Shrem - a Bitcoin Foundation vice chairman - and Robert Faiella have been charged with conspiring to commit money laundering and operating an unlicensed money transmitting business. Shrem is also charged with wilfully failing to file any suspicious activity report regarding Faiella.

Using the name BTCKing, Faiella is accused of running an underground bitcoin exchange on the Silk Road, the notorious Web site which was used to buy and sell illegal goods such as drugs until it was shut down by the feds in October.

With bitcoins the only form of payment accepted on the Silk Road, Faiella bought the currency from Shrem's company, BitInstant, and then sold it on at a mark up. In total, the pair exchanged over $1 million in cash for bitcoins for Silk Road users.

Shrem - who as well as being BitInstant CEO is its chief compliance officer - knew what the Silk Road was used for and even personally bought drugs on it, says the complaint. He also knew that Faiella was running a bitcoin exchange for the site's users, and knowingly facilitated the business, personally processing orders and giving discounts on high-volume transactions.

Shrem failed to file a single suspicious activity report with the US Treasury as he was required to do in his role as compliance officer and helped his accomplice circumvent hos firm's own AML restrictions.

Faiella did stop doing business with Shrem's firm in late 2012 when it stopped accepting cash payments. He also briefly shut his own exchange down before opening up again without Shrem's assistance.

Manhattan US Attorney Preet Bharara says: "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. We will aggressively pursue those who would co-opt new forms of currency for illicit purposes."

The conspiracy to commit money laundering charges carry prison sentences of up to 20 years, while the unlicensed money transmitting business charges carry up to five years.