Authorities arrested the former CEO of a defunct Bitcoin exchange company on charges of conspiring to launder more than $1 million for users of the online drug market Silk Road.

The United States Attorney for the Southern District of New York announced the indictments Monday — one day before the New York Department of Financial Services plans to convene hearings on regulating firms that trade digital currency. Benjamin Lawsky, the department's superintendent, is considering whether to issue special "BitLicenses" to such firms rather than standard money transmitter licenses.

Charlie Shrem, who ran BitInstant in New York until it went on indefinite hiatus around last fall, and Robert Faiella, who allegedly operated a separate "underground" Bitcoin exchange, were each charged with one count of conspiring to commit money laundering and one count of operating an unlicensed money transmitting business. Shrem was also charged with one count of willful failure to file a suspicious activity report.

Shrem is the vice chairman of the Bitcoin Foundation, a group formed in 2012 to promote the Internet currency and payment system and oversee updates to the core protocol software.

"We are surprised and shocked by the news today. As a foundation, we take these allegations seriously and do not condone illegal activity," Jingyoung Lee England, a spokeswoman for the Bitcoin Foundation, said Monday.

"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," Manhattan U.S. Attorney Preet Bharara said in a press release issued Monday. "We will aggressively pursue those who would coopt new forms of currency for illicit purposes."

Shrem was arrested Sunday at John F. Kennedy International Airport. Faiella was arrested Monday at his residence in Cape Coral, Fla.

According to a United States Attorney's Office release, Faiella, under the username of "BTCKing," sold bitcoins to users seeking to buy illegal drugs on the Silk Road site. Shrem allegedly filed and processed the orders for Faiella. Faiella and Shrem continued exchanging tens of thousands of dollars a week in bitcoins until the Silk Road website was shut down by law enforcement in October, the government alleges.

"Hiding behind their computers, both defendants are charged with knowingly contributing to and facilitating anonymous drug sales, earning substantial profits along the way," Drug Enforcement Administration Acting Special-Agent-in-charge James Hunt said in the release. "Drug law enforcement's job is to investigate and identify those who abet the illicit drug trade at all levels of production and distribution including those lining their own pockets by feigning ignorance of any wrong doing and turning a blind eye."