As public understanding of how digital assets work becomes nuanced by the spread of cryptocurrencies, the language of Bitcoin’s “anonymity” (BTC) gradually becomes a thing of the past. High-profile law enforcement operations, such as the one that recently led to the US government seizing some $3.6 billion worth of cryptocurrencies, are especially helpful in driving home the idea that assets whose transaction history is recorded in a ledger open and distributed ledger are best described as “pseudonyms,” and that design is not particularly conducive to those who want to get away with stolen funds.
As much as criminals try to hide the movement of ill-gotten digital money, at some point in the transaction chain they are likely to invoke addresses to which personal data has been linked. This is how it happened in the Bitfinex case, according to documents made public by the US government.
Too comfortable and too soon
A fascinating statement from a special agent assigned to the Internal Revenue Service, Criminal Investigation (IRS-CI) details a process by which US federal government operatives got a whiff of the couple suspected of laundering money stolen in the 2016 Bitfinex hack.
The document describes a large-scale operation to hide the traces of stolen Bitcoin that involved thousands of transactions passing through multiple transit hubs such as darknet markets, self-hosted wallets, and centralized cryptocurrency exchanges.
In the first step, the suspects passed off the cryptocurrencies flagged as stolen in the Bitfinex heist through the AlphaBay darknet marketplace. From there, a portion of the funds traveled to six accounts at various cryptocurrency exchanges that, as investigators later discovered, were registered using email accounts hosted by the same provider in India. The emails had similar names, while the accounts displayed similar patterns of business behavior.
The chain continued, and the BTC that law enforcement followed was funneled into a number of self-hosted wallets and other exchange accounts, some of them registered in the name of one of the suspects. Following the investigators’ narrative, the reader ends up with the impression that, at one point, Ilya Lichtenstein and Heather Morgan felt they had done enough to cover their tracks and could spend some of the money on themselves.
That was it: Gold bars and a Walmart gift card, purchased with funds traceable to the Bitfinex hack, and delivered to Lichtenstein and Morgan’s home. It was all there in the ledger. The resulting report reads like a convincing description of a crime that has been reverse-engineered using an immutable record of transactions.
following the money
The scale of the investigation was perhaps more formidable than that of the laundering operation. Despite years of effort by the suspects to conceal the movement of the funds, government agents were gradually able to unravel the paths along which most of the stolen BTC traveled, eventually seizing it. This shows that the US government’s ability to track money on the blockchain is at least on par with the tactics that those responsible for some of the major cryptocurrency thefts use to escape the law.
Speaking about the investigation, Marina Khaustova, CEO of Crystal Blockchain Analytics, noted that the Bitfinex case is especially difficult to crack due to the large amount of stolen funds and the great efforts of the perpetrators to hide their operations. She commented to Cointelegraph:
“Any case of this size, which has been going on for years, will undoubtedly take a long time for financial investigators to sift through and understand the data they have before using it as evidence.”
US government agents were well-resourced and had access to state-of-the-art blockchain analytics software while tackling the case. It is no secret that some of the biggest players in the blockchain intelligence industry supply law enforcement agencies in multiple countries, including the United States, with software solutions for tracking digital assets.
One possible explanation for why Lichtenstein and Morgan were ultimately caught is the apparent nonchalance with which they abandoned caution and began spending the allegedly laundered funds on their own behalf. Were they not smart enough, or was it because security forces went deeper into the chain of transactions than the suspects could reasonably expect?
Khaustova believes there was “a bit of an oversight in the methods employed” as the suspects let investigators obtain one of the key documents – which allowed them to link email addresses to exchanges, KYC records and personal accounts. – from cloud storage.
However, it is also true that there is a point where any cryptocurrency launderer has to come out of the shadows and convert the stolen funds into goods and services that they can use, at which point they become vulnerable to de-anonymization. Bitfinex’s research showed that if law enforcement is hell-bent on tracking suspects to that point of “collecting,” there is little criminals can do to avoid getting caught.
A case to be made
The general conclusion is that governments – the US in particular, but many others are not far behind when it comes to beefing up their blockchain tracking capabilities – are already aware of the tactics and techniques they use. cryptocurrency launderers. Perfect blockchain traceability might have been a theoretical argument a few years ago, but it is now an empirically proven reality, as evidenced by law enforcement practice.
There are two big reasons why this notion is good for the cryptocurrency industry. One is that there could be some degree of recourse for victims of major cryptocurrency heists. Admittedly, not every cryptocurrency theft case will attract the scant attention of federal investigators, but the most high-profile and egregious ones will.
Another powerful consequence of law enforcement’s newfound prowess in tracking the blockchain is that it renders obsolete some regulators’ hackneyed argument that “cryptocurrencies are a perfect tool for money laundering.” As real-life cases show, digital assets are, in fact, the opposite. If this point is instilled in the minds of legislators, one of the fundamental arguments against cryptocurrencies will end up being discussed.
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