchange for illegal activity. And it does not bode well for big-name backers like the Winklevoss twins.

The Winklevii reportedly own 1% of all Bitcoins, so naturally they are interested in the future of the currency, but they also invested $1.5 million into BitInstant itself last year. Their statement following the news of Shrem’s arrest is predictable:

When we invested in BitInstant in the fall of 2012, its management made a commitment to us that they would abide by all applicable laws – including money laundering laws – and we expected nothing less. Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest. We were passive investors in BitInstant and will do everything we can to help law enforcement officials. 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.

This is not the first time BitInstant has come under fire. Users of the service filed a class-action lawsuit last year saying that BitInstant’s claims and promises to its customers of providing Bitcoins in exchange for cash were disingenuous.

These tiffs with the U.S. legal system are the obstacles that are going to keep Bitcoin a fringe currency for some time — the opposite of what the Winklevoss twins are hoping as they propose the operation of a Bitcoin trade exchange to the SEC. And other governments are taking notice: Russian Central Bank issued a statement following Shrem’s arrest in which it warned that businesses involved with Bitcoin will be automatically suspected of illegal activity.