State of Crypto: The Bitfinex Laundering Story Continues

Examining the intersection of cryptocurrency and government

By Nikhilesh De

Managing Editor, Global Policy & Regulation

February 15, 2022

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Hey folks,

Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.

The U.S. Congress is holding a slate of hearings right now on cryptocurrencies across different committees. I want to write about them but I think I need some more time to speak to people and put thoughts together. As such, we’ll talk about last week’s House Financial Services Committee stablecoin hearing, Senate Agriculture Committee CFTC hearing and today’s Senate Banking Committee stablecoin hearing next week.

Instead, let’s talk about the story that has everyone else captivated: The alleged Bitfinex hack launderers.

—Nik

Misfit launderers

Heather Morgan, aka Razzlekhan (YouTube, modified by CoinDesk)

The narrative

Ilya Lichtenstein and Heather Morgan, married New York residents, were arrested last Tuesday on charges of money laundering conspiracy and conspiracy to defraud the U.S. in connection with allegations they laundered roughly 25,000 BTC and had access to another 94,000 BTC stolen from Bitfinex in 2016.

Why it matters

We might soon see some $3.5 billion worth of bitcoin reenter the market. The recovery of 94,000 BTC and the arrest of two individuals allegedly tied to the Bitfinex theft was arguably the biggest story in crypto last week, and only partly because of the money involved.

Breaking it down

Where do I even begin with last week?

Last Tuesday, federal officials announced they’d arrested two individuals on charges of money laundering conspiracy in connection with the 2016 Bitfinex hack, which saw just under 120,000 bitcoins (worth around $60 million at the time) stolen in a sophisticated attack.

Ilya Lichtenstein and Heather Morgan then made headlines for being a seemingly (mostly) normal New York couple, just one that happened to have access to what’s now worth more than $4 billion in bitcoin.

Bitfinex used BitGo at the time as its custodian, with a multi-signature security setup. (Multisig means you need at least X of Y people with keys to access something, where X > 1. It’s supposed to be more secure than a system where a single individual can access a company’s billions.)

BitGo reported a server breach at the time, while Bitfinex held two of the keys. The precise details of the hack itself seem to still be unclear. Worth noting: Federal officials are not charging either defendant with the hack itself, a stance prosecutors reiterated during a pretrial detention hearing on Monday.

Is it possible the two were responsible for the initial hack? Who knows? Anything’s possible. Morgan gave a talk on social engineering and wrote an op-ed on protecting yourself from cybercrime. Lichtenstein appears to have commented about using bitcoin in crime on HackerNews years ago. Nothing here is definitive.

What we do know is the specific allegations laid out and the subsequent testimony from prosecutors. According to the allegations, Lichtenstein and Morgan both had access to some 94,000 BTC (worth around $3.5 billion) that federal officials were able to seize at the end of January.

The two also allegedly had access to much of the remaining 25,000 BTC, which was laundered through various wallets and darknet marketplaces before being cashed out.

Despite these allegations, the part that seemed to get the most attention was the fact that these two just kind of existed in the way they did. Morgan was an aspiring rapper under the moniker “Razzlekhan.” Lichtenstein tweeted complaints about CoinDesk’s coverage.

They took the world by storm. And look, I wasn’t immune, it was a very odd day week but it does also feel like this part is a distraction from the part where they allegedly had ninety four thousand bitcoin at hand.

The questions I have now:

Bitfinex said in a statement it expects to recoup the coins. Former Bitfinex customers will likely also lay a claim. The timeline here is a bit unclear to me.

Israeli authorities arrested two individuals three years ago on charges they were behind the Bitfinex hack. I couldn’t find an update on their status. It’s also, again, feasible that our new defendants are behind the hack. It does stretch credulity a bit to suggest that someone hacked Bitfinex and then gave the keys to all 120K BTC to a pair of Wall Street residents.

Some of these coins have been disposed of to purchase things like gift cards and PlayStations. Some are in different wallets. Prosecutors alleged that some $300 million are still accessible by the defendants. That leaves a ton of BTC not yet recovered.

Her videos are gone, including a Nov. 20, 2021, video of her wedding. November is also when Morgan and Lichtenstein found out their internet service provider had been subpoenaed. Their attorney told a judge they’d been married for three years but the timing is interesting (even if coincidental).

I also want to leave you with CoinDesk’s (in my biased opinion) outstanding coverage of the past week, spearheaded by my colleague Cheyenne Ligon, who not only read the filings but traveled to both hearings to provide on-the-ground reporting:

Read the rest of the column here.

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The Biden Bunch

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)

There will be a full Senate Banking Committee markup for the Fed nominees today at 2:15 p.m. Eastern (so presumably shortly after the stablecoin hearing ends). That's assuming every member of one political party doesn't walk out.

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Elsewhere

Drained Crypto Accounts at IRA Financial Leave Victims Searching for Answers: Some $36 million in retirement funds kept in crypto have been drained from IRA Financial or Gemini, the company’s custodian, reports my colleague Danny Nelson. What’s more, neither IRA Financial nor Gemini have provided a full accounting of what’s happened.

BlackRock Planning to Offer Crypto Trading, Sources Say: BlackRock has some $10 trillion in assets under management, and it appears it will start offering crypto trading to clients sometime in the near future, reports Ian Allison.

Young, Crypto-Savvy Voters May Hold Key to South Korea's Next Election: South Korea’s presidential candidates are hoping to gain voter support through crypto-friendly policies ahead of the nation’s upcoming election, reports Lavender Au. Still, any such policies probably won’t be properly defined until after the election.

CoinDesk presents Crypto State: Southeast Asia. The next dimension of interaction is already here, and it's built on Web 3, blockchain and virtual reality. Businesses like Facebook and Nike, fashion brands and crypto companies alike are investing heavily in this revolution. We dive into how this technology will transform our world, and how you can take part. Register now!

Beyond CoinDesk

(The Verge) The Verge’s Corin Faife reports that government agencies are still using biometric (read: face scanning) startup ID.me for official business. The company in question also seems to be struggling a bit due to the amount of work.

(Vice) This is a good profile of the overall Web 3 zeitgeist by Motherboard’s Maxwell Strachan. It’s always worth reading and engaging with the criticisms, a lesson some parts of the crypto industry could perhaps learn.

Today’s Tweet

If you’ve got thoughts or questions on what I should discuss next week, or any other feedback you’d like to share, feel free to email me or find me on Twitter.

You can also join the group conversation on Telegram.

See y’all next week!

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