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2 Bitcoin operators plead guilty in case linked to black market website Silk Road

Charles Shrem, foreground, the top executive of a New York City-based Bitcoin company, walks from the federal court house in New York Thursday, Sept. 4, 2014, after pleading guilty to federal charges that he helped smooth the way for drug transactions on the online marketplace Silk Road. (AP Photo/Craig Ruttle)

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Charles Shrem, foreground, the top executive of a New York City-based Bitcoin company, walks from the federal court house in New York Thursday, Sept. 4, 2014, after pleading guilty to federal charges that he helped smooth the way for drug transactions on the online marketplace Silk Road. (AP Photo/Craig Ruttle)

NEW YORK, N.Y. - The top executive of a New York City-based Bitcoin company and a Florida Bitcoin exchanger pleaded guilty Thursday to federal charges, admitting that they enabled the digital currency to be funneled to the black market website Silk Road.

Charlie Shrem, 24, of Manhattan, pleaded guilty in federal court there to aiding and abetting the operation of an unlicensed money transmitting business, while Robert Faiella, 54, of Cape Coral, Florida, pleaded guilty to operating an unlicensed money transfer business.

Sentencing was set for Jan. 20, when each faces as much as five years in prison.

The case grew from the government's shutdown of Silk Road. Shrem was chief executive officer of BitInstant; Faiella operated an unlicensed money transferring business.

They were accused of letting more than $1 million in Bitcoins reach the website. Both admitted during their pleas that they knew narcotics were bought and sold on the website.

U.S. District Judge Jed S. Rakoff asked Faiella whether he knew from December 2011 through last October that his Bitcoins would be used to buy and sell drugs and that it was illegal.

"Absolutely," Faiella answered.

Shrem said he knew that much of the business conducted on Silk Road involved the purchase and sale of narcotics.

"I knew what I did here was wrong," he told Rakoff.

Authorities have said Silk Road's San Francisco operator generated more than $1 billion in illicit business since 2011 on the website. It used Bitcoin, a tough-to-track digital currency, before being shut down.

Prosecutors said Faiella ran an underground Bitcoin exchange on the Silk Road website, operating under the username "BTCKing." They said he sold Bitcoins.

The government said Faiella filled his orders through Shrem's company from August 2011 until July 2013, when the company stopped operating.

Prosecutors said Shrem, who was vice chairman of a foundation dedicated to promoting the Bitcoin currency, failed to file a single suspicious activity report with the U.S. Treasury Department regarding Faiella.

"Robert Faiella and Charlie Shrem opted to travel down a crooked path — running an illegal money transmitting business that catered to criminals bent on trafficking narcotics on the dark web drug site, Silk Road," U.S. Attorney Preet Bharara said in a statement. "The approximately $1 million in Bitcoins Faiella and Shrem sold to these outlaws cost them a lot more than they bargained for and bought them today's convictions."

Marc Agnifilo, Shrem's attorney, said outside court that his client's crime was an aberration.

He said Shrem was dedicated to making Bitcoin a more useful form of currency.

Agnifilo said he would ask Rakoff at sentencing for leniency.

"If God smiles on him, hopefully he'll be back in the Bitcoin world," he said.

A lawyer for Faiella had no comment.

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