The Bitfinex Money-Laundering Story Gets Weirder

The biggest crypto news and ideas of the day

Feb. 9, 2022

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Welcome to The Node.

In today's newsletter: Sweden is leading a charge to ban crypto mining in the EU. An interview with pro-bitcoin California congressional candidate Aarika Rhodes. And everything you need to know about Bitfinex, its token and the couple caught with billions in stolen bitcoin.

Questions? Feedback? We'd love to hear from you – simply reply to this email.

–Daniel Kuhn

Today's must-reads

Top Shelf

PUBLIC vs. PRIVATE: Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said Wednesday that private cryptocurrencies and stablecoins are worse for financial tasks than well-designed central bank digital currencies (CBDC). At an Atlantic Council think tank event Georgieva argued CBDCs could "potentially offer more resilience, more safety, greater availability and lower costs" than stablecoins. Meanwhile, the Bank of Zambia is exploring a potential CBDC to increase citizens' participation in the financial system, expecting to complete its research this year. The news follows shortly after the central bank issued a warning on crypto use.

BANNING OR NO? Sweden is leading a charge to ban crypto mining across the European Union's 27 member nations, saying that renewable energy should be channeled for public use. Politicians in Germany, Spain and Norway are supporting the call. Crypto advocates are pushing back. On Thursday, EU Parliament member Stefan Berger, who is responsible for the upcoming regulatory package, called a potential mining ban a death sentence for bitcoin in the EU. Meanwhile, after months of deliberating, Russia has finally decided to regulate and tax crypto rather than banning them. A regulatory document appeared on the government's official website on Tuesday night. Russia is home to about 144 million people, over 12 million of which hold about 2 trillion rubles ($26.7 billion) worth of crypto, and a large mining industry.

GUIDING POLICY: Coinbase has established a political action committee (PAC) to influence upcoming midterm U.S. elections. While PayPal has formed a six-person advisory council to support crypto-related products and help guide the company on creating a digital financial system, Jose Fernandez da Ponte, a senior vice president for blockchain, crypto and digital currencies at PayPal, said. Peter Briger Jr., co-CEO of Fortress Investment Group; Chris Brummer, a professor at Georgetown Law and Timothy Massad, a former Assistant Secretary of the Treasury for Financial Stability are attached.

FUNDRAISING: Minnesota-based Compute North, provider of sustainable infrastructure for cryptocurrency mining, has closed a $85 million Series C fundraise co-led by Mercuria and Generate Capital plus a $300 million debt financing deal with Generate to fund the continued development of new U.S.-based data centers. Separately, global investment company KKR is in talks to join Animoca Brands' latest financing effort, taking its funding from the round to about $500 million. Metaverse investor Animoca has already secured $300 million from Winklevoss Capital, Soros Fund Management and others at a $5.5 billion valuation. Finally, Abu Dhabi-based crypto trading firm Hayvn is courting investors for a $30 million Series B round with plans to soon go public.

BITFINEX HACK: Bitfinex's unused leo token, which trades under LEO, led crypto market gains with a 46% increase in the past day. This follows news that U.S. federal officials seized nearly $3.6 billion worth of bitcoin tied to the 2016 hack of the crypto exchange Bitfinex. LEO hit all-time highs of $8.16 in early Asian trading hours but has since fallen. Bitfinex is trying to recover the 120,000 seized bitcoin and use 80% of recovered funds to purchase and burn LEO in the open market.

In case you missed the story of the DOJ's largest-ever crypto recovery: Agents arrested a married couple, Ilya "Dutch" Lichtenstein and Heather Morgan, in New York on Tuesday on charges they conspired to launder proceeds from the Bitfinex hack in 2016. The defendants allegedly used a number of techniques to launder the stolen bitcoin, including splitting transactions up into "thousands" of smaller transactions, using darknet markets and converting into other types of crypto such as monero.
It's not known if they perpetrated the hack, but police were able to access the stolen funds after decrypting a file "saved to Lichtenstein's cloud storage account," which included 2,000 crypto wallet addresses and their private keys – an unsealed federal court opinion emphasized the role blockchain analytics played in tracking the funds, with Magistrate Judge Zia Faruqui quoting "The Big Lebowski" cult film when saying analytics tools are the "wave of the future, dude."
The judge has also halted their release on bond (initially asking for a $100 million bond, citing flight risks). Lichtenstein and Morgan are certainly odd ducks. Morgan is a supposed expert in "social engineering," a "surrealist" rapper and frequent TikTok poster. Lichtenstein is reportedly a cloud security expert. According to Cornell Law School's Legal Information Institute, a charge against them carries a maximum sentence of 20 years in prison, no more than twice the value of the property involved or both.

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Overheard on CoinDesk TV...

Sound Bites

"If we're going to solve poverty, we have to start being innovative around it. And I think the Lighting Network offers that."

–Pro-bitcoin California congressional candidate Aarika Rhodes, on CoinDesk TV's "First Mover."

What others are writing...

Off-Chain Signals

Crypto is like the 1990s internet, nearing a hyper-adoption phase, Wells Fargo says (Market Watch)
Who paid for Reese Witherspoon's NFT collection? (Dirty Bubble Media)
NFT wash traders scammed $9M from unsuspecting newbies last year (Protos)
GTA Publisher Take-Two Thinks NFTs Are A Good "Fit" But Wants To "Stay Away From Speculation" (Nintendo Life)
New Alfa Romeo SUV Will Come With NFT Service Record (Decrypt)
Lawmaker Takes Aim at Puerto Rico as Crypto Tax Haven (Decrypt)
AssangeDAO wins Julian Assange x Pak NFT for $53 million (The Block)
Revolut seeks senior blockchain engineers amid token rumors (The Block)
Inside Wirex's crypto strategy for the US (American Banker)

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Putting the news in perspective

The Takeaway

4 Unanswered Questions About the Bitfinex Hack

Yesterday we got stunning news of the arrest of a New York couple, Ilya "Dutch" Lichtenstein and Heather R. Morgan, for their alleged role in attempting to launder bitcoin now worth a staggering $4.6 billion. That bitcoin was stolen from the global exchange Bitfinex in August 2016, and in the half-decade since then, there has been little additional insight into the attack.

That long silence (along with what we'll call some more lyrical factors) drove intense fascination with yesterday's news. But as much as we learned, there's still a great deal we don't know, including dangling questions that could lead down a much deeper rabbit hole. Some of the most important unknowns involve the hack itself, the business fallout of the hack and the alleged launderers' own puzzling behavior during the period they're accused of trying to wash the stolen BTC.

As you might expect, grappling with unanswered questions involves some speculation. I've done my best to highlight where that speculation appears, but we're off the map here in general, so take what follows largely as a series of hypotheticals and thought experiments.

How did the initial hack happen?

A crucial but easily overlooked element of yesterday's charges is that they do not allege that Lichtenstein and Morgan were responsible for the initial hack of Bitfinex. The charges don't offer any specific theory about how they came into possession of the private keys controlling the coins. One possibility is that the couple purchased the BTC from the initial hacker(s) at a discount. Another is that they were merely acting as agents for the hacker(s), though that's less likely given their direct control of the keys.

There is, however, some circumstantial reason to believe that the couple could have been involved in the hack itself, and the Department of Justice just didn't have quite enough evidence to charge them with more than money laundering.

The most intriguing (though again entirely circumstantial) evidence is that Morgan appears to have been outright obsessed with "social engineering," a type of hacking that focuses on compromising people instead of code. In one lengthy presentation given at the event series NYC Salon, she described methods of deception and intimidation that she had used in real-world exercises to influence individuals and gain access to spaces and organizations.

That is particularly intriguing given the nature of the original hack, which involved compromising multisignature protections that went through security provider BitGo. In CoinDesk's reporting at the time, Michael McSweeney wrote that "in order to withdraw such a large amount of funds, BitGo would likely have had to sign off on those transactions," because of a multisignature security layer implemented for Bitfinex users. That raises the possibility that social engineering was involved in the hack.

It has been noted that Morgan interviewed Matt Parrella, a former chief compliance officer at BitGo, for a 2020 Forbes column titled, amazingly, "Experts share tips on how to protect your business from cybercriminals." That's a serious eyebrow-raiser, but it may not mean much given that Parrella was only briefly employed at BitGo in 2019 and 2020.

Why would crypto-literate criminals store private keys in the cloud?

One of the really bizarre things revealed in yesterday's charging documents is that authorities claim they were able to seize the stolen BTC after accessing private keys that Lichtenstein/Morgan had stored in a cloud service. Keeping private keys offline at all times is one of the most fundamental security tenets of crypto management, and it's implausible that someone undertaking to launder crypto on such a huge scale wouldn't be well aware of that.

There are a few non-conspiratorial ways to understand the keys being stored online. Most importantly, the keys were themselves encrypted, which you can at least imagine someone rationalizing as secure.

Crypto researcher Eric Wall further suggested that despite claims in the charging documents, the keys may not have been decrypted by law enforcement. Instead, the keys may have been handed over by the culprits when confronted. That could also explain why a large portion of the stolen coins was moved on Feb. 1. Perhaps the accused launderers were demonstrating that the keys worked before handing their booty over to the feds.

It's also worth remembering that the BTC in question was worth about $70 million at the time of the hack. It ballooned to multiple billions over the course of five years, possibly outpacing the culprits' ability to upgrade their security practices.

Read the full story here.

–David Z. Morris

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