The problem it solved
In 2012 the hard part of buying bitcoin was not the bitcoin. It was getting money to an exchange. Bank transfers took days, most exchanges were offshore, and a wire that arrived late arrived at a different price.
BitInstant's own about page put the pitch plainly: it moved funds between Dwolla, Mt. Gox, Bitstamp, BTC-e and several other services "without delay", with funds "available in as little as 15 minutes and are typically available within one hour". The version people remember is the cash one. A customer in the United States could walk into a branch of a major bank, deposit cash over the counter without holding an account there, and have the balance land at their chosen exchange the same hour.
The company described itself as BitInstant LLC, "founded by two BitCoin traders who saw the need for a quick, easy, and secure way of transferring funds to their bitcoin Exchange accounts", with staff in New York City and the United Kingdom. Its team page named Gareth Nelson as co-founder and chief technology officer, Charlie Shrem as co-founder and chief executive, Roger Ver as director of marketing and Erik Voorhees as head of marketing and communications. The Bitcoin Foundation's bylaws list "Charles Shrem, CEO of BitInstant" among its founding members. No registration record for the company was located here, so no jurisdiction is claimed.
It stopped operating in July 2013.
On the record
On 4 September 2014 Charlie Shrem pleaded guilty in the United States District Court for the Southern District of New York, before Judge Jed S. Rakoff, to aiding and abetting Robert M. Faiella in the operation of an unlicensed money transmitting business. The Justice Department's account is that Faiella, trading on Silk Road as "BTCKing", filled his customers' orders through BitInstant, that Shrem knew this, processed the orders personally, gave volume discounts, and filed no suspicious activity report with the Treasury even though BitInstant was registered with it as a money services business and even though enforcing those controls was his own job as compliance officer. The two exchanged nearly $1 million in cash for bitcoin for Silk Road users.
On 19 December 2014 Judge Rakoff sentenced Shrem to two years in prison, three years of supervised release, and forfeiture of $950,000.
The plea was to aiding and abetting an unlicensed money transmitting business. No court or regulator has made a finding of fraud against BitInstant or against Shrem, which is why this entry is tagged Scandal and not Fraud.