It was yet another piece of bad Bitcoin news: BitInstant Chief Executive Officer Charlie Shrem was arrested by federal agents Sunday and charged with using Bitcoin in a money-laundering scheme connected to the now-defunct Silk Road illegal drug website.
Ever since it started to get attention from mainstream media, Bitcoin has been unfairly saddled with a reputation for being nothing more than a high-tech tool for illegal activities.
Most Bitcoin news stories written over the past couple of years have prominently mentioned the use of the digital currency on Silk Road to buy and sell illegal drugs. Federal agents shut down that website in October.
Making matters worse (and more than slightly ironic) is that the 24-year-old Shrem is vice-chairman of the Bitcoin Foundation, a trade group dedicated to promoting the legitimacy of Bitcoin.
The arrest of Shrem has put those negative associations with Bitcoin back in the spotlight. But Bitcoin news like this is just a distraction from the digital currency's real potential to disrupt and improve electronic payment systems.
What this does is give more ammunition to Bitcoin's critics at a time when it should be moving closer to the mainstream and wider acceptance, both by governments and the public at large.
Here's why this latest Bitcoin news says less about the legitimacy of Bitcoin than those critics would have you think.
Bitcoin News: What the Government Says Shrem Did
In addition to Shrem, federal agents also arrested a Florida man named Robert Faiella, who they charge bought the bitcoins from Shrem and exchanged them for cash to enable Silk Road customers to purchase illegal drugs.
According the Internal Revenue Service, the pair exchanged $1.05 million worth of bitcoin in a 10-month period that ended in October 2012.
According to the court documents, Shrem and Faiella are both charged with conspiracy to launder money and operating an unlicensed money-transmitting business. Shrem also faces a charge for not reporting the scheme to the government.
In addition to the connection to the notorious Silk Road, Shrem's stature in the Bitcoin community has made this story particularly damaging to the digital currency's reputation...
Shrem was one of just five board members of the Bitcoin Foundation, the pre-eminent organization working to promote the digital currency.
And BitInstant, the company Shrem ran, was a popular Bitcoin exchange that enabled people to rapidly convert fiat currencies to the digital kind. The Winklevoss twins, by way of a $1.5 million investment in BitInstant last year, have also been dragged into the mire of this week's bad Bitcoin news.
"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," Cameron and Tyler Winklevoss said in a statement.
While Bitcoin news, like the arrest of Shrem and all that goes with Silk Road, might temporarily tarnish Bitcoin's reputation, it does nothing to change the digital currency's promise or utility.
Time to Embrace Bitcoin
It's important to note that Bitcoin is simply a tool; like the Internet itself, it can be used for good or for bad. Because it's so new, Bitcoin lacks many of the regulations needed to curb abuses like those Shrem allegedly committed.
While some of the libertarian proponents of Bitcoin won't like it, government regulation is the one thing most likely to propel the digital currency into the mainstream. People need to be able to trust a payment system before they will use it.
Last November we heard government regulators speak favorably about Bitcoin at Congressional hearings last year even while voicing concerns over the need to address illegal activities. They're still trying to figure out exactly how to impose rules on digital currencies without killing its potential.
And this week, the New York Department of Financial Services is conducting hearings to learn more about Bitcoin and how they might go about regulating it. They even suggested the possibility of issuing state-level "BitLicenses" to regulate digital currencies.
In that sense, the Shram arrest may actually help speed up the regulation of Bitcoin and other digital currencies, and ultimately their adoption.
"Bitcoin is in the process of getting institutionalized," Gil Luria, an analyst at Wedbush Securities Inc., told Bloomberg News. "Early on it was exploited by bad guys because it was still very raw and accessible. As more investors and businesses get involved, it's going to get harder and harder to use it for illicit purposes."
One of the most compelling aspects of Bitcoin is that it is both cheaper and more secure than traditional credit and debit cards. In an era in which hackers are getting better and better at stealing our personal data, Bitcoin just could be the right technology at the right time...
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