The “Crypto Couple” and the Failure to Follow their Own Advice of Safeguarding their Stash

March 10, 2022

On February 8th, 2022 the Justice Department made history when they seized over $3.6 billion worth of Bitcoin, and given its value when it was seized, Deputy Attorney General Lisa Monaco announced it is “the department’s largest financial seizure ever.” The Bitcoins seized were actually stolen in 2016 as a result of a breach of Bitfinex, a Hong-Kong based virtual currency exchange which also happens to be one of the world’s largest platforms. In 2016, the time of the initial hack, the stolen Bitcoins were worth a mere $71 million, but now they are worth nearly $4.5 billion. When Bitfinex was hacked, 120,000 bitcoins were stolen and immediately transferred into a digital wallet that was outside of Bitfinex. Although the individuals in control of that digital wallet attempted to hide the money through a series of extremely complex transactions over time, the Justice Department was still able to track them down.

Federal agents arrested Ilya “Dutch” Lichtenstein and his wife, Heather Morgan and they have been accused of conspiring to launder 119,754 Bitcoins stolen from Bitfinex. Ironically, the couple had been known for rendering advice about cryptocurrency and specifically “the importance of safeguarding your stash.” Mr. Lichtenstein took to Twitter in November, 2022 expressing his frustrations with a news article for including “almost nothing about how to secure your keys” which are the passwords that when correctly entered allows an individual access to Bitcoins. Meanwhile, his wife wrote an article in 2020 for Forbes Magazine where she stated, “[c]ybercriminals and fraudsters are taking advantage of this unexpected disruption [due to COVID-19], leading to a spike in scams and cybercrime.”

Despite their advice, the couple ultimately is alleged to have joined the growing number of cybercriminals. Mr. Lichtenstein’s frustration with the lack of guidance on securing keys was warranted as they were not secure enough to prevent federal agents from linking the stolen Bitcoins to accounts controlled by Mr. Lichtenstein. Some of the activity that initially drew suspicion included that the couple had created false identities in an attempt to open seven accounts on the exact same exchange containing over $186,000 in assets but the accounts were all frozen because the exchange was unable to verify the identities. In addition to suspicious activity, U.S. authorities were also able to trace Bitcoins stolen from Bitfinex on the BTC blockchain.

After obtaining a search warrant they were able to search the files and subsequently law enforcement obtained approval to execute a lawful seizure supported by probable cause under exigent circumstances to seize the balance of Mr. Lichtenstein’s wallet which contained approximately 94,636 bitcoins worth $3.629 billion.

Through their investigations, federal agents were able to untangle a series of complex transactions designed to obscure the fact that the Bitcoins were stolen from Bitfinex. Beginning around January 2017, a portion of the stolen bitcoins were transferred out of the wallet that they were transferred into immediately following the hack of Bitfinex and ended up in accounts controlled by Mr. Lichtenstein and Ms. Morgan. After obtaining a search warrant they were able to search the files and subsequently law enforcement obtained approval to execute a lawful seizure supported by probable cause under exigent circumstances to seize the balance of Mr. Lichtenstein’s wallet which contained approximately 94,636 bitcoins worth $3.629 billion. The complaint alleges they committed the following offenses: Money Laundering Conspiracy, in violation of 18 U.S.C. § 1956(h); and Conspiracy to Defraud the United States, in violation of 18 U.S.C. § 371.

While this may have been the largest seizure to date, it is not the first time that currency exchanges have been hacked by cybercriminals. Mt. Gox was another virtual currency exchange and they “collapsed into bankruptcy in 2014, after huge, unexplained losses of the volatile digital currency Bitcoin.” Currency exchanges are vulnerable to hackers gaining access to virtual wallets by obtaining their private keys. The largest problem is that given the nature of these exchanges and the lack of a central authority, once the money is moved out of one’s wallet and placed in another location, there is no way to move that money back. Once the money is gone, the only hope of recovering it is if federal agents can track it.

Monaco stated “[a]s the technology advances, so too must the Department evolve with is so that we’re poised to root out abuse on these platforms and ensure user confidence in these systems.”

Ms. Morgan may have been correct that the pandemic has caused disruptions allowing cybercriminals to flourish. In 2020 losses from crypto-related crime rose 79% and in 2021, hackers stole $14 billion in cryptocurrency. In response to the increase in cyber activity, back in October of 2021 Deputy Attorney General Lisa O. Monaco announced the creation of a National Cryptocurrency Enforcement Team. Monaco stated “[a]s the technology advances, so too must the Department evolve with it so that we’re poised to root out abuse on these platforms and ensure user confidence in these systems.” However, approximately a week after the DOJ seized $3.6 billion worth of Bitcoin from Mr. Lichtenstein and Ms. Morgan, on February 17th, 2022 the Justice Department announced the first director of the National Cryptocurrency Enforcement Team. The new director has stated that the team “will play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds.”

Allison Gray

Allison Gray is a graduate of Davidson College where she majored in Philosophy and also played Division I Women’s Soccer. In law school, Allison is currently a staff writer for JOLT and will be the Executive Editor for Volume 24. After law school, Allison hopes to practice litigation and focus her pro bono efforts on the mental health of incarcerated individuals. See the author’s previous blog post here.