Charlie Shrem's arrest could not have have come at a worse time.
The BitInstant founder and Bitcoin Foundation vice chairman was charged last week with conspiracy to commit money laundering, failure to report suspicious financial activities to authorities and for operating BitInstant without a money transmitter license just days before the BitLicense hearings, EDC breakfast and Wells Fargo panel in New York City.
While news of his arrest stole headlines across the major news media, a larger debate raged within the community regarding Shrem: how should the Bitcoin Foundation, the industry's lone advocacy group, treat one of its own in the face of a serious criminal complaint?
This was the community's first real identity crisis. This wasn't Ross Ulbricht and Silk Road. This was Charlie Shrem, a bitcoin pioneer, entrepreneur and spokesperson.
Three camps emerged in a matter of hours. The first (and perhaps most vocal) group on reddit consisted of supporters who cried foul at the timing and weakness of the allegations, and railed against government conspiracy, prosecutorial hypocrisy and even the validity of money laundering and drug trafficking laws themselves.
The second emerged from industry insiders and friends who revered Shrem as a visionary, and firmly believed that the Bitcoin Foundation should throw its full support behind its Vice Chairman in order to send a message that bitcoin would defend its leaders.
The third consisted largely of those Foundation members who demanded that the organization quickly and clearly distance itself from Shrem in order to preserve its reputation. These groups debated furiously while Shrem was detained incommunicado.
The crypto-anarchist backbone of the bitcoin community quickly presented itself in full force, even defending the rightness of Shrem's alleged illegal activities.
Many disparaged the law enforcement community for its double standard in indicting Shrem for relatively mild offences, in light of the government's toothless criminal case against convicted money launderers at Wall Street firms like HSBC.
Others scoffed at the charges themselves, comparing money laundering to financial "thought crime" and defending the actual drug peddlers one-degree-removed from Shrem with assertions that individuals had the right to put whatever "they want into their own bodies."
As one commenter angrily noted, there seemed to be three degrees of separation between Shrem and any illegal activity associated with Silk Road.
Still, the intensity of the ideological debate paled in comparison to the practical one. Insiders fretted that Shrem's arrest might be a sign of things to come for others in the space.
Some felt that defending a high-profile member of the community was a necessary battle for the Bitcoin Foundation to wage in light of the fact that many of its members operated under the same lack of regulatory clarity.
If the Foundation refused to defend one of its highest profile members, the organization's value as an advocacy organization would be diminished. Any knee-jerk condemnations and collective hand-washing of all things Shrem would set a dangerous precedent, and weaken the community to additional "witch hunts".
Others, including myself, were quick to disagree. The Foundation represents the entire bitcoin community and as such, we felt it shouldn't embroil itself in a personal criminal matter. The longer the directors of the Foundation waited to sever ties with Shrem the more damage we felt would be done during bitcoin's high-profile week in front of regulators.
Bitcoin simply couldn't afford the bad press at a time when it was attempting to correct misconceptions about its utility as a black market currency. While no one wanted to see Shrem behind bars for 30 years, many wanted him suspended on a temporary basis at the very least.
The possible costs of having a potential felon maintain his seat on the Foundation's board overwhelmed the benefits of demonstrating a united front.
The Bitcoin Foundation (and Charlie) respond
The consensus from over a dozen members of the Bitcoin Foundation that I spoke to was that the easiest path for all involved would be an immediate resignation by Shrem.
The only question was whether that would even be feasible. How could he be expected to tender his resignation from behind bars when he had more pressing personal concerns?
The Foundation's directors recognized the gravity of the situation, but simply didn't have a contingency plan in place. Handling such a scenario hadn't ever been discussed, much less incorporated into the Foundation's bylaws. As one source told me: "We were taken off guard just like everyone else. We just want to be thoughtful in our response."
And so they waited.
By a stroke of good fortune (given the circumstances), Shrem made bail the next day and tendered his resignation within hours of his release. Contrary to some speculation, he was not forced out, but rather resigned on his own accord. In a private note to his supporters, he said:
Shrem's prompt and professional response was lauded by members of the Foundation, and cause for relief among the directors. Yet although the bleeding was staunched, the situation produced fresh debates.
How should similar situations be handled by the Foundation if they do occur? Was there a need for a second advocacy organization, which could provide the personal advocacy complement to the Bitcoin Foundation's regulatory focus? Who should ultimately replace Charlie Shrem as vice chairman?
These are just three of the tough questions that will be answered over the coming months.
It would be easy, but inaccurate, to characterize the flat-footed response of the Bitcoin Foundation as the result of under-preparation. Instead, the behind the scenes chaos of last week reflects the harsh reality that the bitcoin community must act decades older in preparation and maturity than would otherwise be expected of a five-year-old industry.
Bitcoin is in its lab rat phase of evolution, and yet it will be subject to the same regulatory scrutiny (or more) as century-old financial institutions. We can only hope that the Bitcoin Foundation and derivative advocacy groups are up for the challenge.
Because we've seen firsthand how the best laid schemes of mice and Shrem can quickly go awry.
Ryan Galt is a blogger, entrepreneur and freelance opinion writer for CoinDesk. His opinions do not necessarily reflect CoinDesk’s. You may email him at firstname.lastname@example.org, or follow him on twitter @twobitidiot.
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