Charlie Shrem, CEO of BitInstant, Bitcoin’s payment processor, and vice chariman of the Bitcoin Foundation was arrested on Sunday at the JFK airport, Department of Justice officials announced on Monday, January 27th. Additionally, Robert Faiella, who is an alleged Bitcoin exchanger, was also arrested.

Charlie Shrem

Charlie Shrem IMG: via Twitter

This is just the newest development in a long series of event connected to the “Silk Road” black market investigation. Both Shrem and Faiella have been charged with money laundering and operating unlicensed money transmitting business, according to Forbes.

Shrem was a prominent figure arguing for the legalization of Bitcoin as a legitimate currency, and his arrest will be a huge setback for the Bitcoin community. Seed funding of about $1.5 million for BitInstant was raised by venture capitalists Cameron and Tyler Winklevoss last year.

“Charlie has been in the space for a very long time, and he has an impeccable reputation among Bitcointers. He knows everyone in the space and everyone in the space knows him,” Cameron Winklevoss stated last year. “He would be in that category of someone who lives, breathes, and sleeps Bitcoin.”

Unfortunately for Shrem, that impeccable reputation may now very well be ruined. The indictment for Shrem and Faiella is fairly condemning: “Not only did Shrem knowingly allow Faiella to use [BitInstant’s] services to buy bitcoins for his Silk Road customers, he personally processed Faiella’s transactions, gave Faiella discounts on his high-volume orders, willfully failed to file suspicious activity reports about Faiella, and deliberately helped Faiella circumvent the Company’s [anti-money laundering] restrictions, even though it was Shrem’s job to enforce them.”

Forbes’ Andy Greenberg is following the story, and you can see the full indictment in his article, which has reporting from Runa Sandvik (Washington, DC) and Kashmir Hill (San Francisco).