In the early days of the internet, getting information into and out of the net was complicated, unless you knew some coding. Web browsers solved that problem, providing an interface between the user and the network. Similarly, in the early days of bitcoin, there were few ways of buying bitcoin with fiat currency, and exchanges sprung up to solve that problem - online marketplaces for the trading of money.
Many of the first exchanges opened up, got hacked, and then closed down, all in a matter of weeks or months. The first recorded exchange, BitcoinMarket, appeared online in February 2010, with MtGox in Japan following in July of the same year. Britcoin (a British sterling-bitcoin exchange) opened in March 2011, followed shortly afterwards by BitcoinBrasil and bitmarket.eu. Then Polish exchange Bitomat opened in April 2011, promptly becoming the third-largest bitcoin exchange, and promptly managing to lose the entire wallet of 17,000 bitcoins a few weeks later. MyBitcoin launched in early 2011 and by August lost 150,000 bitcoins before closing down. In February 2012, then second-largest exchange TradeHIll.com closed down after encountering problems with a payment processor. This trend would prove unstoppable. The early exchange scene was in dire need of improvement.
In September 2011, US college student and bitcoin enthusiast Charlie Shrem (pictured above) co-founded Bitinstant, with the aim of becoming a bitcoin exchange. The company partnered with a payment processor, which allowed people to pay for bitcoin at banks and retail stores, and receive bitcoin in exchange by email. Bitinstant flourished and bitcoin booster Roger Ver, one of the early influential players, invested to help build up the business as money poured through BitInstant. A second group of investors followed, and pushed Shrem to raise yet more money and bring in fresh investors. As BitInstant’s lawyers struggled to put together paperwork for the new investors, they could see that the business was full of holes. As they started to scrutinise their customer base more closely, they discovered that many customers had been buying bitcoin with aliases and fake IDs. That wasn't good: in the wake of the 9/11 attacks, US lawmakers had hacked together the Patriot Act using anti-money laundering legislation that had been sitting unloved in the Congress.
Shrem may not have realised that the investigators working on Silk Road were also paying attention to BitInstant. To stay compliant with regulators, BitInstant was allowing users to do no more than $1,000 of trading a day without meeting AML and KYC regulations. Any more, and BitInstant would fall inside stricter regulations. But law enforcement watching Silk Road were indeed drawn to BitInstant: at least one person was using Bitinstant to for nefarious reasons, according to the Manhattan US Attorney, who brought charges against Shrem in January 2014 for laundering one million dollars worth of bitcoin. The charges said that a 52-year-old Florida man called Robert Faiella was moving thousands of dollars a day through Bitinstant to buy bitcoin, and selling it to his clients, who were then using the bitcoin to buy items on Silk Road. In their eyes, Shrem was running a money laundering service for criminals. He was arrested and eventually imprisoned in March 2015, spending 14 months in prison for the lesser charge of aiding and abetting unlicensed money transmission.
But in the intervening three years since Shrem launched BitInstant, and despite the perception that bitcoin was something mixed up in dark deeds on the dark net, several exchanges were thriving. The US exchange Coinbase, which was founded in July 2011 had become a serious enterprise, as had Kraken. Hong Kong-based Bitfinex, also founded in 2011, had become the biggest exchange by volume. An infrastructure was slowly started to settle into place.
