The U. S. Attorney for the Southern District of New York, Preet Bharara, has issued several recent statements signaling a steady pursuit of criminal conduct related to bitcoin.  First, on Thursday, November 6, 2014, Trendon Shavers was arrested and charged with one count of securities fraud and one count of wire fraud in connection with what Mr. Bharara describes as the “first federal criminal securities fraud case involving a bitcoin-related Ponzi scheme.”  Notably, this criminal case follows a civil action against Mr. Shavers that was filed by the SEC in July 2013, and allowed to proceed in Texas federal court in August 2013.  According to the criminal complaint filed in New York federal court, Mr. Shavers – who runs a company called Bitcoin Savings and Trust – allegedly raised more than 764,000 bitcoin from investors between September 2011 and September 2012.  Mr. Shavers allegedly told investors that he would engage in a bitcoin market arbitrage strategy (i.e., lending bitcoin to others for a fixed period of time, trading bitcoin via online exchanges, and selling bitcoin locally via private off-market transactions).  In return for the investors’ bitcoin, Mr. Shavers promised up to one percent per day.  According to the U.S. Attorney, however, Mr. Shavers failed to execute the claimed market arbitrage strategy, failed to honor investors’ redemption requests, and failed to deliver the agreed upon rates of interest.

On the same day as Mr. Shavers’ arrest, Mr. Bharara also announced the arrest of Blake Benthall for allegedly owning and operating the Silk Road 2.0 website, which was used to conduct black-market activity.  The website was essentially a replica of the original Silk Road website, which was shut down by the government in October 2013.   Like its predecessor, Silk Road 2.0 required all transactions to be paid in bitcoin in order to preserve purported user anonymity.  In his press release, Mr. Bharara warned, “[l]et’s be clear – this Silk Road, in whatever form, is the road to prison. Those looking to follow in the footsteps of alleged cybercriminals should understand that we will return as many times as necessary to shut down noxious online criminal bazaars. We don’t get tired.” According to the criminal complaint, since December 2013, Mr. Benthall secretly operated the website Silk Road 2.0 on the “Onion Router” or “Tor” network, a special network designed to conceal the true IP addresses of the computers on the network, and thereby, the identities of the network’s users.

Finally, on Friday, November 7, 2014, Mr. Bharara’s office filed a forfeiture complaint seizing numerous “Dark Market Sites” that operate on the Tor network.  According to the U.S. Attorney, these websites were designed to facilitate illegal conduct by accepting payment in bitcoin or similar electronic currency that is meant to be as anonymous as cash.  More than 400 Tor website addresses – also known as “.onion” addresses – as well as the servers hosting them were seized as part of the operation.  Examples of the seized Dark Market Sites are:

  • “Pandora” (pandora3uym4z42b.onion) and “Cloud Nine” (xvqrvtnn4pbcnxwt.onion), which were dark markets similar to Silk Road 2.0, offering illegal goods and services, including drugs, stolen credit card data, counterfeit currency, and fake identity documents.
  • “Executive Outcomes” (http://iczyaan7hzkyjown.onion), which specialized in firearms trafficking.
  • “Fake Real Plastic” (http://igvmwp3544wpnd6u.onion), which offered counterfeit credit cards, encoded with “stolen credit card data” and “printed to look just like real VISA and Mastercards.”
  • “Fast Cash!” (http://5oulvdsnka55buw6.onion) and “Super Notes Counter” (http://67yjqewxrd2ewbtp.onion), which offered counterfeit Euros and U.S. Dollars in exchange for bitcoin.