What occurred when Bitfinex was hacked? What does it signify that the United States now possesses Bitcoin? Why is LEO token mooning happening, and how does Netflix fit in?
It’s a Netflix script that came to life on its own. The crypto world has been astonished by the storey, which includes suspected suicides in Spanish jail cells and nonfungible token sales for dead rappers.
The scenario features the US Department of Justice (DoJ), a shady crypto exchange, a rapper-turned-Forbes magazine writer, a voucher for a new PlayStation, an occasional magician, and $4 billion in Bitcoin (BTC).
Since the larger-than-life storey broke last week, the internet has been enthralled by the suspected Bitfinex hack money launderers. It’s no surprise that Netflix has confirmed that the plot will be brought to life.
Heather Morgan, a zany rapper who advises businesses on social engineering and battling cybercriminals, and her cybersecurity expert husband, Ilya Lichtenstein, were discovered trying to launder monies stolen from the 2016 Bitfinex attack. The money was laundered by buying games consoles, Uber trips, and other gift cards.
Despite their nerdy credentials, the couple’s secret keys were obtained by law enforcement through a cloud storage account, according to the DoJ report. Yes, the private keys to almost $3 billion in Bitcoin were held on the cloud.
The announcement of the Bitfinex billions, however, has left Twitter scurrying for puzzle pieces, while armchair investigators have their job cut out for them, coming up with even more odd theories.
This essay aims to lay out the documented facts surrounding the Bitfinex hack, as well as what it means now that the Department of Justice has 90,000 Bitcoin in its possession.
2016 Bitfinex hack
Bitfinex, a Hong Kong-based cryptocurrency exchange, was hacked for $70 million six years ago. Bitfinex wallets under Bitgo’s custody were drained of all their cash in just two Bitcoin blocks lasting around 20 minutes. The theft totaled 120,000 Bitcoins, which are currently valued more than $4 billion.
The breach, which was one of the largest in Bitcoin history, triggered a dramatic selloff, with the price per Bitcoin plummeting to roughly $500. It’s vital to clarify that Morgan and Lichtenstein, the money laundering pair, are not charged of hacking the exchange; the hackers are still on the loose.
In the aftermath of the breach, the Bitfinex team worked relentlessly to devise an innovative approach to restore investor confidence. Bitfinex created and published BFX tokens and “recovery rights tokens” at first (RRT). While tokenization will be commonplace in 2022, the issue of tokens in 2016–17, prior to the initial coin offering craze, was revolutionary.
Customers affected by the attack received tokens that could be redeemed for cash or swapped for iFinex capital stock (iFinex is Bitfinex’s parent business).
The BFX and RRT approach kept Bitfinex liquid and potentially “paid investors faster than regular processes” by allowing Bitfinex to later buy back the tokens from customers or give shares in the company as compensation.
Bitfinex had recovered enough funds by April 2017 to repay or reimburse all users who had been impacted by the attack eight months previous. The recapitalization was dubbed “F*cking Amazing” by Erik Voorhees, while Bitcoin podcaster Peter McCormack described it as “socialising the losses.”
The hack and subsequent quasi-fund recovery stand in stark contrast to the famed Mt. Gox hack of 2014, which is only now considering return arrangements with creditors.
Five years later, while part of the Bitfinex Bitcoin was moved numerous times and efficiently laundered over time, law enforcement and blockchain aficionados kept a close eye on the wallets.
The hijacked currencies were blacklisted from crypto exchanges due to the transparency of the Bitcoin network, making it harder to launder the money.
In early February, 90,000 Bitcoins were traded, totaling $3.6 billion. The move was orchestrated by the Department of Justice, and the protagonists, Morgan and Lichtenstein, were thrust into the limelight. According to the Department of Justice’s statement:
“Special agents gained access to files in a Lichtenstein-controlled online account. These files provided the private keys needed to get access to the digital wallet that received the monies taken from Bitfinex directly, allowing special agents to properly seize and reclaim more than 94,000 bitcoin stolen from the exchange.”
As a result, the Department of Justice currently holds 94,000 Bitcoin. The consequences of the United States getting so much Bitcoin are numerous, ranging from a potential Bitcoin price fall to doubts about when, if, and where the monies will be returned.
The Netflix saga takes a break here, and speculation reigns supreme. The retrieved Bitcoin is still in a wallet, and while the money-laundering trial unfolds, the UNUS SED LEO (LEO) token has risen in value as commenters speculate on the stolen Bitcoin.
The LEO token is another example of financial creativity. It is a little piece of the Bitfinex puzzle, but it is an important component of the larger Bitfinex narrative picture. LEO was introduced as an exchange utility token by Bitfinex parent firm iFinex in 2019.
The token allowed traders to pay lesser fees and resolved issues with iFinex’s payment processors. Importantly, the token’s white paper for 2019 stated:
“Within 18 months of the date of recovery, an amount equivalent to at least 80% of recovered net cash from the BitFinex hack will be utilised to repurchase and burn outstanding LEO tokens.”
Bitfinex backed up the white paper assertion in a bulletin issued last week, writing, “Within 18 months of the date it receives that recovery, Bitfinex will expend a sum equivalent to 80% of the recovered net money to repurchase and burn outstanding UNUS SED LEO tokens.”
Traders are betting that these funds will return to Bitfinex. The LEO token has shot to new highs, with a gain of more than 50%.
Despite Bitfinex’s confidence in recovering the hacked Bitcoin, the Department of Justice has not revealed the next measures.
Is the Department of Justice now a snooper?
The stolen Bitcoin is still in a Department of Justice wallet, as previously indicated. The blockchain wallet address now has 94,632 Bitcoin in it, with the most recent deposit on February 11th.
In 2022, a wallet with over 94,000 Bitcoin is significant: MicroStrategy owns 125,000 Bitcoin while Tesla has 43,200. We can only assume that the DOJ’s opsec is superior to that of the suspected money launderers, and that the keys will not be stored in the cloud.
Treasuries in Bitcoin Twitter joked that it would be added to their list of Bitcoin treasuries, meaning that the recovered monies will be held by the US.
“If they [Bitfinex] receive the BTC back, how should they split it with LEO holders, or the folks that suffered a loss to take LEO at the time of the attack (and later sold LEO)?” said Binance CEO Changpeng Zhao.
Didn't have time to research it in detail. 2 honest questions.
Did bitfinex lose or make money from the hack?
If they get the BTC back, how should they split that with LEO holders, or the people who took a loss to accept LEO at the time of the hack (and then sold LEO)? 🤔
— CZ 🔶 Binance (@cz_binance) February 8, 2022
Paolo Ardoino, Bitfinex’s chief technology officer, expressed confidence in reclaiming the assets in an interview on the WAGMI podcast. He stated that they are “actively working on carefully recovering them (the monies),” but that it may take some time.
Ardoino emphasised the significance of “giving back to the community” and said that Bitfinex will use 80% of the proceeds to buy back LEO — but it will not be a “market buy.”
“Bitfinex is going to fight like hell to keep the money for themselves,” said David Silver, a securities fraud and investment loss attorney.
“Ultimately, the government will administer the redistribution,” he added. In a win for privacy, the government might utilise the opportunity to identify and tax the original Bitcoin holders once the cash are returned.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.