The Stolen Bitfinex Bitcoin Has Been Recovered - The Blockchain Helps Catch Criminals Again
Why Bitcoin isn't an enabler for crime
When it comes to Bitcoin, a go-to objection for skeptics is that it enables criminal activity.
It’s a common misconception, often voiced by those in government and positions of influence, who don’t understand it and conveniently overlook that their beloved cash has crime and anonymity for centuries.
In this piece I want to propose that Bitcoin actually prevents, or at least hinders criminal activities using a few example cases. Most notable is one that’s unfolding right now - the Bitfinex hack and the recent recovery of $3.6 billion in Bitcoin stolen in 2016.
The funds from this particular hack wouldn’t have been recovered were it not for the innate workings of the blockchain. The couple who’ve been arrested in connection with the crime did some extremely odd things too, that may have helped in their being apprehended.
The problems with cash
Criminals rely on protecting their anonymity to evade capture. Historically this has been achieved by dealing mostly in cash. We’ve all seen enough movies to understand the challenges that this presents.
Demanding a ransom? In the past you’d rely on receiving a suitcase full of cash and hoping it wasn’t tracked, booby-trapped or contaminated with forgeries. Alternatively you could insist on an electronic transfer of funds and hope that it isn’t traced after sending.
If you’ve somehow received that ransom without being arrested, or you’ve stolen a few million in hard cash - what then? There’s the tricky task of laundering the cash. Even if it isn’t traced through monitoring of the serial numbers on the bills, you can’t spend it frivolously or you’ll attract unwanted attention.
With these difficulties in mind, it’s easy to understand the allure of Bitcoin to the criminal classes - in principal at least.
Bitcoin and criminality
Bitcoin isn’t regulated or even acknowledged by most governments nor their respective banking systems. For this reason it’s possible to hold, send and receive Bitcoin without having any interaction with the conventional system of global finance.
Honest people like me have signed up for crypto-exchanges like Coinbase to buy their Bitcoin. Using such channels involves completing some basic ID and verification activities which create a paper trail that could alert the authorities that I may own some Bitcoin. But once it’s owned, it can be sent and received completely peer-to-peer between crypto wallets that are themselves untraceable.
A hardware crypto wallet (similar to a USB memory stick) can be purchased for a few dollars. Each wallet has a unique address and is used to send, receive and store its holder’s Bitcoin. The wallet doesn’t have to be registered anywhere, it can be carried across geographic borders and can even used to spend Bitcoin too.
With that basic understanding, it’s easy to see why some criminals believe that Bitcoin might be the answer to their dreams, and why high profile figures in government and banking might perceive it to be a threat.
But it’s not that simple
Many think that this is the full extent of the story and take it as gospel that Bitcoin is a tool that facilitates criminality. They haven’t taken the time to understand Bitcoin better. If they did, perhaps they wouldn’t be quite so quick to dismiss it.
At a Berkshire Hathaway investors meeting last year, investing guru and business partner of Warren Buffett, Charlie Munger, had this to say:
“Of course I hate the Bitcoin’s success and I don’t welcome a currency that’s so useful to kidnappers, extortionists and so-forth… I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization.”
So, not a fan then Charlie?
The response on Twitter to Munger’s comments was as might have been expected — scathing to say the least:
I liked this one too:
Most would defer to Munger’s huge success as an investor, but his comments betrayed a lack of genuine understanding of Bitcoin and a reliance on the usual cliches and rhetoric in the absence of genuine knowledge.
This isn’t a hit-piece on Munger though - his response is pretty typical and representative of those who only see the surface picture.
Meanwhile, statistics prove that the volume of criminal transactions involving Bitcoin are declining year-on-year.
The transparency of the blockchain ledger
There’s more to Bitcoin than anonymity and libertarianism.
The blockchain ledger is part of what makes the Bitcoin network what it is. There is one, single, correct and fully-accurate ledger. Copies of it exist and are maintained at each network node (or computer) running the core code of Bitcoin. The ledger is an ever-growing record that contains the history of each and every single Bitcoin in existence.
The ledger records each and every transfer of every Bitcoin (or fractional units of Bitcoins - Satoshis or ‘Sats’ - that are to Bitcoin what cents are to dollars), between wallets
The ledger records when each Bitcoin came into existence through the process of Bitcoin Mining, and which node successfully mined it.
The ledger knows where each Bitcoin is. That’s to say, it knows which wallet contains it, even if it doesn’t know where that wallet physically is.
By using appropriate software together with the relevant expertise, it’s easy to interrogate the blockchain ledger and to track the movement of individual Bitcoin around the network. Companies like Chainalysis have made entire businesses out of doing just that.
What this means in practice is that while a criminal can receive Bitcoin in payment of a ransom (for example), the blockchain can be interrogated to monitor and track the movement of those Bitcoin once sent.
This doesn’t prevent the criminal from moving that wallet around the world, but if they send any of that Bitcoin to another wallet (which could be a transfer to another person, or spending it with a vendor who accepts payment in Bitcoin) the movement can be monitored and tracked. It also means that the individual units of Bitcoin can be recovered if the containing wallets are ever recovered.
In real terms, what this means is that Bitcoin is actually harder for criminals to dispose of, launder, or use than cash. It can also theoretically be recovered and returned to its original owner if traced through the blockchain.
Not convinced?
Bitcoin recovered from criminals
There've been a few notable examples where Bitcoin has been recovered from criminals, aided by the way the blockchain is structured. In some instances (albeit aided by varying degrees of stupidity) it’s also led to the criminals themselves being apprehended too.
When the Colonial Pipeline was hacked last year by the Russian hacking collective known as DarkSide, control of the pipeline infrastructure could only be recovered after a ransom was paid - 75 Bitcoin or around $4.5 million at the time. Upon payment, hackers removed ransomware, gasoline began flowing from Texas to the east coast US once again, and Colonial continued recruiting for a new Cyber Security manager.
While the hackers managed to get away with 12 BTC from the ransom, the FBI reported triumphantly on June 7 that they’d managed to track and recover the other 63 BTC before they could be sent elsewhere or disbursed amongst the hackers. Their error had been to leave the BTC in a crypto wallet on a live server (known as ‘hot storage’). As a result of this mistake, the FBI were able to track the wallet and seize the server.
In another notable and high-profile case - one which probably introduced many to Bitcoin for the first time - US government agents from a variety of forces including the FBI and the IRS apprehended Ross Ulbricht in 2013. Ulbricht had created The Silk Road, a dark net website that offered buyers illegal drugs, hacking tools and guns for purchase with payment being made using Bitcoin.
The IRS seized crypto wallets from Ulbricht and other associates (including crooked agents who had turned during the investigation) and ultimately, in 2020 seized a haul of 69,370 Bitcoin - over 7 years after Ulbricht had been arrested. This was added to a further haul of 175,000 BTC previously seized from The Silk Road by the Federal Government.
A total of over $10 billion recovered (at today’s exchange rate), all made possible through analysis of the blockchain and the transparency it enables.
The most recent example has been the seizure of around $3.6 billion of Bitcoin, originally stolen from the Bitfinex crypto exchange in 2016.
Bitfinex and Razzlekhan
At the time it was hacked in 2016 Bitfinex was the largest and most-used crypto exchange in the USA, responsible for 40-50% of daily transactions. Almost 120,000 Bitcoin were stolen by hackers who infiltrated the exchange and began drawing down BTC from customer accounts.
Bitfinex detected and halted the theft before all accounts could be cleared out, but at the time the hack came as a hammer-blow for the company.
They managed to restore an element of customer faith and ultimately reimbursed their customers for funds lost. They issued a debt-token - BFX - to customers at a rate of 1 token for every dollar of value lost through the hack. In the following months these tokens could be sold back for a dollar each or converted to shares in the parent company iFinex which would have yielded a positive rate of return.
Customers of Bitfinex were reimbursed for their losses and all was well in the world, and then the Feds managed to track and recover most of the Bitcoin stolen in 2016.
All praise the blockchain?
Once again, through interrogating the blockchain ledger US federal officers were able to monitor the wallets that had originally received the BTC stolen from Bitfinex. While it wasn’t possible to seize the funds themselves (or to catch the crooks) without access to the wallets, the criminals were restricted in how much they could spend. It was assumed they’d fled the US and were laying low while gradually using the funds in small increments.
Not so, as it turned out.
Hiding in plain sight?
On February 8 2022 the US Department Of Justice announced it had recovered $3.6 billion of the Bitfinex Bitcoin, and arrested a husband and wife who are currently under house arrest for their role in the theft.
Ilya Lichtenstein, 34, and his 31-year-old wife, Heather Morgan were arrested in New York City. Both had previously been tech entrepreneurs working in blockchain technology. They were apparently ‘hiding’ within reach of prosecutors from the Southern District of New York - notoriously vicious in their appetite for pursuing those who commit financial crime.
Far from fleeing to foreign shores, the pair had apparently remained in New York and were living off the stolen Bitcoin by spending it gradually on $500 gift cards.
In the course of online investigations, Feds managed to obtain encrypted files that the pair had stored in the cloud, containing lists of sources of fake ID together with an encrypted file with the wallet IDs and private keys associated with the stolen Bitcoin.
These acts seem decidedly amateurish, and have led many online to question whether the pair could possibly possess the technical expertise to have stolen the Bitcoin in the first place. Presumably the truth will come to light as investigations continue.
Most surprising (and amusing) of all was that Heather Morgan seems to have spent most of her time following the theft, trying to forge a career as an online influencer and amateur rap artist - ‘Razzlekhan’.
Social media platforms are now flooded with incredulity at the fact that someone on the run could do so much to attract attention for all the wrong reasons:
Bitcoin prevents (or at least, hinders) criminality
The choices made by the pair behind the Bitfinex hack are largely irrelevant at this point. What the case illustrates once again, is that while Bitcoin is appealing to criminals for many reasons, it’s certainly no more suited to crime than cash is.
The traceability and transparency enabled by the blockchain ledger has demonstrated once again that criminals are hindered in being able to spend BTC easily or freely without attracting attention. This transparency also makes it possible for stolen funds to be tracked down and recovered, depending on the carelessness of those who steal and use it!
If you’re interested in buying and holding Bitcoin safely and securely, without risk of it being stolen, maybe you’ll enjoy my guide on how to do just that.
Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.
I invested in bitcoin 5 or 6 years ago $7,000 with USI tech. To buy Bitcoin at the time was under $3,000 a coin it grew quickly. USI Tech stole my money and shut down my access. Any comments. I would love to regain but would love even more if they paid the piper. Several people I knew lost way more than I did. This operation was a pyramid scam and they got away with it. Has anyone investigated them? Let me know what your thoughts are? Thanks Nancy Iannitelli
Morgan's "music" should be prosecuted on its own.