BitInstant was a bitcoin exchange founded by Gareth Nelson and Charlie Shrem in 2011, which eventually shut down in January 2014.
BitInstant’s volume grew rapidly in 2013 due to a bitcoin price hike, in which it increased from approximately $100 to just above $1000. During this period, BitInstant underwent phases of temporary shutdown and maintenance, upgrades, and new hires.
In May 2013, Winklevoss Capital invested $1.5 million in BitInstant, which was intended to fund the scaling of its personnel and product.
On July 8th, 2013 several BitInstant customers filed a class action lawsuit against the exchange, claiming that it had falsely represented its services. The plaintiffs specifically stated that the exchange made false claims about the speed of its services and the refunding of fees. BitInstant received a subpoena from the NY Department of Financial Services (NYDFS) during the same week of the filing. NYDFS sought information about the exchange’s operations and the consumer protections it had in place.
In January 2014, Shrem was arrested for allegedly attempting to launder and sell more than $1 million worth of bitcoin to users of darknet market Silk Road with associate Robert Faiella, also known as ‘BTCKing.’ The Manhattan US Attorney charged both men with operating an unlicensed money transmitting business and conspiring to commit money laundering. Shrem was also “charged with willfully failing to file any suspicious activity report regarding Faiella’s illegal transactions through [BitInstant], in violation of the Bank Secrecy Act.” Both men entered into plea bargains and Shrem was sentenced to two years in prison, while Faiella was sentenced to four years in prison. The plea bargains also stipulated that Shrem and Faiella each forfeit $950,000 to the government.
Gareth Nelson, Bitinstant’s founding partner, was not charged or accused of wrongdoing.
Authored by Matthew Kimmell