DOJ Seizes $4B in BTC – A Look Back at a Story That Began in 2016 With the Bitfinex Hack
A surreal story that raises questions about how these 94K BTC will be used by the DOJ.
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The news has been making headlines all over the media in the last few hours. The U.S. Justice Department (DOJ) now owns more BTC than any government in the world, except perhaps the Bulgarian government. But that's another story I'll probably come back to next time.
The DOJ just seized 94,000 BTC that were stolen in the August 2016 hack of the Bitfinex trading platform. A married couple suspected of laundering this money has been arrested. The couple will face charges of conspiring to launder money and to defraud the U.S. government. Ilya Lichtenstein, 34, and Heather Morgan, 31 will face up to 25 years in prison if convicted.
With the price of Bitcoin at around $43.5K at the time of writing, the DOJ's seizure is worth just over $4 billion. Everyone is now wondering what the US authorities will do with all that Bitcoin. It is worth noting that the DOJ did not manage to recover all of the funds stolen in the Bitfinex hack, as 119,754 BTC were stolen at the time.
Anyway, I'd like to go into more detail about this incredible story.
It all starts with a Bitfinex hack in August 2016 during which a hacker stole 119,754 BTC
As I told you, the story begins in August 2016. A hacker still unknown gets access to the Bitfinex exchange. This allows him to authorize around 2,000 unauthorized transactions. These transactions allow stealing 119,754 BTC, which represents at the time $72M. Following the announcement of the Bitfinex hack, the price of Bitcoin fell by more than 25% in two days:
It then appears that the stolen coins were sold in P2P/OTC deals between the hacker and third parties. This was another hack of this trading platform that had lost the public's trust for good. The other hacks had been smaller, but the security issues had never really been addressed by Bitfinex.
While most of Bitfinex's customers had not been hacked in this hack, the exchange had to reduce the account balance of the entire platform by 36% to remain solvent. The losses induced by this account rebalancing were then repaid by tokens issued especially for the occasion by Bitfinex: BFX equity tokens and Recovery Right Tokens (RTT). More details here: “Bitfinex Announces Sizable Token-for-Equity Exchange by Customers”.
Nothing more happened until 2020, when Bitfinex decided to put up a $400M bounty on the stolen Bitcoin, which was then worth $1.3B. The stolen Bitcoin had been moved around a bit since August 2016, but no one had been able to trace it to any physical person.
Everyone knew where the funds were, but no one could link them to identity until January 31, 2022…
On January 31, 2022, on-chain observers began to see strange activity around the wallets holding the funds from the Bitfinex hack. What seemed most strange to observers was that the funds were consolidating without any privacy-seeking behavior (mixing, use of Monero, ...).
Consider these alerts from the Whale Alert service on Twitter:
This is what allowed the DOJ to identify the couple Ilya Lichtenstein and Heather Morgan. What is important to understand here is that no one had ever really lost track of the Bitcoin stolen in the Bitfinex hack in 2016. And that's even though those who controlled the wallets had tried to cover their tracks by using AlphaBay cards (now defunct), Monero, and gift cards.
On-chain observers, and the DOJ, knew where the stolen funds were. What they didn't know until now was who was behind the hack or who was recovering the stolen money. By tracing the exchange accounts to India-based emails, they were able to link the stolen Bitcoin to the business and personal accounts of two people: Ilya Lichtenstein and his wife Heather Morgan.
Once the identities were in their possession, authorities obtained a warrant to break into the cloud data provider account of Ilya Lichtenstein, who has dual Russian and American citizenship. Luckily for the DOJ, Ilya Lichtenstein made the monumental mistake of storing the private keys in plain text on this service. This allowed the DOJ to get access to 94,000 BTC.
This is where the story gets even stranger in my opinion. While the couple was billionaires in BTC, they had laundered the money through the purchase of $500 gift cards from Walmart, Uber, Hotels.com, or Playstation. In short, the couple could not even access the majority of this fortune in BTC.
The couple accused of laundering these 94K stolen BTC was known to the general public
Even better, the couple was relatively well known to the general public. Heather Morgan was a serial entrepreneur and angel investor who has written in the past for Inc and Forbes magazine about entrepreneurship and social persuasion. She also had a more surprising side hustle: amateur rap. Under the alias “RAZZLEKHAN”, she had notably released this song:
Some are not hesitating to say that this song is an even greater crime than the charges for which the DOJ is currently accusing her. I'll let you be the judge of that ...
For his part, Ilya Lichtenstein was publicly known as the co-founder of MixRank, a Y-Combinator backed startup that helps companies analyze marketing data around customers and competitors.
What will the DOJ do with this Bitcoin? The decisions that will be made could have significant implications for the price of Bitcoin...
Now that I've detailed this incredible story, we can get back to the big question: what will the DOJ do with these 94,000 units of BTC?
One would think that the DOJ will return this Bitcoin to Bitfinex so that the exchange platform can reimburse customers who were harmed at the time. The problem is that the BFX and RTT tokens no longer exist, as they have been replaced by Bitfinex's LEO token. Did the customers who were harmed at the time continue to HODL these tokens? Probably not all. Given the amount of BTC we're talking about here, the choice that will be made by the DOJ and then Bitfinex could have strong implications for the price of Bitcoin in the near term.
Bitfinex has already communicated that it will work with the DOJ to find the most appropriate legal process to establish the rights to the stolen BTC units and then return them to users. The exchange platform also explains that it will commit within 18 months of receiving the recovered funds to use an amount equal to 80% of those funds to redeem and then burn the LEO tokens. This last operation could be carried out via transactions on the spot market or via OTC deals.
The DOJ could also decide to keep this Bitcoin. It's not technically theirs, but since they have the private keys, it's just as well. There are already voices in America saying that the authorities should keep this amount of BTC for national security reasons.
We'll see what happens in the coming weeks and months regarding this seizure of BTC from the Bitfinex hack in 2016. If you were to learn only one lesson from this story, it's the same one I remind you every time: you only own the Bitcoin for which you have the private keys. So while exchanges may seem like an easier way to store your Bitcoin, they are never 100% secure.
The past has taught us this time and time again. Bitcoin allows you to take full responsibility for the fruits of your labor. This is something I urge you to do to avoid similar mishaps because make no mistake: exchange platforms are constant targets of hackers.
Some reading
Bitcoin and the Story of the Empty Transactions’ Block. Is this allowed? Why do some BTC miners do this?
Bitcoin Price Hits $45.5K, but a Pullback With Consolidation on Supports Is Needed To Confirm the Momentum Reversal. For now, it's just the usual volatility of Bitcoin that is operating.
8 Unknown Facts About Bitcoin. #1: A bug created 184 million BTC in 2010.
Louis Pouzin’s Datagram Story Is There To Remind Us Why Being a Bitcoin Maximalist Is Common Sense. Maximalism on Louis Pouzin’s datagram could have changed the course of history.
Customers of the First Bitcoin Giant MtGox Will Soon Share $9B. What will the refunded customers do with their Bitcoin?