The US government has arrested a New York-based couple — Ilya Lichtenstein and Heather Morgan — for allegedly attempting to launder 119,754 Bitcoin, an equivalent of roughly $4 billion in USD. The government has requested the judge not allow the husband and wife to be released on bail, as each of them is facing the possibility of 20 years in prison. The Department of Justice (DOJ) has seized the Bitcoin. But few seemed to be asking the obvious question: will the Bitcoin get returned to its rightful owners? The answer is not so clear, nor is it clear who the rightful owners are anymore.
The Background
Back in 2016, the cryptocurrency exchange, Bitfinex, was hacked and the ~120K Bitcoin were stolen. What’s interesting is that Lichtenstein and Morgan aren’t accused of stealing the Bitcoin. The actual thief (or thieves) is unknown. The DOJ claims that the Bitfinex hacker sent the Bitcoin to Lichtenstein's digital wallet through a series of transactions. The relationship, if any, between the hacker(s) and Lichtenstein is unknown, although curious. Does the DOJ know? Well, they declined to comment on that. But they did tell reporters that the DOJ plans to establish a court process for victims to reclaim the stolen Bitcoin.
But Bitfinex considers that it’s already made investors whole, and thus, they claim they are entitled to the loot. They released a statement saying they intend to establish their rights the stolen Bitcoin (my emphasis in bold):
“Bitfinex will work with the DOJ and follow appropriate legal processes to establish our rights to a return of the stolen bitcoin. Bitfinex intends to provide further updates on its efforts to obtain a return of the stolen bitcoin as and when those updates are available.”
When the Bitcoin was stolen, Bitfinex allocated losses of more than 30% to all customer accounts. It then created and credited tokens to customers at a ratio of one for every $1 lost. All holders either redeemed the tokens for cash or exchanged them for iFinex capital stock (iFinex Inc. is owner and operator of the Bitfinex exchange).
Bitfinex then created another token named Recovery Right Token (RRT) for holders that had converted into iFinex shares. The thinking was that if the stolen Bitcoins were ever recovered, RRT holders would receive up to $1 per token. This is what Bitfinex will, no doubt, point to as a transfer of rights from the original Bitcoin owners into Bitfinex hands. But with 30 million RRT tokens outstanding, that only adds up to, at most, a reimbursement of $30 million.
So that leaves the obvious question: what about the remaining billions? If Bitfinex gets the loot, they will make out like bandits considering Bitcoin’s appreciation going from less than $600 around the time it was stolen to around $42,000 now.
The Couple
At the time of the hack, the sum of the digital loot was worth $71 million. As the value of Bitcoin took off in the succeeding years (at one point the loot peaked at ~$5 billion), the couple — at this point in possession of the Bitcoin — allegedly created fake identities to try and liquidate some of it. According to the DOJ, the couple is accused of using fake identities, automating transactions, depositing stolen funds into accounts at a variety of virtual currency exchanges, and then withdrawing the funds to purchase NFTs, gold, and “even using the money to buy a Walmart gift card.”
Lichtenstein and Morgan are relatively young — 34 and 31 years old, respectively. Lichtenstein went by the nickname “Dutch” and Morgan used the alias “razzlekhan.” While Lichtenstein’s Twitter posts were generally mild,
… Morgan’s posts were more fun. She’s an interesting character, to say the least. Her music is on Spotify here.
The story and characters are wild enough that Netflix has announced a forthcoming docuseries on the whole ordeal. But for me, I’m most interested in the fate of the seized Bitcoin.
How “Crypto” is Crypto?
The amount of Bitcoin that this couple came into was too much to go unnoticed. The government had their eyes peeled for any movement on the blockchain. What’s crazy is that only ~2% of the stolen Bitcoin was moved. Now, this raises two other obvious questions:
How “crypto” is crypto, if the government, allegedly, can track its movement?
How safe is blockchain money if it can demonstrably be hacked? Note that in 2020, U.K.-based crypto exchange, Cashaa, suffered a hack where 336 Bitcoin were stolen. Then only weeks later, Spanish crypto trading platform, 2gether, was hacked, too.
Former federal prosecutor, Ari Redbord (now head of legal affairs at a blockchain intelligence company, TRM Labs) makes a telling statement on what may be a false sense of anonymity with crypto:
“This is further proof that the nature of the blockchain — the forever open ledger — allows investigators to follow the money in ways impossible in complex webs of shell companies and bulk cash smuggling.”
And Deputy Attorney General, Lisa Monaco, said the DOJ plans to focus more resources and attention on policing the cryptocurrency:
“At the end of the day, what we’re talking about here is trying to clean up the ecosystem that these criminal actors are trying to use and hide behind. If we’re going to see — as I think we will — cryptocurrency gaining more traction and gaining wider adoption, we’ve got to make sure that the ecosystem that they operate in can be trusted and frankly can be policed.”
Now, I’m not an expert on blockchain (not even a respectful amateur), but to me the benefit of Bitcoin and other decentralized money is supposed to be its anonymity and its disconnection from government control.
Just a few weeks ago, the world watched as GoFundMe, in collaboration with the Canadian government, seized ~$10 million of donations to the Canadian Freedom Convoy 2022 as they protest Covid vaccine mandates among other related government overreaches. At first, GoFundMe stated they would take the money and donate it to a cause of their choosing. Only after public outcry and threats of litigation, they reversed course and decided to automatically refund donations. People responded with the phrase, “Bitcoin fixes this.” But does it really? I have some concerns.
And just yesterday, the Canadian government has invoked the Emergencies Act which essentially gives the government free rein to use whatever means they desire to shutdown the Freedom Convoy or anyone aiding the effort. The government has threatened to freeze bank accounts, shutdown crowdfunding, and even threated against the use of, you guessed it, cryptocurrencies.
Deputy Prime Minister, Chrystia Freeland, outlined the plan to consider any and all supporters as terrorists:
“… we are broadening the scope of Canada’s anti-money laundering and terrorist financing rules so that they cover crowdfunding platforms and the payment service providers they use. These changes cover all forms of transactions, including digital assets such as cryptocurrencies.”
What is the Government Really After?
In addition to the potential 20-year prison sentence for money laundering (a victimless crime in my view), Lichtenstein and Morgan could receive an additional sentence of up to five years for conspiracy to defraud the U.S. I’m sorry, but “defraud the U.S.?”
You see, it’s the fact that the government didn’t get their cut (in the form of taxes) that the heads of this young couple are on the pikes. The government doesn’t appear to be as interested in the fact that the Bitcoin was stolen.
Only time will tell if the DOJ relinquishes what they now have in their possession. Even if the DOJ honestly wanted to return the Bitcoin to the original owners, that may not be an easy task. Anyone with an email address can open an account on Bitfinex, so verifying identities could be a challenge. But, if the government has the capability of tracking the blockchain, surely they have the capability of finding the original owners.
I doubt that the DOJ will give the seized Bitcoin to Bitfinex, and I don’t think they should, especially considering it was Bitfinex’ failure to prevent the hack in the first place. But if the DOJ do give it to Bitfinix, you can almost guarantee that there will be litigation, but the outcome will depend on the fine print that the original Bitcoin holders signed.