The 2016 Bitfinex hack resulted in the theft of a huge cache of 119,756 Bitcoins that are now worth more than $5 billion.
Last week, the Department of Justice pulled off a crimefighting coup when it managed to claw back $3.6 billion of the stolen cryptocurrencies in the biggest financial seizure of all time.
A “hipster crypto couple” was arrested and charged with money laundering. Rapper Heather Morgan, 31, and her husband, Ilya “Dutch” Lichtenstein, 34, are now facing charges of conspiracy to commit money laundering, which carries a maximum sentence of 20 years in prison, and conspiracy to defraud the United States, which carries a maximum sentence of five years.
The case has two important takeaways for the crypto community. Firstly, the seizure means that victims of the heist may get some of their cashback.
“Bitfinex will work with the DOJ and follow appropriate legal processes to establish our rights to a return of the stolen Bitcoin,” the exchange announced in a statement. “Bitfinex intends to provide further updates on its efforts to obtain a return of the stolen Bitcoin as and when those updates are available.”
If the Bitcoin is handed back to Bitifinex, it will use 80% of the funds to buy up UNUS SED LEO tokens, which is used by the Bitfinex community
“These token repurchases can be accomplished in open market transactions or by acquiring UNUS SED LEO in over-the-counter trades, including directly trading bitcoin for UNUS SED LEO,” Bitfinex continued. “We want to express our appreciation for the dedication and hard work by the DOJ team that led to this great success. We will continue to support their efforts.”
The most important implication of the seizure is contained in a statement released by the DOJ.
Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division, said: “Today, federal law enforcement demonstrates once again that we can follow the money through the blockchain, and that we will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system. The arrests.. show that we will take a firm stand against those who allegedly tried to use virtual currencies for criminal purposes.”
What this means is that anyone hoping to trade Bitcoin in anonymity should be nervous. If the cops can trace the Bitfinex funds, they can trace your funds too.
The investigation is a fascinating glimpse of the techniques now available to investigators. When the hack took place in 2016, a thief breached Bitfinex’s systems and initiated more than 2,000 unauthorized transactions which sent the stolen bitcoin to a digital wallet the DOJ alleged was “under Lichtenstein’s control”.
During the past five years, cops believe 25,000 of those stolen Bitcoins were transferred out of Lichtenstein’s wallet “via a complicated money laundering process that ended with some of the stolen funds being deposited into financial accounts controlled by Lichtenstein and Morgan”.
The rest of the stolen funds (more than 94,000 Bitcoins) were then kept in a wallet used to receive crypto stolen in the hack.
Investigators were granted court-authorized search warrants which allowed them to delve into online accounts controlled by Lichtenstein and Morgan, where they found files containing the private keys which allowed them to access the digital wallet and recover 94,000 coins.
“Cryptocurrency and the virtual currency exchanges trading in it comprise an expanding part of the U.S. financial system, but digital currency heists executed through complex money laundering schemes could undermine confidence in cryptocurrency,” said U.S. Attorney Matthew M. Graves for the District of Columbia. “The Department of Justice and our office stand ready to confront these threats by using 21st-century investigative techniques to recover the stolen funds and to hold the perpetrators accountable.”
The criminal complaint alleged that Lichtenstein and Morgan used “numerous sophisticated laundering techniques” including the use of fictitious identities to set up online accounts. They were also alleged to have deployed “computer programs to automate transactions” as well as a laundering technique that “allows for many transactions to take place in a short period of time” and deposits stolen funds into accounts at exchanges and darknet markets, which is later withdrawn. This “obfuscates the trail of the transaction history by breaking up the fund flow”.
What the case reveals is that Bitcoin’s infamous anonymity is largely a myth. If you’re doing anything dodgy involving the blockchain, the cops will probably be able to catch you.
