Donna Leinwand Leger

USA TODAY

A leading bitcoin entrepreneur pleaded guilty Thursday in New York to illegally helping a dealer sell $1 million in bitcoins to customers on Silk Road, a Dark Web site where users could anonymously buy and sell contraband and drugs.

Charlie Shrem, chief executive officer of the bitcoin exchange company BitInstant.com, was the company official charged with making sure the exchange complied with federal money laundering laws. He could be sentenced to five years in prison. By taking a plea deal, Shrem avoids going to trial on more serious charges of money laundering and violations of the Bank Secrecy Act, which carries more prison time.

The Silk Road dealer Robert Faiella, known by his online handle "BTCKing," pleaded guilty Thursday to operating an unlicensed money transmitting business that knowingly sent money to a criminal enterprise. He could be sentenced to five years in prison.

The men will be sentenced Jan. 20.

"Working together, Shrem and Faiella exchanged nearly $1 million in cash for bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road," the Justice Department said in a statement.

Federal agents shut down Silk Road, a sprawling online black market bazaar, on Oct. 2, 2013. The site operated on TOR, also known as The Onion Router, a website that routes users through multiple computers to conceal their locations and identities. Buyers and sellers on the site did business in bitcoin, a digital currency that gave users another layer of anonymity.

Bitcoin, launched in 2009, is a decentralized digital currency traded from person to person rather than through banks. It is generated by a computer algorithm and has no issuing or regulating country. The currency is not illegal in the USA and some businesses accept it as a form of payment.

Prosecutors say Faiella, 54, of Cape Coral, Fla., ran a bitcoin exchange on Silk Road from December 2011 until the site shut down, and he violated federal law by failing to register with the Treasury Department as a money transmitting business. Faiella exchanged his customers' cash for bitcoin through Shrem's company.

Prosecutors say that Shrem knew Silk Road was a drug-trafficking website, that he knew Faiella operated a bitcoin exchange service for Silk Road users and that he personally handled the transactions to hide the business from his partners.

Shrem is well-known in the bitcoin community. Until his indictment in January, he was vice president of the BitCoin Foundation, a trade group that promotes bitcoin as an alternative currency. In his bio on the foundation's website, Shrem is described as using "his position in both the old banking world and new, alternative currency world to help pave the way for the bitcoin economy to emerge in early 2011."

BitInstant.com, one of the earliest bitcoin businesses, drew interest and investment from the tech-savvy Winklevoss twins, Cameron and Tyler. The brothers' Winklevoss Capital had invested money in the business, but they said they had no active role in the company.