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…