The first “Bitcoin felon” and founder of the BitInstant exchange, Charlie Shrem, is again accused of fraud. This time, the Winklevoss twins are the plaintiffs, who are confident that the crypto entrepreneur stole 5,000 Bitcoins from them, which is about $32 million at the current rate. The publication of The New York Times describes the events that took place in 2012 when Cameron and Tyler Winklevoss turned to Shrem for buying Bitcoins. The brothers claim that throughout cooperation, Shrem appropriated 5,000 Bitcoins, which over the past year provided him with the purchase of six objects of real estate, two Maserati sports cars, and two powerboats. Shrem denies the charges, citing insufficient evidence of his guilt. Whose side is the law on and how did Shrem’s case affect the crypto market? All described in this article by DeCenter.

Over the past year, the 28-year-old Bitcoin investor Charlie Shrem purchased two Maserati sports cars, two powerboats, a $2 million home in Florida, and five more properties. Of course, in the crypto world, the rapid ups and downs of investors in digital assets no longer surprise anyone. According to The New York Times, however, something else is noteworthy. Charlie Shrem managed to put together his fortune almost immediately after leaving prison, where he served a term for money laundering and providing illegal financial services to Silk Road clients from 2014 to 2016.

The Rise and Fall of BitInstant and Charlie Shrem

Charlie Shrem first invested in Bitcoin while still a college student in 2011. After a successful, profitable investment, he got the idea to establish BitInstant, one of the first Bitcoin trading platforms on the cryptocurrency market. According to The Verge, the exchange started raking in substantial income “literally from the first days” and was in demand among the players of the cryptocurrency market. That, in turn, attracted the attention of the Winklevoss brothers, who at the time headed the private investment company Winklevoss Capital Management.

As a result, in 2012, the company invested $1.5 million in the development of the BitInstant trading platform, laying the foundation for the partnership of Shrem and the Winklevoss brothers. In the same year, the twins appointed Shrem their first adviser on cryptocurrencies and allocated $750,000 for him to invest in Bitcoin. By September 2012, the Winklevosses handed Shrem an extra $250,000 to buy the first cryptocurrency, but in return received Bitcoins worth much less at $189,000. At the time, the price of Bitcoin was about $12.50 apiece, and therefore, the brothers were short more than 4,880 Bitcoins.

The missing cryptocurrencies caused a dispute between Shrem and the brothers, who accused the investor of embezzling their funds: “I was patient enough, but this is becoming absurd. Do not think that I take this situation frivolously,” as Cameron Winklevoss wrote in an e-mail to Shrem in 2013. A specially involved accountant also confirmed the absence of Bitcoins.

The brothers’ claims did not end there, and Charlie Shrem had more serious problems. In July 2013, BitInstant was forced to freeze all operations in the light of a class action against the site’s owners for “false representation of the service.” Despite Shrem’s attempts to attract new investors, the marketplace soon closed, and the Winklevoss brothers cut off all ties with the young Bitcoin entrepreneur.

On January 24, 2014, Shrem was arrested at John F. Kennedy International Airport for money laundering charges on the Silk Road. Shrem admitted his guilt in the illegal transfer of funds and was sentenced to two years in prison, and according to the sentence, he had to pay a $950,000 fine. Otherwise, Shrem was threatened with up to 30 years in prison. Thus, Charlie Shrem became the first “Bitcoin felon” in the history of the crypto market.

In June 2016, Shrem was released. In an interview for the podcast “Death, Sex, and Money,” Shrem said that for the first six months, he hadn’t opened his e-mail and had worked as a dishwasher. “When I got out of prison, my total assets were less than $100,000. For six months, I worked in a restaurant in Pennsylvania, after which I changed several jobs where I was able to save enough money and restore my financial situation.”

Shrem’s Return to the Cryptocurrency Wild West

By the spring of 2017, Shrem was already actively looking for ways to return to the crypto world. In March of last year, together with Dash DAO, he started issuing the Dash debit cards. A month later, he was appointed as director of business development for the Jaxx cryptocurrency wallet. And in August 2018, Shrem co-founded the educational crypto startup Crypto.IQ. Not all of Shrem’s projects, however, were crowned with success. The ICO of the BnkToTheFuture financial investment platform, where he was one of the advisers, failed, and the crowdsale organizers had to return the funds to the investors.

In September of this year, the Winklevoss brothers decided to raise the issue of lost Bitcoins again after watching the growing list of Shrem’s expensive investments. “When he purchased several real estate objects worth $4 million, two sports cars, and two powerboats, we decided it was time to get to the bottom of the matter,” as Cameron Winklevoss told The New York Times. A private investigation revealed that in 2013, 5,000 Bitcoins were transferred to a cryptocurrency wallet linked to Charlie Shrem, after which the funds were withdrawn to the Xapo and Coinbase wallets.

In this connection, the brothers filed a lawsuit against Shrem in the District Court of the Southern District of New York with a request to freeze the funds of the Bitcoin investor during the trial. Federal judge Jed Rakoff satisfied the request of the owners of the Gemini exchange, noting that the actions of Mr. Shrem “indicate that he is intentionally preventing the collection of funds by his creditors.”

On November 5, Charlie Shrem’s attorneys filed a counterclaim in the District Court of the Southern District of New York, which states that the brothers are “completely wrong” and have no weighty evidence to accuse Shrem of criminal intent. According to a published document, Shrem never owned 5,000 Bitcoins, and those that are associated with his wallet, in fact, belong to a stranger whose name is not being disclosed.

According to the investor, he helped a certain “Mr. X” transfer his Bitcoins to a cold wallet, but Shrem himself never had access to these funds. As proof of this statement, Shrem presented printouts of transactions registered with Blockchain.info, according to which 5,000 Bitcoins were transferred twice on December 31, 2012, to and from Shrem’s wallet. Shrem also provided the court with e-mails that explained the reason for these transactions. In this regard, Shrem asked the court to unblock his funds.

The provided documents were enough to convince the federal judge to unfreeze the Bitcoin entrepreneur’s funds. The decision was made on November 8, according to which the crypto trading sites pledged to restore Shrem access to his funds. Curiously, Coinbase, Xapo, Digital Asset Holdings, Branch Banking and Trust Company, Noble Markets, and ItBit presented documents to the court proving that Shrem did not have funds on any of the above exchanges. The Poloniex exchange informed the court that Shrem had a wallet with $0.41 in Bitcoins, while the Bittrex wallet had about $4.44 in Bitcoin and Bitcoin Gold cryptocurrencies. As Judge Jed Rakoff noted, “After careful consideration of the case, the court decided to refuse the claimant to seize the property and is lifting the current restrictions effective immediately.”

Now the case will be transferred to the court for trial by jury with the first hearing scheduled for April 8, 2019. Both parties may make changes to their statements, request additional documents, and pose questions of interest before November 15.

Law and Order in the Crypto Industry

Charlie Shrem’s case had a significant response, proving that violation of the law, even in such an unregulated environment as the crypto market, is fraught with consequences.

Thus, among the most high-profile litigations of this year, one cannot but recall the Thai scam project, the victim of which was a 22-year-old Finnish entrepreneur. According to the Bangkok Post, Aarni Otava Saarimaa lost 5,564 Bitcoins after he had received an offer to invest in the Dragon Coin cryptocurrency and a casino in Macau in June 2017, which was supposed to accept this currency. Saarimaa did not receive any profit from the invested funds. Suspecting a deception, the investor asked his Thai partner for help, who in January of this year appealed to the local authorities. During the investigation, Thai law enforcement agencies (the Crime Suppression Division, the CSD) ruled that the project was a fraud, which was headed by the Thai film actor Jiratpisit “Boom” Jaravijit and his brother. As a result, in August, the authorities arrested the actor, while his brother managed to escape and is allegedly in the United States.

Also at the end of August of this year, California law enforcement authorities arrested Xzavyer Narvaez, 19, on charges of seven crimes related to the theft of cryptocurrencies. According to authorities, the young criminal used SIM card hijacking, in which the mobile operator transfers the victim’s phone number to the criminal. By having the phone number, the scammer gained access to online accounts and wallets with cryptocurrencies. In total, Narvaez stole 157 Bitcoins worth $1 million. And in October, police in the city of Oklahoma arrested two more scammers who had taken about $14 million in cryptocurrencies with the help of SIM card hacks over the year.

In October of this year, a 23-year-old woman was arrested in Sydney, Australia, for stealing about 100,000 XRP from a wallet of a 56-year-old Ripple coin holder. During the investigation, which lasted ten months, the police found that at the end of 2017, the suspect broke into the e-mail of the man and was thus able to gain access to the cryptocurrency. At the time of the crime, the amount of the stolen coins was worth AUD 45,000.