U.S. Arrests Two and Seizes $3.6 Billion Cryptocurrency Stolen in 2016 Bitfinex Hack

The U.S. Justice Department (DoJ) on Tuesday announced^[1]
the arrest of a married couple in connection with conspiring to
launder cryptocurrency worth $4.5 billion that was siphoned during
the hack^[2]
of the virtual currency exchange Bitfinex in 2016.

Ilya Lichtenstein, 34, and his wife, Heather Morgan, 31, both of
New York, are alleged to have “stolen funds through a labyrinth of
cryptocurrency transactions,” with the law enforcement getting hold
of over $3.6 billion in cryptocurrency by following the money
trails, resulting in the “largest financial seizure ever.”

“Bitfinex will work with the DoJ and follow appropriate legal
processes to establish our rights to a return of the stolen
bitcoin,” the company said^[3]
in a statement, adding “We have been cooperating extensively with
the DoJ since its investigation began and will continue to do
so.”

The laundering scheme involved moving proceeds of 119,754
bitcoin (BTC) from Bitfinex by initiating more than 2,000
unauthorized transactions that were diverted to a digital wallet
under Lichtenstein’s control. Over the past five years, roughly
25,000 stolen bitcoins were then transferred and deposited into
financial accounts held by the couple.

“Beginning in or around January 2017, a portion of the stolen
BTC moved out of Wallet 1CGA4s in a series of small, complex
transactions across multiple accounts and platforms,” explained^[4]
IRS investigator Christopher Janczewski in an affidavit. “This
shuffling, which created a voluminous number of transactions,
appeared to be designed to conceal the path of the stolen BTC,
making it difficult for law enforcement to trace the funds.”

Ilya Lichtenstein and his wife Heather Morgan

To achieve this, the defendants are said to have used a number
of sophisticated laundering methods, including —

• Setting up online accounts using fake identities,
• Using software to automate transactions,
• Depositing stolen funds into accounts at a variety of virtual
  currency exchanges and darknet markets to obfuscate the transaction
  trail,
• Converting bitcoin to other private digital currencies like
  Monero, a practice known as chain hopping, and
• Misusing U.S.-based business accounts to legitimize their
  banking activity

Pursuant to a court-authorized search warrant of online accounts
controlled by the two individuals, law enforcement officials
ultimately obtained access to a file saved to Lichtenstein’s cloud
storage account that contained the private keys required to access
the digital wallet used to receive the funds, enabling the
authorities to recover the remainder of more than 94,000
bitcoins.

Both Lichtenstein and Morgan have been charged with conspiracy
to commit money laundering, which carries a maximum sentence of 20
years in prison, and conspiracy to defraud the U.S, which carries a
maximum sentence of five years in prison.

“Today, federal law enforcement demonstrates once again that we
can follow money through the blockchain, and that we will not allow
cryptocurrency to be a safe haven for money laundering or a zone of
lawlessness within our financial system,” said Assistant Attorney
General Kenneth A. Polite Jr. of the Justice Department’s Criminal
Division. “The arrests today show that we will take a firm stand
against those who allegedly try to use virtual currencies for
criminal purposes.”