The DOJ’s $3.6B Seizure Shows How Hard It Is to Launder Crypto


On Tuesday, Ilya Lichtenstein and Heather Morgan have been arrested in New York and accused of laundering a document $4.5 billion value of stolen cryptocurrency. Within the 24 hours since, the cybersecurity world has ruthlessly mocked their operational safety screwups: Lichtenstein allegedly saved lots of the personal keys controlling these funds in a cloud-storage pockets that made them simple to grab, and Morgan flaunted her “self-made” wealth in a series of cringe-inducing rap videos on YouTube and Forbes columns.

However these gaffes have obscured the outstanding variety of multi-layered technical measures that prosecutors say the couple did use to attempt to dead-end the path for anybody following their cash. Much more outstanding, maybe, is that federal brokers, led by IRS Legal Investigations, managed to defeat these alleged makes an attempt at monetary anonymity on the way in which to recouping $3.6 billion of stolen cryptocurrency. In doing so, they demonstrated simply how superior cryptocurrency tracing has turn into—probably even for cash as soon as believed to be virtually untraceable. 

“What was superb about this case is the laundry record of obfuscation strategies [Lichtenstein and Morgan allegedly] used,” says Ari Redbord, the pinnacle of authorized and authorities affairs for TRM Labs, a cryptocurrency tracing and forensics agency. Redbord factors to the couple’s alleged use of “chain-hopping”— transferring funds from one cryptocurrency to a different to make them tougher to observe—together with exchanging bitcoins for “privateness cash” like monero and sprint, each designed to foil blockchain evaluation. Courtroom paperwork say the couple additionally allegedly moved their cash by the Alphabay dark web market—the largest of its type on the time—in an try to stymie detectives.

But investigators appear to have discovered paths by all of these obstacles. “It simply reveals that regulation enforcement will not be going to surrender on these instances, they usually’ll examine funds for 4 or 5 years till they will observe them to a vacation spot they will get info on,” Redbord says.

In a 20-page “statement of facts” printed alongside the Justice Division’s legal criticism in opposition to Lichtenstein and Morgan on Tuesday, IRS-CI detailed the winding and tangled routes the couple allegedly took to launder a portion of the almost 120,000 bitcoins stolen from the cryptocurrency change Bitfinex in 2016. Most of these cash have been moved from Bitfinex’s addresses on the Bitcoin blockchain to a pockets the IRS labelled 1CGa4s, allegedly managed by Lichtenstein. Federal investigators ultimately discovered keys for that pockets in certainly one of Lichtenstein’s cloud storage accounts, together with logins for quite a few cryptocurrency exchanges he had used.

However to get to the purpose of figuring out Lichstenstein—alongside along with his spouse, Morgan—and finding that cloud account, IRS-CI adopted two branching paths taken by 25,000 bitcoins that moved from the 1CGa4s pockets throughout Bitcoin’s blockchain. A kind of branches went into a set of wallets hosted on AlphaBay’s darkish internet market, designed to be impenetrable to regulation enforcement investigators. The opposite seems to have been transformed into monero, a cryptocurrency designed to obfuscate the paths of funds inside its blockchain by mixing up the payments of multiple monero users—each actual transactions and artificially generated ones—and concealing their worth. But in some way, the IRS says it recognized Lichtenstein and Morgan by tracing each these branches of funds to a set of cryptocurrency change accounts of their names, in addition to within the names of three corporations they owned, referred to as Demandpath, Endpass, and Salesfolk.

The IRS hasn’t totally spelled out how its investigators defeated these two distinct obfuscation strategies. However clues within the court docket doc—and evaluation of the case by different blockchain evaluation specialists—counsel some doubtless theories.

Lichtenstein and Morgan seem to have supposed to make use of Alphabay as a “mixer” or “tumbler,” a cryptocurrency service that takes in a person’s cash and returns totally different ones to forestall blockchain tracing. AlphaBay marketed in April 2016 that it provided that characteristic to its customers by default. “AlphaBay can now safely be used as a coin tumbler!” learn a put up from certainly one of its directors. “Making a deposit after which withdrawing after is now a option to tumble your cash and break the hyperlink to the supply of your funds.”

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