Bitcoin

A crucial clue in the 4.5 billion Bitcoin heist: A 500 Walmart gift card | Fox Business

Federal investigators spent years searching for clues in the 2016 hack of cryptocurrency exchange bitfinex, when thieves stole bitcoins now worth $4.5 billion. In the end, what helped lead them to two suspects was something much more everyday: a $500 Walmart gift card.

that card and more than a dozen others like it, including those from uber, hotels.com and playstation, were linked to emails and cloud service providers belonging to a young manhattan couple, ilya “dutch” lichtenstein and Heather R. Morgan, according to a criminal complaint. Authorities arrested the pair after seizing $3.6 billion worth of bitcoin allegedly under their control, the largest financial seizure ever by the Justice Department.

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Since then, new details have emerged about the investigation, in particular how it took advantage of not only advanced forensic tools, but also the growing push to rein in cryptocrime, including by the industry itself. discoveries would have been less likely at the time of the hack, when bitcoin was far removed from the financial world’s mainstream.

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Cryptocurrency has long been the preferred choice of criminals large and small, including ransomware operators, drug traffickers, and street gangs due to its perceived anonymity and ability to conduct frictionless international transfers. Despite its reputation as difficult to trace, analysts say it is sometimes easier to trace than hard currencies. each transaction is public, leaving a permanent trail. the trick is to link that money to real people.

mr. lichtenstein, 34, and mrs. Morgan, 31, was charged with conspiring to launder money and defraud the federal government. the most serious charge carries a maximum sentence of 20 years in prison. federal prosecutors have not alleged that mr. lichtenstein and mrs. Morgan did the hacking.

His attorneys did not respond to requests for comment. in a memorandum filed with the court, his lawyers said that “the money laundering allegations in the government lawsuit are based on a series of circumstantial inferences and assumptions drawn from a complex web of cryptocurrency and blockchain tracking claims.” .

At a hearing on Monday, a judge ordered Mr. lichtenstein to remain in jail, but allowed mrs. Morgan will be released to home prison on a $3 million bail package while they await trial.

The couple, who have been together for seven years, their lawyers said, both worked in technology. Mr. Lichtenstein was an introvert who preferred programming and making computer circuit boards to socializing, friends of the couple said. his family emigrated to the us. from Russia when he was 6 to avoid religious persecution, his lawyers said.

mrs. Morgan, from Northern California, was much more outgoing. she wrote columns for forbes where she described herself as an expert dedicated to fighting fraud and cybercrime. “When she’s not reverse-engineering black markets to think of better ways to combat fraud and cybercrime, she enjoys rapping and designing street fashion,” according to her forbes.com biography. her rap lyrics include: “spear phish her password / all her funds transferred from her.”

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The theft occurred in August 2016, when hackers used malware to infiltrate the Hong Kong-based exchange Bitfinex and moved bitcoin, then worth around $71 million, through more than 2,000 unauthorized transfers to an external account. the money sat idle for several months. In January 2017, small amounts began to move in a series of complex transactions, according to a criminal complaint filed against Mr. lichtenstein and mrs. morgan.

Initially, according to the complaint, the stolen bitcoin was funneled through alphabay, an online marketplace that operates on the dark web, a section of the internet that can only be accessed through special software where people can interact anonymously. A question on the website’s FAQ section asked “is the alphabay marketplace legal?” the answer: “of course not”. alphabay also advertised itself as a cryptocurrency “tumbler,” a service that could exchange deposited bitcoins for others to help prevent tracking.

In July 2017, federal authorities seized and shut down alphabay. Such crackdowns have made it harder to launder stolen crypto funds and helped investigators track dirty money. “There are places where you can still charge anonymously and without controls, but there are very few of them right now,” said Tom Robinson, co-founder of cryptanalytics firm Elliptic Enterprises Ltd.

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Prosecutor’s files said some of the stolen bitfinex bitcoins that had been dumped by the pair through the alphabay accounts were deposited into newly created accounts at various exchanges registered to foreign email addresses created at the time of the incident. attack. the deposits quickly came into conflict with anti-money laundering enforcement efforts at cryptocurrency exchanges, prosecutors allege.

some exchanges asked to verify the identities of some of the account holders. receiving no response, the exchanges froze the accounts, with over $300,000 left.

Authorities said in the documents that the cryptocurrency linked to the hack was transferred to the accounts of Mr. lichtenstein and mrs. Morgan had created linked to his real identities and businesses. represented their initial deposits as coming from previous investments, gifts, or customer payments. they made similar representations when they transferred funds from crypto exchange accounts to traditional financial institutions.

at the bond hearings, mrs. Morgan’s attorney said her client’s accounts were set up to handle legitimate income for her business and there is no evidence that she knew of any connection between the incoming funds and the illegal activity.

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in 2016 mr. lichtenstein and mrs. Morgan lived in the San Francisco Bay Area, according to friends. Mr. Lichtenstein ran an online marketing technology company called MixRank. em. Morgan, at age 23, founded Salesfolk LLC, which specialized in unsolicited marketing emails.

The two moved to New York in 2017, where they founded a couple of startups and worked to bolster their image as tech-savvy entrepreneurs. the following year mrs. Morgan was exhausted and she decided to pursue a different passion, she wrote in a Forbes column. She started making rap music under the name Razzlekhan. She dedicated a song to hackers and entrepreneurs, and described herself as the “crocodile of wall street.”

“I’m definitely not trying to win a grammy for my voice, but I’m addicted to rap,” she wrote in her column.

in june 2019, mr. lichtenstein asked mrs. Morgan to marry him. As part of the proposal, she wrote in a Facebook post, hired a marketing agency to put up posters of Razzlekhan on the streets of New York City, and bought electronic billboards in Times Square that featured photos of her face. .

In August 2019, the couple traveled to Ukraine for a month-long trip, according to prosecutor documents. during that time, mr. lichtenstein, which has double u.s. and Russian citizenship, updated files in a cloud storage account that had money laundering information, and false identity documents with Ukrainian connections, prosecutors said.

The couple’s lawyers said they had no intention of leaving the country and emphasized that mrs. morgan’s frozen eggs needed for in vitro fertilization are in new york. “They would literally leave their future behind if they left,” Samson Enzer, one of the couple’s attorneys, said at Monday’s hearing.

every bitcoin transaction is recorded in a public ledger for anyone to see, leading to huge volumes of data. analyzing their patterns can reveal groups that appear to share a common source or connection. court documents show that federal agents used software tools to filter the data for connections and patterns, a process called cluster analysis.

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A group of bitcoin addresses, identified in court documents as 36b6mu, caught the attention of investigators.

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On May 3, 2020, a fraction of bitcoin moved from the cluster to an exchange that sells prepaid gift cards. In return, a $500 Walmart gift card was sent to an email registered in Russia. however, the transaction was made through an ip address linked to a cloud service provider in new york that investigators linked to mr. lichtenstein, according to the agents.

portions of the gift card, according to documents presented, were redeemed through the walmart phone app. three online purchases were made using ms. Morgan’s name was provided, using one of her emails, and the couple’s apartment address for delivery.

Between February 2019 and December 2020, bitcoin with a current value of approximately $7.8 million flowed through the pool to and from accounts at various crypto exchanges that investigators say, in court documents, are linked to the Mr. lichtenstein and mrs. morgan.

The investigating agents in January 2021 asked us that the magistrate judge zia faruqui in washington will issue an order to search for email accounts connected to the couple. Judge Faruqui approved the order in August, noting that the public nature of the blockchain ledger meant that those who used it had no constitutional right to privacy. Relying on cluster analysis to guide searches, she wrote, was akin to relying on a confidential source that provided advice to researchers.

The judge wrote that cryptocurrencies and related software analytics tools are the “wave of the future, man. 100 percent electronic,” referencing a line from the movie “The Big Lebowski.”

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mr. lichtenstein and mrs. Morgan learned of the investigation in November, when an internet service provider told them authorities had searched for records related to the couple on a subpoena a year earlier, her attorneys said in court documents.

that same month they celebrated a wedding. they discussed starting a family through in vitro fertilization, according to their lawyers.

on january 1 to january 5, federal agents showed up at the couple’s wall street apartment with a search warrant.

In the apartment, investigators seized a plastic bag marked “disposable phone,” more than $40,000 in cash and more than 50 electronic devices, prosecutors said in court documents.

According to prosecutors’ files, the couple opted to leave the premises while agents searched. they asked to bring their cat, which was hiding under the bed.

like mrs. Morgan tried to lure the cat out of hiding from him, grabbing a phone from a nightstand, the documents show. She repeatedly tried to press the lock button, which prosecutors said appeared to be an attempt to prevent investigators from searching it, and law enforcement officials had to take the phone away from her.

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by then, investigators had access to mr. Lichtenstein’s email and cloud account, according to court documents. on Jan on January 31, the government was able to break the encryption on several of the files. Among them was a spreadsheet that listed various accounts, including some that had been abandoned when exchanges requested identity verification in 2017. There was a folder called “people” that had identification documents, and another called “passport_ideas.”

Researchers also said they found a file listing all the addresses within the digital wallet where most of the bitcoins that had been stolen from bitfinex were kept. the currency, worth $3.6 billion, was seized. the seizure was visible on the blockchain ledger.

click here to read more in the wall street journal.

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