DOJ Seizes $3.6 Billion in Bitcoin Stolen in Bitfinex Hack

By BLOOMBERG

The U.S. seized about $3.6 billion in Bitcoin stolen during a 2016 hack of the Bitfinex currency exchange — the largest financial seizure ever — and arrested two people, the Justice Department said

Ilya Lichtenstein and his wife, Heather Morgan, were detained in the morning and by late afternoon appeared at federal court in Manhattan. The two — who appear to have had colorful social media accounts ahead of their arrests — allegedly conspired to launder 119,754 Bitcoin stolen after a hacker breached Bitfinex’s systems. 

“Today’s arrests, and the Department’s largest financial seizure ever, show that cryptocurrency is not a safe haven for criminals,” Deputy Attorney General Lisa Monaco said in a statement. “In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions.”

Bitfinex is the exchange affiliated with the world’s biggest stablecoin, Tether. At the time of the hack, the digital currency haul was estimated at about $71 million, the Justice Department said. The department said the total value of stolen Bitcoin is now worth about $4.5 billion. 

“This case and the arrests today are extraordinary,” said Ari Redbord, a former federal prosecutor who is now the  head of legal and government affairs at TRM Labs, a blockchain intelligence company. “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.”

The cryptocurrency known as Unus Sed Leo, which was issued in part to recapitalize the Bitfinex exchange following the 2016 hack, surged more than 50% after the DOJ announcement. 

Dressed in casual clothes, Lichtenstein and Morgan didn’t speak at their court appearance Tuesday afternoon. Their lawyers — they have retained separate counsel — did all the talking. The government asked the judge not to allow them to be released on bail. Each of them is facing the possibility of a 20-year prison sentence, so they have the motivation to run, a prosecutor told the judge.

The trial will eventually be held in Washington, where the charged were filed. 

The defendants in Tuesday’s case weren’t accused of doing the actual hacking. A 20-page statement of facts details the complex movement of Bitcoin after the hack, but it offers no clues as to who actually stole the digital currency. Justice Department officials declined to comment when asked about who carried out the hack. 

According to DOJ, the couple used sophisticated techniques, including “using fictitious identities to set up online accounts; utilizing computer programs to automate transactions, a laundering technique that allows for many transactions to take place in a short period of time; depositing the stolen funds into accounts at a variety of virtual currency exchanges and darknet markets and then withdrawing the funds.” 

Lichtenstein, 34, and Morgan, 31, also funneled the money through AlphaBay Marketplace, which was shut down in 2017, to hide their transactions. Some of the money was cashed out through Bitcoin ATMs. Some was used to buy NFTs and gold. They even used the money to buy a Walmart gift card.

‘Crocodile of Wall Street’

Lichtenstein, who went by the nickname “Dutch,” described himself as an angel investor in technology companies, as well as an adviser to multiple startups, according to a public LinkedIn profile. A Twitter account with his name also posted frequently, weighing in on topics such as cryptocurrency trends, the technology sector and the evolution of NFTs. 

Morgan, who prosecutors say used the alias “razzlekhan,” promoted herself as a part-time rapper, entrepreneur and media personality on what appears to be her personal website. In one post, the defendant described herself as “the infamous crocodile of Wall Street” and “like Genghis Khan, but with more pizzazz.” 

A separate Instagram account that appears to be associated with the defendant included videos of Morgan, as Razzlekhan, rapping and appearing at a wedding ceremony in which she was carried on a throne by roughly eight people. 

The details of the case date to August 2016, when Bitfinex reported a security breach and halted all trading, withdrawals and deposits. The company later disclosed in a blog post some of its users had their Bitcoin stolen, and that it had reported the theft to law enforcement. 

Bitfinex said in a statement that it has been cooperating “extensively” with the Justice Department throughout the investigation and that it will seek “to establish our rights to a return of the stolen Bitcoin.”

In a briefing for reporters, Justice Department officials said they plan to establish a court process for victims to reclaim the stolen Bitcoin.

In a phone interview after the arrests were announced, Deputy Attorney General Monaco said the Justice Department plans to focus more resources and attention on policing the cryptocurrency “ecosystem” and will be seeking as much help and support as possible from private entities like virtual currency exchanges. 

“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,” Monaco said. “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.”

In addition to a possible 20 years in prison for the money laundering charges, Lichtenstein and Morgan could receive an additional sentence of up to five years for conspiracy to defraud the U.S., according to a Justice Department statement.