Crypto stumbles just days before…

Then bounces back at Super Bowl

After a rough week, the cryptocurrency crowd needed something to cheer about.

Signaling the surging mainstream acceptance of cryptocurrencies as a means of investment, four crypto companies aired commercials during Super Bowl LVI. Viewers saw LeBron James pitching and Larry David starring in an ad for FTX, as well as eToro’s flock of birds and Coinbase’s mysteriously floating QR code.

Lebron 1Years from now, people may look back at 2022’s Super Bowl as the coming out party for cryptocurrencies. And the crypto world sure needed something to celebrate, no matter what the future holds for it.
Just days before the big game, confidence in cryptocurrencies was shaken by some unsettling and potentially damaging news.

A husband and wife (Ilya Lichtenstein, 34, and Heather Morgan, 31) were arrested the morning of February 8 in Manhattan for an alleged conspiracy to launder Bitcoin that was stolen during the 2016 hack of Bitfinex, a virtual currency exchange. The U.S. Justice Department (DOJ) reported that law enforcement had so far seized $3.6 billion in cryptocurrency linked to that hack.

“Today’s arrests, and the department’s largest financial seizure ever, show that cryptocurrency is not a safe haven for criminals,” Deputy Attorney General Lisa O. Monaco said in a statement. “In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions.”

According to court documents, the spouses allegedly conspired to launder the proceeds of 119,754 Bitcoin that were stolen from Bitfinex’s platform after a hacker breached Bitfinex’s systems and initiated more than 2,000 unauthorized transactions.

The DOJ said those unauthorized transactions sent the stolen Bitcoin to a digital wallet controlled by Lichtenstein. And over the last five years, approximately 25,000 of those stolen Bitcoin were transferred out of the wallet via a complicated money laundering process that ended with some of the stolen funds being deposited into financial accounts held by the couple. The rest of the stolen funds, about 94,000 Bitcoin, stayed in the wallet and were used to receive and store the illegal proceeds from the hack.

After executing search warrants of online accounts controlled by the couple, special agents accessed files within an online account. DOJ says those files contained the private keys needed to unlock the digital wallet that directly received the funds stolen from Bitfinex.

In short, federal law enforcement was able to follow the money through the blockchain. “We will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system,” said Assistant Attorney General Kenneth A. Polite Jr. of the DOJ’s Criminal Division.

Lichtenstein and Morgan are charged with conspiracy to commit money laundering, which carries a maximum sentence of 20 years in prison, and conspiracy to defraud the United States, which carries a maximum sentence of five years in prison, according to the DOJ.

A challenging case

The government’s case, however, faces some hurdles. It seems there are no witnesses nor other traditional evidence of a crime, according to Andrey Spektor, a former Assistant U.S. Attorney in New York’s Eastern District, and now a litigation and investigations partner with the law firm of Bryan Cave Leighton Paisner.

Spektor“Based on what the government has revealed this might be a case that relies purely on tracing, and that could be a challenge,” Spektor told Advisors Magazine in an email. He added that if there is a trial the government might be forced to reveal its techniques, which it may not want to do.

“In most criminal cases, there is a witness—most of the time someone who participated in the scheme and is cooperating in the hopes of receiving leniency—who can narrate the scheme,” Spektor explained. “The government may have one here, but so far, the evidence it has relied on does not suggest that it does.”

He added: “But as the defense points out, there also appear to be no wiretaps, texts, or other communications one might expect. The government did recover electronic devices during the search, and those could contain a treasure trove of evidence.”

Having a married couple for defendants is another concern, Spektor points out, because it’s unlikely that one spouse will testify against the other.

“When you couple the intricacy of tracing analysis with cryptocurrency, which is still a novelty to many people, this could be a very difficult trial for the government,” Spektor said.

As a prosecutor, Spektor led numerous criminal trials and argued 15 appeals before the influential Second Circuit. He also directed dozens of grand jury proceedings, including securities and investment fraud, cybercrime, accounting fraud, money laundering, export control law breaches, kickbacks and health care fraud.

Since the arrest, there has been a hotly litigated bail proceeding, Spektor said. At the time of this writing, the husband has been detained pending trial, but the wife was released on bail.

“As the government goes through some of the evidence it recovered during the search and produces it to the defense, expect both sides—particularly Lichtenstein—to revisit this decision,” Spektor said. “If the evidence is not as strong against him as the government has promised it is, that could be used to seek his release.”

Still, U.S. government agencies are clearly now recognizing crypto as a growing part of the country’s financial backbone.

“Cryptocurrency and the virtual currency exchanges trading in it comprise an expanding part of the U.S. financial system,” said U.S. Attorney Matthew M. Graves for the District of Columbia, “but digital currency heists executed through complex money laundering schemes could undermine confidence in cryptocurrency.”

A matter of trust

In a related move, on February 16, Paxos — a regulated blockchain infrastructure platform — announced the launch of the Travel Rule Universal Solution Technology (TRUST). It’s described as an industry-driven solution designed to comply with a requirement known as the Travel Rule while protecting the security and privacy of customers.

The Travel Rule was implemented by The Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The Travel Rule helps law enforcement agencies detect, investigate and prosecute money laundering and other financial crimes by preserving an information trail about persons sending and receiving funds through transfer systems.

FATF recommendations are regarded as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.

David Solomon 1TRUST, according to Paxos, is a platform that allows cryptocurrency exchanges to securely send information legally required by the Travel Rule.

Signing on as U.S. TRUST members are some of the biggest names in crypto trading. These include: Anchorage, Avanti, Bitgo, bitFlyer, Bittrex, BlockFi, Circle, Coinbase, Fidelity Digital Asset Services, Gemini, Kraken, Paxos, Robinhood, Standard Custody & Trust, Symbridge, TradeStation, Zero Hash, and Zodia. “And we are expanding to other global jurisdictions shortly,” Paxos said in its blog post.

Elsewhere, during Pivot MIA — a tech and business conference held in Miami this week — David Solomon, chairman and CEO of Goldman Sachs said: “Crypto, as an asset, is highly speculative.”

Solomon added: “That doesn't mean that it might not be a good store of value. Certainly, if you're an individual who has investable assets, I would strongly urge you to have a broad, diversified pool of investments.”


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