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The U.S. Department of Justice (DOJ) has seized a record 94,000 Bitcoin, worth $3.6bn, refuting criticism that criminals can hide behind cryptocurrencies.
On Tuesday (February 8), the DOJ announced that law enforcement agencies had arrested two individuals on the suspicion that they laundered cryptocurrency linked to a massive Bitfinex hack attack.
“Today, federal law enforcement demonstrates once again that we can follow money through the blockchain, and that we will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system,” said assistant attorney general Kenneth A. Polite Jr. of the Justice Department’s Criminal Division.
“In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions,” said deputy attorney general Lisa O. Monaco, emphasising that “the department once again showed how it can and will follow the money, no matter what form it takes.”
The Bitcoin seized in the case relates to a 2016 Bitfinex incident in which hackers stole 119,754 Bitcoin from Bitfinex users.
Throughout the last five years, New York couple Ilya Lichtenstein and Heather Morgan laundered the proceeds of 25,000 Bitcoin, with the remainder 95,000 Bitcoin now being seized by the DOJ.
This has amounted to the largest cryptocurrency seizure to date, valued at more than $3.6bn.
The couple has now been arrested and could face up to 20 years in prison for money laundering and an additional five years for defrauding the United States.
“Criminals always leave tracks, and today’s case is a reminder that the FBI has the tools to follow the digital trail, wherever it may lead,” said FBI deputy director Paul M. Abbate.
Like any store of value, cryptocurrencies could be exploited by criminals to trade illegal goods on the dark web, ask for ransom payments or launder money.
However, as the latest Europol report highlights, cryptocurrencies are much less used for such kinds of activities than is often supposed, compared with other forms of traditional finance.
In addition, the underlying blockchain technology enables financial investigators to follow the trail of the money regardless of how long in the past the transaction took place.
As a public transaction ledger, the blockchain includes a record of every Bitcoin transaction that has ever occurred. It registers the time and amount of the transaction, and the sender and receiver’s addresses, a combination of alphanumeric characters.
This feature was used in the current case by U.S. authorities to trace the stolen funds.
What makes the prosecution challenging, is finding the link between blockchain addresses and people in the real world.
There are, however, various solutions for how investigators can get to the bottom of anonymity.
For instance, in many cases, investigators have suspects in a cryptocurrency crime at the beginning of the investigation. In this case, enforcement agents can search the suspects’ premises for devices or documents that might contain details of cryptocurrency accounts, according to Federico Paesano, senior financial investigation specialist at the Basel Institute's International Centre for Asset Recovery.
Another tool is address clustering, which is aimed at breaking the pseudo-anonymity by linking addresses that are controlled by the same user based on the information available from the blockchain.
Once the group of addresses is identified, blockchain analysis firms can help enforcement agents analyse the transactions and get critical information such as geolocation data or the cryptocurrency exchange used for the transactions. Investigators can then request further details from the exchange that are required to do know your customer (KYC) checks on their users in many parts of the world.
In the current case, U.S. enforcement agencies accessed online accounts controlled by Lichtenstein and Morgan after obtaining court-authorised search warrants.
Files within an online account controlled by Lichtenstein contained private keys that were required to access the digital wallet that directly received the funds stolen from Bitfinex.
After blockchain analysis confirmed that almost all of the addresses were directly linked to the hack, the government requested and was granted a court warrant authorising the seizure of the funds.
