A reminder why crypto isn’t ideal for money launderers

The crypto business benefits from law enforcement’s strong ability to track money on the blockchain.

With the mainstreaming of crypto, public knowledge of how digital assets work is becoming more sophisticated, and the terminology of Bitcoin’s (BTC) “anonymity” is rapidly becoming a thing of the past. High-profile law enforcement operations, such as the one that recently resulted in the US government seizing $3.6 billion in cryptocurrency, have played a key role in hammering home the point that assets whose transaction history is recorded on an open, distributed ledger are better described as “pseudonymous,” and that such a design is not particularly favourable for those attempting to flee with stolen funds.

No matter how hard thieves try to hide the transfer of ill-gotten digital money, they are bound to use addresses linked to personal information at some point in the transaction chain. According to documents made public by the US authorities, here’s what happened in the Bitfinex case.


Too much comfort, too soon

A intriguing statement from a special agent with the Internal Revenue Service, Criminal Investigation (IRS-CI) describes how the US federal government’s operatives caught a sniff of the couple suspected of laundering the money stolen in the 2016 Bitfinex hack.

Thousands of transactions passed via different transit hubs such as darknet marketplaces, self-hosted wallets, and centralised cryptocurrency exchanges as part of a large-scale operation to hide the traces of stolen Bitcoin, according to the paper.

The suspects began by running the crypto designated for looting in the Bitfinex theft through the darknet market AlphaBay. A part of the cash were then sent to six accounts on other crypto exchanges, all of which were registered using email addresses maintained by the same provider in India, according to investigators. The emails had identical naming conventions, and the trading accounts had similar trading habits.

As time went on, the BTC that law enforcement was tracking was diverted to a series of self-hosted wallets and other exchange accounts, some of which were registered in one of the suspects’ true names. Following the investigators’ storey, the reader gets the idea that Ilya Lichtenstein and Heather Morgan felt they had done enough to cover their tracks and that they could now spend part of the money on themselves.

That was the end of it: Gold bars and a Walmart gift card were delivered to Lichtenstein and Morgan’s home address using monies traceable back to the Bitfinex hack. On the ledger, everything was in order. The final report reads like a compelling account of a crime that was reverse-engineered using an immutable transaction record.


Tracking the money

The scope of the probe was possibly much greater than that of the money laundering scheme. Despite the suspects’ years of efforts to conceal the monies’ transfer, government investigators were able to progressively untangle the paths taken by the majority of stolen BTC and eventually capture it. This demonstrates that the US government’s ability to track money on the blockchain is on par with the methods used by the perpetrators of some of the biggest crypto heists to avoid the law.

The Bitfinex case is particularly difficult to solve, according to Marina Khaustova, chief executive officer of Crystal Blockchain Analytics, because of the huge volume of stolen assets and the culprits’ significant efforts to mask their operations. She told:

“It will undoubtedly take a long time for financial investigators to review and understand the data they have before presenting it as evidence in any case of this magnitude that has been ongoing for years.”

As they worked on the case, the US government agents were well-resourced and had access to cutting-edge blockchain analytics software. It’s no secret that some of the biggest names in the blockchain intelligence industry provide software solutions for digital asset tracing to law enforcement in a variety of nations, including the United States.

One probable explanation for why Lichtenstein and Morgan were eventually caught is their seeming casualness in abandoning caution and spending the allegedly laundered monies in their own names. Is it because law enforcement has gone far further into the transaction chain than the suspects could reasonably imagine, or is it because they were simply not smart enough?

The suspects let investigators access one of the main documents – which allowed them to link email addresses to exchanges, KYC information, and personal accounts – from cloud storage, according to Khaustova, who believes there was “a little of carelessness to the procedures deployed.”

However, any crypto launderer must eventually emerge from the shadows and convert stolen monies into goods and services they can utilise, at which time they become vulnerable to deanonymization. The Bitfinex investigation demonstrated that there is nothing that criminals can do to escape being detected if law enforcement is hell-bent on tracking them down to the point of “cashing out.”


There is a case to be made.

The broader picture here is that governments — particularly the United States government, but many countries aren’t far behind when it comes to boosting their blockchain-tracing capabilities — are already familiar with the methods and procedures employed by crypto launderers. Perfect traceability on the blockchain may have been a theoretical argument a few years ago, but it is now an experimentally established reality, as evidenced by enforcement practise.

There are two major reasons why this idea is beneficial to the cryptocurrency sector. One possibility is that victims of significant crypto heists may have some redress. Granted, not every case of crypto theft will get federal investigators’ limited attention, but the most high-profile and heinous ones will.

Another significant benefit of law enforcement’s improved blockchain tracking expertise is that it disproves some regulators’ stale argument that “crypto is a wonderful instrument for money laundering.” As real-life examples show, digital assets are the polar opposite of that. One of the main anti-crypto narratives will be debunked if this fact is hammered home to policymakers.


Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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