Cryptocouple is a watershed in bitcoin crimes

When anonymous hackers infiltrated the Bitfinex cryptocurrency exchange in 2016, they shook up the fledgling world of digital currency, sparking speculation about who might have stolen what was then $71 million worth of bitcoins.

Unlike traditional financial transactions, however, bitcoin trading is publicly visible; moving the coins could reveal who was behind the robbery. And so, for six years, as the value of bitcoin soared, the theft became visible online, as tiny fractions of the giant sum occasionally disappeared in a blizzard of complex transactions.

It was as if a burglar’s getaway car was permanently parked in front of the bank, securely locked, with the money still inside.

Then, earlier this month, the car took off.

In the strange and sometimes murky world of cryptocurrency, it was like an earthquake. In the years after the Bitfinex hack, the cryptocurrency exploded into the mainstream and the theft became notorious: a hefty sum of more than $4 billion. It finally looked like the hackers had come out of hiding.

But it wasn’t the hackers who moved the stolen bitcoin. It was the government, which seized him as part of an investigation into two New York City businessmen: an unknown Russian immigrant and technology investor and his wife, an American businesswoman and aspiring social media influencer with a second personality as a satirical rapper. called Razzlekhan.

Accused of forming a conspiracy to launder billions of dollars in bitcoins, couple Ilya Lichtenstein, 34, and Heather Morgan, 31, were indicted for embezzling parts of the stolen currency and trying to hide it in a complex network of digital wallets and internet characters. If convicted of this and a second conspiracy charge, they could face up to 25 years in prison.

The arrests shocked some acquaintances of the couple, whose bland online lives appeared to conflict with prosecutors’ description of them as sophisticated criminals with mounds of foreign currency, multiple false identities and dozens of encrypted devices hidden in their New York apartment.

As they await a Monday hearing in Washington on whether they should be released on bail, Lichtenstein and Morgan remain raising an intriguing question: Could they really be at the center of one of cryptocurrency’s oldest mysteries?

The charges were a watershed moment in the ongoing regulation of the digital currency and, for some, a step forward in the government’s ability to track its illegal laundering.

“Cryptospace has always been seen as a safe haven for criminals,” said Christopher Tarbell, a former FBI special agent who helped investigate Silk Road, an online marketplace for illegal drugs and other illicit goods.

“We’re now seeing that law enforcement has the knowledge, the tools and the ability to offer certain insights into the new ‘wild west’ of cybercrime,” Tarbell said.

Authorities did not say whether they believe Lichtenstein and Morgan were directly involved in the Bitfinex hack. But their arrests have revealed the murky fringes of crypto culture, where the line between sophisticated virtual financial ventures and online childish jokes is blurred and ever-shifting.

Sandra Ro, who leads the Global Blockchain Business Council, an industry association advocating the adoption of cryptocurrency markets, said the arrests “play on the narrative that the crypto community is populated by dubious and fringe characters, which is not true.” .

“There are adults in the room,” said Ro, “who are building real products and services to responsibly grow a multi-trillion industry.”

To many who follow the industry, Lichtenstein and Morgan seemed familiar characters in a realm where fortune favored the boldest investors; the most flamboyant personalities got rich quickly; and a single malicious tweet could shake entire markets.

Almost immediately after the arrests, the hyperactive community that discusses cryptocurrencies on social media and message boards began to dwell on Morgan’s bizarre digital trail. Videos of her — barely watched before she was charged — were suddenly being shared widely.

In one, apparently recorded over breakfast, Morgan marvels at the size of his plate of pancakes, scoffs, sticks out his tongue and waves his fingers before announcing that he is making a comment about consumerism and the shallow nature of networks. social.

The Bitfinex hack was already legendary, but Lichtenstein and Morgan hardly seemed like smooth or subtle digital thieves — or the tip of a grand conspiracy.

Sharing the pancakes video, a typically flippant Twitter account that comments on cutting-edge financial markets in an Incredible Hulk parody captured a commonly voiced reaction: “Okay. Hackers aren’t the CIA. They’re idiots.”

Morgan was a regular contributor to Forbes magazine, writing columns advising her fellow entrepreneurs on how to secure their digital currency and recommending rap as a form of grooming, as she did through her alter ego, Razzlekhan (Genghis Khan, but with more pike, according to the website).

People who know Morgan said his social media ad-libs were part of an act designed to tackle social pressures.

“She works to break free from a lot of the scripts that are built into our society,” said Morgan Brittni Sonnenfeld, who says she is Morgan’s cousin. “I admire her for that; she’s very strong.” Sonnenfeld acknowledged that the media coverage of Morgan made her “seem kind of crazy,” and she wondered if Morgan’s personality might have caught the attention of authorities.

“I wonder, why do they want people to look at her? Who are we not looking at? Why did they choose this particular person?” asked Sonnenfeld.

The arrests also surprised Morgan’s friends, who described her as an incredibly honest colleague in an industry defined by fierce competition.

“It’s very shocking to think that someone so open and vulnerable with people would have secrets,” said a friend, Nora Poggi. “She’s a very important person to me.”

In court records, the Justice Department describes the trail that would have led investigators to Lichtenstein and Morgan.

In January 2017, five months after hackers hit Bitfinex, some of what they stole was transferred in small, complex transactions to accounts controlled by the couple, according to a criminal complaint filed in federal court in Washington.

“This shuffling, which created a massive number of transactions, appeared to have been designed to hide the path of theft” of bitcoins, the complaint reads.

Lichtenstein and Morgan were tech entrepreneurs at the time. Lichtenstein specialized in cryptocurrencies and encryption, according to his LinkedIn profile, and Morgan had returned from the Middle East, where he focused on the currency markets.

Anirudh Bansal, the couple’s lawyer, declined a request for an interview. But in court documents he made clear that he believes the government’s case is weak and based on “conclusive and unsupported leaps”.

Aside from Morgan’s highly public personality, little is known about the couple. They have been together for seven years and married for three, Bansal told a federal judge in New York on Tuesday, during discussions over whether the couple should be released on bail.

Saying that his clients were not at risk of flight, Bansal provided some personal data about them.

Lichtenstein, the lawyer said, came to the United States from Russia when he was six. His father works for the Cook County, Illinois housing agency, and his mother is a biochemist at Northwestern University.

Morgan, who was born in Oregon, runs a consulting firm that employs up to 30 freelance writers, Bansal said. His father served in the US Armed Forces and is a retired biologist. His mother is a high school librarian.

Lichtenstein’s family had migrated to the United States to flee religious persecution, and there was “not the slightest chance” that he would return to Russia, Bansal said.

In a later letter, another lawyer for the couple wrote that Morgan had frozen several of their embryos in a hospital in New York, hoping to start a family.

“The couple would never flee the country at the risk of losing access to their ability to have children,” the lawyer wrote.

At the hearing, a prosecutor, Margaret Lynaugh, objected to bailing Lichtenstein, who has dual US and Russian citizenship, because he had an active Russian passport and the means and intent to flee.

The judge ordered the couple to be released on multimillion-dollar bail, but at the government’s request, a federal judge in Washington blocked their release and set the hearing for Monday.

In court documents, the government called Lichtenstein and Morgan “highly sophisticated criminals”. Prosecutors said they believed the couple had significant additional assets, including hundreds of millions of dollars in virtual currency stolen from the Bitfinex Exchange that had not been recovered, as well as access to numerous false identities purchased on the so-called darknet, a hidden part of the internet used to illicit transactions.

The government says the couple also opened financial accounts in Russia and Ukraine and appeared to be putting together a contingency plan to live in one of those countries before the pandemic hit.

As evidence of what they described as a complex money laundering scheme, the prosecution said in a court filing that it had traced the stolen cryptocurrency to more than a dozen accounts with the real names of the couple or their companies.

The government says in the court filing that when agents executed a search warrant on the couple’s New York apartment on Jan. $40k in cash. Many of the devices were partially or fully encrypted or password protected, the lawsuit says.

In Lichtenstein’s office, agents found two hollow books whose pages appeared to have been cut by hand to create secret compartments, the lawsuit says. (The compartments were empty.)

And then there was the couple’s cat.

As agents were about to begin the search, Morgan and Lichtenstein said they would leave the apartment but wanted to take their cat, the lawsuit says. The agents allowed Morgan to catch the cat, which was hiding under the bed.

But when Morgan crouched beside the bed and called for the cat, she positioned herself next to a bedside table where one of her cell phones was, the document says. Then she reached out, picked up the phone and repeatedly pressed the lock button, in what prosecutors said was an attempt to stop investigators from searching the phone’s contents.

The agents had to snatch the device from Morgan’s hands. Court records gave no further information about the cat.

Translated by Luiz Roberto M. Gonçalves