Confiscation of Bitfinex Funds Reminds Crypto Isn’t Good for Money Launderers

As the public understanding of how digital assets work becomes more nuanced, along with the mainstreaming of crypto, the language of Bitcoin’s (BTC) “anonymity” is gradually becoming a thing of the past. High-profile law enforcement operations, such as the one that recently led to the US government’s seizure of approximately $3.6 billion worth of crypto, are particularly important in promoting the idea that assets whose transaction history is recorded in an open source. , distributed ledger can be better described as “pseudonym”, and that such a design is not particularly beneficial for those who want to get away with stolen money.

As hard as criminals try to cover up the movement of ill-gotten digital money, at some point in the transaction chain they are likely to call up addresses that have personal information associated with them. This is how it happened in the Bitfinex case, according to the documents made public by the US government.

Too comfortable too early

A fascinating statement from a special agent assigned to the Internal Revenue Service, Criminal Investigation (IRS-CI) describes a lawsuit in which US federal government agents got a whiff of the couple suspected of laundering the money stolen in the 2016 Bitfinex hack.

The document describes a large-scale operation to hide the traces of stolen Bitcoin, involving thousands of transactions through multiple transit hubs, such as darknet marketplaces, self-hosted wallets and centralized cryptocurrency exchanges.

In the first step, the suspects ran the crypto earmarked as looted in the Bitfinex heist through darknet marketplace AlphaBay. From there, some of the money went to six accounts on different crypto exchanges that, as researchers later discovered, were all registered with email accounts hosted by the same provider in India. The emails had similar naming styles, while the accounts showed similar patterns of trading behavior.

Related: Understanding the Bitfinex Bitcoin Billions

The chain continued, and the BTC law enforcement tracked continued to be funneled into a slew of self-hosted wallets and other exchange accounts, a few of which were registered in the real name of one of the suspects. By following the story of the investigators, a reader eventually gets the impression that at one point Ilya Lichtenstein and Heather Morgan felt that they had done enough to cover their tracks and that they could get some of the money to themselves. to spend.

That was it: gold bars and a Walmart gift card, bought with the money traced back to the Bitfinex hack and delivered to Lichtenstein and Morgan’s home address. Everything was there on the ledger. The resulting report reads like a compelling description of a crime that was reverse engineered using an immutable record of transactions.

Follow the money

The scope of the investigation was perhaps even more formidable than that of the money laundering operation. Despite the suspects’ years of efforts to cover up the money traffic, government agents were able to gradually unravel the paths through which the majority of stolen BTC traveled, eventually confiscating it. This shows that the US government’s ability to track the money on the blockchain is at least on par with the tactics used by the people behind some of the major crypto heists to escape the law.

Speaking of the investigation, Marina Khaustova, chief executive officer at Crystal Blockchain Analytics, noted that the Bitfinex case is particularly difficult to crack due to the massive amount of stolen funds and the extensive efforts of the perpetrators to hide their activities. She said to Coin-Crypto:

“Any case of this magnitude, which has been going on for years, will undoubtedly take a long time for financial investigators to examine and understand the data they have before using it as evidence.”

The US government agents were well-equipped and had access to state-of-the-art blockchain analysis software as they tackled the case. It’s no secret that some of the leading players in the blockchain intelligence industry provide law enforcement services in multiple countries, including the United States, with digital asset tracking software solutions.

One possible explanation for why Lichtenstein and Morgan were eventually arrested is the apparent nonchalance with which they abandoned the caution and began to spend the supposedly laundered money in their own names. Were they just not smart enough, or is it because the police have penetrated unprecedentedly deep into the transaction chain, deeper than suspects could reasonably expect?

Khaustova thinks there was “a bit of carelessness in the methods used” as the suspects let the investigators obtain one of the key documents — which allowed them to link email addresses to exchanges, KYC records and personal accounts — from cloud storage.

But it is also true that there is a point where every crypto money launderer has to step out of the shadows and turn the stolen funds into goods and services they can use, at which point they become vulnerable to deanonymization. The Bitfinex investigation showed that if law enforcement is focused on tracing the suspects to the point of “cash out”, criminals can do little to avoid being caught.

A case that must be made

The big bottom line here is that governments — notably the US government, but many others aren’t too far behind when it comes to bolstering their blockchain tracking capabilities — are already aware of the tactics and techniques crypto money launderers are using. . The perfect traceability of the blockchain could have been a theoretical argument a few years ago, but now it is an empirically proven reality, as evidenced by enforcement practice.

There are two main reasons why this idea is good for the crypto industry. One is that there can be some degree of redress for the victims of major crypto heists. Granted, not every case of crypto theft will capture the scant attention of federal investigators, but the most high-profile and egregious ones certainly will.

Another powerful consequence of law enforcement’s newfound prowess with blockchain tracing is to obsolete some regulators’ tired argument of “crypto as a perfect money laundering tool.” As real-life examples show, digital assets are in fact the opposite of that. Hammering this point into the minds of policymakers will eventually bring up one of the fundamental anti-crypto stories.

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