Two leading Bitcoin promoters face money laundering charges after they were linked with helping gangs finance buying and selling illegal items on an underground web site.
The pair allegedly sold £600,000 of the virtual online currency to users of the web site Silk Road, who wanted to sell drugs.
The two facing the charges are Charlie Shrem, 24, chief executive of BitInstant, New York, and Robert Faiella, who runs a Bitcoin Exchange in Florida.
Shrem is also vice-president of a foundation promoting Bitcoin.
He was bailed on a $1 million bond by a court in New York. Faiella remains in custody pending a bail hearing.
Silk Road drug deals
Federal prosecutors claim Shrem logged on to Silk Road to buy drugs while knowing the web site let users make anonymous drug purchases.
Federal prosecutors also claim Bitcoin helped Silk Road finance $1 billion of business between January 2011 and September 2012. The site was closed by the authorities at that time.
Silk Road had around a million subscribers who could shop for drugs and other illegal contraband online, paying with Bitcoin.
Police say a man arrested while chatting to a ‘co-operating witness’ online at a San Francisco library was the brains behind the web site.
US Attorney Preet Bharara said: “Truly innovative business models don’t need to resort to old-fashioned law-breaking, and when Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act.”
Bitcoin still trading
He also claimed Shrem and Faiella ‘hid behind computers’ and earned large sums of money from conspiring to make selling drugs on line easier.
The charges are another setback for promoters who want to make Bitcoin a legitimate alternative global currency to the US dollar that is beyond the control of government and central banks.
In recent weeks, Bitcoin has seen US store chain Overstock agree to exchange the currency for goods, while German banks will swap them for euros. Cumbria University in Britain will even accept them as payment for tuition fees.
However, in the US, more bad news keeps piling up as Federal prosecutors dismantle the Silk Road organisation that fed off the fact that the currency is hard to trace and allows criminals to take part in illegal trades with anonymity.
The value of Bitcoin was little affected by the court hearing, trading at around $970 against a high of $1,000 earlier in January but $150 higher than a few months earlier.