Updated 23:40 GMT with comments from Senator Tom Carper & the Winklevoss brothers.

Charlie Shrem, CEO of bitcoin exchange service BitInstant, has been arrested for his alleged involvement in a scheme to "sell and launder over $1m in bitcoins" through the now defunct online black market Silk Road.

According to a document published by the Manhattan US Attorney, charges have also been filed against Robert M. Faiella, a 52-year-old Florida native better known as "BTCKing". Both Shrem and Faiella have been charged with conspiring to commit money laundering and operating an unlicensed money transmitting business, among other individual charges.

If convicted, Faiella and Shrem face maximum prison sentences of 25 years and 30 years, respectively. The case is being handled by the Office’s Complex Frauds Unit, and Assistant US Attorney Serrin Turner is in charge of the prosecution.

Manhattan US Attorney Preet Bharara issued a statement, reinforcing his office's hardline stance toward the use of virtual currencies to commit crimes, not simply the currency itself:

Senator Tom Carper (D-Del.), Chairman of the Homeland Security and Governmental Affairs Committee (HSGAC), released a written statement thanking investigators and reminding everyone that law enforcement is "focused on ensuring that those who want to use digital currencies for harm are stopped."

He did, however, also add cautiously that bitcoin and digital currency might be beneficial if regulated properly:

Cameron and Tyler Winklevoss, who had been major investors in BitInstant since 2012, have distanced themselves from Shrem with an emailed statement that they expected management to obey all applicable laws.

Law enforcement officials allege that from December 2011 to October 2013, Faiella ran an underground bitcoin exchange through the Silk Road website, described as a "sprawling and anonymous black market bazaar" where "every variety" of illegal drugs was sold.

The release went on to detail why it believes Faiella failed to properly register his exchange as a money transmitting business:

Further, the statements allege that Shrem was complicit for failing to report Faiella's crimes, as he was legally obligated to do in his position.

The charges state that Shrem "was fully aware that Silk Road was a drug-trafficking website", and that he knew Faiella was "operating a bitcoin exchange service for Silk Road users". It went on to allege that Shrem had also used the site to purchase drugs, and that correspondences between Shrem and Faiella provide evidence as to this preexisting knowledge.

The announcement follows the news that Shrem was pulled last minute at this weekend's North American Bitcoin Conference in Miami, Florida. His talk was replaced by an economics panel, but no official explanation for the change was given at the time.

Shrem is a high-profile member of the bitcoin community, serving not only as CEO of BitInstant, the New York-based bitcoin exchange that garnered a $1.5m investment from Wiklevoss Capital, but as vice chairman of the Bitcoin Foundation.

Cameron and Tyler Winklevoss issued a statement following Shrem's arrest, indicating that when they extended capital to the firm, it was with the understanding that its management would abide by anti-money laundering laws.

"Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest. We were passive investors in BitInstant and will do everything we can to help law enforcement officials."

The 24-year-old graduate of City University of New York-Brooklyn College received a rush of media attention and public interest for his status as a "bitcoin millionaire", and has been an outspoken evangelist for bitcoin.

Despite Shrem's success, however, BitInstant has been plagued by outrage from frustrated users and was even hit with a class-action lawsuit. Shrem has not commented on the allegations publicly or via his official Twitter account.

Though the arrests may come as a surprise to those who have used the anonymous networks, researchers have indicated that tracing individual bitcoins to specific exchanges is possible, and as such, would lead to more arrests in cases like Silk Road.

Sarah Meiklejohn, author of the paper, “A Fistful of Bitcoins: Characterizing Payments Among Men With No Names," noted in December that such actions would even be "easy" for law enforcement officials.

"The FBI now has all the data for Silk Road, they can see how much these guys earned, and they can see the addresses they used. So, it really seems like they have a lot of what they need to be able to prosecute them," Meiklejohn told CoinDesk.

The Silk Road website has since been forfeited, and authorities have announced they will look to sell $25m in bitcoin holdings confiscated from the site.

The announcement follows the increased scrutiny of US citizens who are using bitcoin black markets for illicit and illegal transactions.

On 18th January, a Florida man was arrested for selling a deadly toxin to police officers through the bitcoin black market Black Market Reloaded. Similarly, earlier this month, another black market use was arrested for shipping a legal firearm to international authorities.

Manhattan U.S. Attorney Announces Charges Against Bitcoin Exchangers, Including Ceo Of Bitcoin Exchange Com...

Charlie Shrem image via Wikipedia