On February 8, 2022, the United States Department of Justice (DOJ) announced a landmark seizure of 94,000 Bitcoin valued at over US$3.6 billion, the DOJ’s largest seizure of cryptocurrency ever and the largest single financial seizure in the department’s history. Two individuals were arrested and charged with conspiracy to commit money laundering and conspiracy to defraud the United States. This landmark seizure is an early victory for the DOJ’s new initiative, the National Cryptocurrency Enforcement Team (NCET), first announced in October 2021. The seizure also highlights law enforcement’s growing ability to trace and recover digital assets used or obtained in connection with cybercrime, as well as the importance of the private sector’s role in helping to thwart unlawful activities involving cryptocurrencies. The case began when a hacker infiltrated a virtual currency exchange In 2016, a hacker infiltrated one of the world’s largest virtual currency exchanges and transferred 119,754 Bitcoin from the exchange into private wallets. At the time of the hack, the stolen funds were valued at approximately US$71 million. Since that time, the value of the stolen Bitcoin has increased to more than US$4.6 billion. Over the course of the last five years, and with the assistance of multiple cooperating cryptocurrency exchanges, law enforcement was able to trace those funds across thousands of additional transactions through a bevy of complicated laundering schemes. Ultimately, law enforcement traced these thousands of transactions to multiple accounts affiliated with the defendants. Executing a search warrant on a cloud account held by one of the defendants, law enforcement discovered files containing the private keys to the wallet in which most of the stolen funds had been stored since the initial 2016 hack, as well as over 2,000 other BTC addresses. Using those private keys, law enforcement seized over US$3.6 billion in cryptocurrency. Blockchains and new analytical tools enable effective long-term tracing of digital assets Authorities hunted the funds by using public blockchain data, searching through thousands of transactions conducted over the course of nearly six years, which ultimately led them to accounts maintained by the defendants. Many of these transactions were the result of complex laundering schemes, including (i) “chain hopping,” in which coins are converted from tokens on one blockchain to another; (ii) “peeling” transactions, in which the funds undergo a series of progressively smaller transfers to different destinations; and (iii) various “mixing” attempts in which transactions of various users are mixed together to obfuscate the details of any particular transaction. A recently unsealed district court opinion reveals that authorities relied on sophisticated analytical methods developed in the private sector to thwart these techniques. The opinion, which was tied to the government’s search warrant application, explains that the DOJ used “clustering analysis” – essentially pattern recognition algorithms – to scan the blockchain for transaction patterns, thereby assisting investigators in untangling attempts to obfuscate the flow of funds. US Magistrate Judge Zia Faruqui praised the method as “one of the most reliable bases for a search ever.” Federal law enforcement agencies have signed multimillion-dollar contracts with multiple developers of such tools, highlighting law enforcement’s focus on the cryptocurrency space and the important role the crypto community can play in helping the government root out illicit activity. Anti-money laundering and know-your-customer procedures play an important role in thwarting cybercrime In addition to the use of innovative technology, authorities relied on the private implementation of anti-money laundering and know your customer procedures to help uncover the alleged crimes. In a video statement released on Twitter, Deputy Attorney General Lisa O. Monaco highlighted the work of several exchanges that “asked questions about where the money came from or even froze funds based on their suspicions.” These exchanges “enforced anti-money laundering policies and know-your-customer requirements that proved key to this investigation, showing how cryptocurrency can become safer and more reliable when we work together to root out its abuse.” Many cryptocurrency exchanges operating in the United States are regulated as money services businesses (MSBs) subject to the requirements of the Bank Secrecy Act (BSA). MSBs are required to maintain anti-money laundering (AML) policies and know-your-customer (KYC) procedures to guard against illicit use of their platforms. They also must register with the Financial Crimes Enforcement Network (FinCEN) and report suspicious activity. Compliance with these requirements is key, and in this case proved essential. In the case of the stolen exchange funds, representatives of multiple virtual currency exchanges sought to verify a number of the accounts used as part of the scheme, including by inquiring about the sources of funds being transferred, requesting supplemental identification information from the alleged perpetrators, and inquiring as to the nature of business entities involved in some of the transactions. The accused launderers allegedly responded with a variety of explanations: the source of the currency involved in one transaction was derived from “early crypto assets,” which were amassed through “investing in and mining [Bitcoin] since 2013,” and representations such as “I’m a tech entrepreneur . . . looking to diversify,” and that all trades would be “from my own personal funds” and “the LLC is simply there to manage my assets.” In some instances, the virtual currency exchanges’ AML detection methods worked well, and the exchanges froze activity on what were perceived as suspicious accounts. In other instances, the answers were allegedly “belied by the blockchain,” which purportedly showed the alleged perpetrators were misrepresenting their sources of funds. Law enforcement will continue to make blockchain analysis a priority to keep pace with new and innovative schemes In a marketplace as technologically sophisticated as the rapidly expanding and evolving cryptocurrency market, tools of deception are also expanding at pace, and even proven methods of detection will continue to require updating. Both law enforcement agencies and the private sector are on the case: going forward, expect them to harness the evolving and growing power of the blockchain technology that gave rise to the global cryptocurrency market. This burgeoning technology will better enable virtual currency exchanges, banks, and other financial institutions subject to BSA/AML requirements to comply with regulatory requirements, avoid risk to their customers and clients, and avoid potential regulatory or civil liability for themselves. Governments will likewise be better able to prevent, detect, and deter crime, including cybercrime, involving digital assets and the blockchain. While some policymakers and regulators in Washington may view digital assets and the blockchain with skepticism, this case demonstrates how the immutable and public nature of blockchain transactions can help authorities follow the money and track down wrongdoers, and it highlights the essential role played by the crypto industry in helping law enforcement stay one step ahead of bad actors. Key takeaways Details on the scheme and its unraveling are available at: Two Arrested for Alleged Conspiracy to Launder US$4.5 Billion in Stolen Cryptocurrency - Statement of Facts (justice.gov) For more information, please contact the authors of this article or your DLA Piper relationship attorney.
As an expert deeply immersed in the world of cryptocurrency and blockchain technology, it is evident that the article discussing the landmark seizure by the United States Department of Justice (DOJ) on February 8, 2022, showcases the intersection of law enforcement, digital assets, and the evolving landscape of the cryptocurrency market.
The case, involving the seizure of 94,000 Bitcoin valued at over US$3.6 billion, demonstrates the growing sophistication of law enforcement in tracing and recovering digital assets associated with cybercrime. This success is attributed to the efforts of the National Cryptocurrency Enforcement Team (NCET), a new initiative by the DOJ announced in October 2021.
The narrative unfolds with the hacking of a virtual currency exchange in 2016, where the perpetrator transferred 119,754 Bitcoin, originally valued at US$71 million, into private wallets. Over the subsequent five years, law enforcement, aided by multiple cryptocurrency exchanges, meticulously traced the stolen funds through complex laundering schemes. This ultimately led to the identification of accounts affiliated with the accused individuals.
The article emphasizes the pivotal role played by blockchain technology and innovative analytical tools in the investigation. Authorities employed techniques such as "chain hopping," "peeling" transactions, and various "mixing" attempts, all of which were unraveled through clustering analysis, a pattern recognition algorithm. The use of such tools has become a reliable basis for search warrants, as acknowledged by US Magistrate Judge Zia Faruqui.
Notably, federal law enforcement agencies have invested in multimillion-dollar contracts with developers of these sophisticated analytical tools, underscoring their commitment to combating illicit activities within the cryptocurrency space.
Additionally, the article underscores the importance of anti-money laundering (AML) and know-your-customer (KYC) procedures implemented by cryptocurrency exchanges. The Deputy Attorney General, Lisa O. Monaco, highlights how exchanges' enforcement of these policies played a crucial role in uncovering the alleged crimes. Many exchanges in the United States operate as money services businesses (MSBs) and are subject to the Bank Secrecy Act (BSA), mandating compliance with AML and KYC regulations.
The case exemplifies instances where exchanges, as part of their AML detection methods, successfully identified and froze suspicious accounts. It also reveals the deceptive tactics employed by the accused individuals in misrepresenting the sources of their funds, underscoring the ongoing need for vigilance in the crypto industry.
Looking ahead, the article anticipates continued emphasis on blockchain analysis by law enforcement to counteract evolving criminal schemes within the cryptocurrency market. The immutable and public nature of blockchain transactions, despite skepticism from some policymakers and regulators, proves to be a powerful tool for authorities to follow the money and apprehend wrongdoers.
In conclusion, this case serves as a compelling illustration of the collaboration between law enforcement, the private sector, and the cryptocurrency community in addressing and staying ahead of illicit activities within the digital asset space. The lessons learned emphasize the importance of technological advancements, regulatory compliance, and ongoing adaptation to combat emerging threats in the evolving landscape of cryptocurrencies.
