The case basically comes down to fewer than a dozen emails between Shrem and a customer calling himself "BTCKing," who was buying bitcoins on BitInstant using large amounts of cash. BTCKing was a reseller, someone who bought bitcoins and resold them at a markup. His customers, however, were users of the infamous Silk Road, the underground Bitcoin-only marketplace where people bought and sold illegal drugs.

According to the complaint, on January 17th, 2012, BTCKing tried to deposit $4,000 in cash on BitInstant in a single day. By then, awareness of money transmitter laws was growing within the Bitcoin community and a new attitude of caution was taking hold. BitInstant was registered as a money transmitter with the federal government, which meant anything over $3,000 had to be reported. In addition, BitInstant officially refused deposits over $1,000, although it occasionally broke this rule.

BTCKing had pushed the limit before, and BitInstant’s cash-processing company TrustCash had doubts. Shrem went nuclear, cc’ing the TrustCash CEO on a fire-breathing email banning BTCKing from the service permanently. "We have all your deposits on record, your picture from bank security cameras," Shrem wrote. "Any attempt at a new transfer will result in criminal prosecution." By the end, BTCKing was begging just to get his money back.

But BTCKing was a whale, doing thousands of dollars in transactions a week. For a small exchange like BitInstant, it was hard to let that business go. After the kerfuffle died down, Shrem messaged him privately with a much softer tone. "No problem, in the future please have your customers respect our $1,000 limit," he wrote, according to court documents. "Your email address is banned, but you can use a different one."

According to an IRS investigation, the man behind BTCKing was Robert Faiella, a 52-year-old Florida man. Faiella never registered with any financial authorities, of course.

The case basically comes down to fewer than a dozen emails

Faiella knew he would face jail time if the authorities ever found out what he was up to, according to conversations he allegedly had with the former Silk Road operator, the pseudonymous Dread Pirate Roberts. But by all indications, Shrem didn’t take the law seriously. While his co-founder Nelson had reversed his earlier bluster and become very careful about money-laundering laws, Shrem was cavalier.

"He has not broken a law and Silk Road itself is not illegal," Shrem said in one email to his co-founder cited in the complaint. "We also don't have any rules against resellers. We make good profit from him."

Right, Nelson replied, but "so many of his transactions smell like fraud or money laundering."

"Cool," came the one-word reply.

The criminal complaint alleges that Shrem himself had bought drugs on Silk Road, which squares with the pothead lifestyle he boasted about to reporters. "I won’t hire you unless I’ve either had a drink with you or smoked weed with you. That’s just my rule," he told both The New York Observer and Vocativ. In February of 2012, he messaged a Verge reporter, excited about receiving a package. "Wow, Silk Road actually works," he wrote. "Just got my batch of brownies." (While Silk Road did sell non-drugged food items, it was implied that the brownies were laced with pot.)

The companies kept growing, Shrem’s and Faiella’s in parallel, according to the investigation. Soon Faiella was doing $20,000, $30,000, $40,000 in a single week. Shrem reassured him, "I always take care of you, we even know which orders are yours." As Faiella brought in more and more money, Shrem started offering him discounts. By October of 2012, Faiella had bought more than $1 million worth of Bitcoin through BitInstant.

That same month, TrustCash decided it had had enough and broke off its business with Shrem, leaving BitInstant unable to process cash deposits. When TrustCash left, so did Faiella. He started taking cash on his own, telling clients to deposit money directly into his bank account.

That was the last Shrem heard of BTCKing until the day of his arrest. While Shrem was being arraigned in New York, Faiella was being indicted in Florida.