- So this isn't legal advice,
but if you're gonna steal $4 billion worth of Bitcoin,
maybe keep a low profile and don't do this.
♪ Everyone worries too much about what's proper ♪
♪ But not Razz ♪
♪ No shame, that don't stop her ♪
♪ Blindly following rules is for fools ♪
- Yes, stealing billions of dollars in Bitcoin is a crime,
but those rap videos are crimes against humanity.
(upbeat music)
Yes, with the development of the internet
and cryptocurrency, so too came the opportunity
for spectacular criming.
How spectacular?
Well, criming in the dollar amount of-
(dramatic music)
- Billions.
- Enter one Heather Morgan, 31,
and her Russian-born husband, Ilya Dutch Lichtenstein, 34,
who have been charged by the Department of Justice
with trying to launder an astounding $4.5 billion
in stolen Bitcoins.
This case is so captivating,
not just because of the staggering dollar amounts
or what the DOJ described as the alleged
labyrinth of cryptocurrency transactions
to launder the stolen funds,
but what makes this case so headline grabbing,
well, the defendants are, to put it mildly, a bit out there.
Lichtenstein calls himself a technology entrepreneur,
coder, and investor, while his wife Morgan...
Well, I'll let Morgan introduce herself in her own words.
♪ I'm many things ♪
♪ A rapper, an economist, a journalist, a writer, a CEO ♪
♪ And a dirty, dirty, dirty, dirty ho ♪
- In addition to being an irreverent comedic rapper
using the stage name Razzlekhan,
yes, I am not making that up,
Morgan is also self-described as, "A serial entrepreneur."
Because of course she is.
And a former prolific contributor to "Forbes" Magazine,
she's even dubbed herself the Crocodile of Wall Street,
for some reason.
So today let's think like a cyber security lawyer
who may or may not make investment decisions
based on dog memes.
So we'll dive into the stunning indictment,
examine the characters involved,
and analyze the implications on the law
and cryptocurrency in general,
and determine if this isn't only
the largest money laundering scheme in history,
but also the cringiest.
All right, so let's start with the indictment
and the weirdos involved.
Back in 2016, hackers stole 119,754 Bitcoins
from the Bitfinex cryptocurrency exchange in Hong Kong.
Since that hack, the value of the Bitcoins has skyrocketed
from $72 million to an astounding $4.5 billion in 2022.
For six years, those monies successfully evaded the grasp
of law enforcement, until now.
On February 8th, 2022, the Justice Department announced
the arrest of Ilya Lichtenstein and Heather Morgan
from their New York high rise apartment.
In its statement on the arrest,
the DOJ reported having successfully recovered
80% of the Bitcoin stolen from Bitfinex, or $3.6 billion,
making it the largest financial seizure in history.
Department officials also stated that they plan to establish
a court process for victims
seeking to reclaim their stolen Bitcoin.
Lichtenstein and Morgan faced up to 20 years in prison
for money laundering charges.
In addition, the pair could receive an additional sentence
of up to five years for the charge of conspiracy
to defraud the United States.
Now, for those of you who haven't had money laundering
explained to them by Saul Goodman-
- Your filthy drug money has been transformed
into nice clean taxable income
brought to you by a savvy investment in a thriving business.
- It refers to the act of making large amounts of money
obtained by criminal activity
appear to come from legal sources.
And conspiracy to defraud the United States
generally criminalizes the use of deception
to cheat the government out of property or money,
or to otherwise impair, obstruct, or defeat
the lawful function of the government.
Interestingly, the indictment does not allege
that the pair are the ones who actually stole the money.
It only alleges that an unknown hacker
gave them the stolen Bitcoin,
and that the couple attempted to launder
the billions of dollars in crypto to evade law enforcement.
Following their initial court appearance,
the magistrate judge ruled
that Lichtenstein could be released into home detention
on a $5 million bond cosigned by his parents.
The bond amount for Morgan was set at $3 million,
but both parties were ordered to remain in custody
until the bail conditions were met.
Prosecutors opposed granting the defendants bail,
claiming that they were significant flight risks.
Prosecutors argued that just a portion
of the billions of dollars in crypto
that they've stole or tried to launder could buy a new house
or, "Buy each of their parents a private island."
Prosecutors further warned that Lichtenstein,
who holds dual citizenship in the U.S. and Russia,
was a particular flight risk
as he could flee to Russia and seek immunity
if he were no longer held in the United States' custody.
Federal District Judge Beryl Howell agreed with prosecutors
and modified the magistrate's bail order accordingly.
On February 14th, the judge revoked Lichtenstein's bail
and ordered him to remain in jail pending trial.
Judge Howell said that the government had deemed
that Morgan was not as involved
in planning the alleged crimes as her husband,
and that Lichtenstein was largely in control
of the funds himself.
Judge Howell also considered Morgan's health issues
as a factor as she recently had surgery
to remove a lump in her breast.
With follow-up doctor's appointments expected,
the court released Morgan into house arrest
with a GPS ankle monitor.
Now I would be remiss not to take this opportunity
to go into the storied background of Dutch and Razzlekhan.
So before delving into the specifics of the indictment,
which I should note are only allegations
until prove true in a court of law
as the defendants are presumed innocent until proven guilty,
I wanna give a little background on the couple
that "The New York Times" has dubbed
Bitcoin's Bonnie and Clyde.
Now, Lichtenstein, who goes by the nickname Dutch,
describes himself on his LinkedIn page
as an angel investor in technology companies
and an advisor to various startups.
A Twitter account purportedly in his name
posted frequently on cryptocurrency trends,
the technology sector, and the evolution of NFTs.
While Dutch seemed to stick
to being your prototypical crypto bro,
his wife Morgan jumped between being
a self-described serial entrepreneur
and in her words a, "Raunchy rapper making surrealist art."
Morgan was also a frequent contributor to "Forbes" Magazine,
publishing more than 55 pieces
between July 2017 and September 2021.
Morgan also published articles on a variety of topics
ranging from soul food served at the 2021 Met Gala,
why women are better negotiators than men,
and, ironically, expert tips on protecting your business
from cyber criminals.
- It's not ironic.
It's just coincidental.
- And, I mean, in fairness, she probably knows more
about hacking Bitcoin accounts than most people,
so maybe she is an expert in this area.
Now Morgan is also a prolific presence on TikTok,
rapping under the name Razzlekhan.
According to her website, she's, "Like Genghis Khan,
"but with more pizazz."
She also characterizes herself as basically a mix
of Hunter S. Thompson and Diane Arbus,
with a sprinkle of Tom Green.
And yeah, I mean I guess she's not
completely wrong about that.
And look, it's easy to make fun, but all art is subjective
and it's really not anyone's place to judge art
as good or bad.
♪ What ♪
♪ Razzle Dazzle living in a glass castle ♪
♪ Don't (beep) with no hassle ♪
- Okay, I take it back.
If the pair is found guilty,
I really hope that the judge issues an injunction
preventing Ms. Morgan from ever rapping again,
and also request that Ms. Morgan pay restitution
to my eyes and ears for all the videos I've watched
in preparing for this video.
Uh, yeah.
Now let's get onto the complaint itself
and onto the whole issue of laundering billions of dollars
in stolen cryptocurrency.
Now in the statement announcing the arrest,
here's how the DOJ summarized
the defendants' alleged money laundering scheme.
The criminal complaint alleges that Lichtenstein and Morgan
employed numerous sophisticated laundering techniques,
including using fictitious identities
to set up online accounts,
utilizing computer programs to automate the transactions,
a laundering technique that allows
for many transactions to take place
in a short period of time,
depositing the stolen funds into accounts
at a variety of virtual currency exchanges
and darknet markets.
Basically, they would often try to convert Bitcoin
into other forms of virtual currency
and other real tangible assets,
including anonymity enhanced virtual currency
in a practice known as chain hopping,
and using U.S.-based business accounts
to legitimize their banking activity.
According to Jim Lee of the IRS Criminal Investigation,
they conducted a methodical and calculated scheme
to allegedly launder and disguise their vast fortune.
And here's how the government says that they did it.
In or around August of 2016,
a hacker breached the Bitfinex security system
and infiltrated its infrastructure.
Once in the network, the unidentified hacker
was able to initiate over 2,000
unauthorized Bitcoin transactions,
resulting in 119,754 Bitcoins being transferred
from Bitfinex wallets to an unidentified outside wallet
controlled by the defendants.
Now, if you read the actual complaint
you'd be shocked to see how little
of the billions of dollars in Bitcoin
was actually laundered and spent.
In fact, about 80% of the nearly 120,000 stolen Bitcoin,
the 3.6 billion that the government recovered,
was found in exactly the same crypto wallet
into which they were originally deposited.
As for the remaining 20%, well, starting in January of 2017,
defendants allegedly began moving
some of the stolen Bitcoins out of the original wallet
through a series of small and complex transactions
across multiple accounts and platforms.
Now, one of those accounts
that the Bitcoin was funneled into
was the AlphaBay Marketplace, a prominent darknet market
that was shut down in 2017 by the FBI
working in conjunction with international law enforcement.
Now, the defendants used a high number
of very small transactions to conceal the path
of the stolen Bitcoin and avoid law enforcement for years.
So the $3.6 billion question is,
how did the defendants get caught?
Well, it was a mix of good old fashioned police work,
due diligence from the private sector,
and the public nature of the blockchain itself.
Oh, and the most helpful element in any investigation,
really stupidly sloppy mistakes from the alleged criminals.
Because on January 31st, 2022,
law enforcement gained lawful access
to Dutch's cloud storage pursuant to a search warrant.
Law enforcement decrypted a single file
in Dutch's cloud storage that contained a list
of 2,000 virtual currency addresses,
along with the corresponding private keys
to open all of those wallets.
That's not surprising because one of the most tedious things
about cryptocurrency is keeping track
of all your accounts and private keys.
And that's hard for even people
that have stolen billions of dollars in crypto coins.
Analyzing the public blockchain records,
the feds confirmed that those addresses
came from the 2016 hack,
because the blockchain is completely public.
Now in the days that followed,
the feds obtained seizure warrants
and used those private keys contained in Dutch's file
to seize over $3.6 billion in Bitcoin
and place them into the government's possession.
Also discovered in Dutch's cloud,
a folder entitled "Personas" that included biographical info
and documents on numerous individuals,
a file entitled "Passport Ideas" with links to darknet sites
selling fake passports,
and a folder with potential financial institutions
to launder the money, which described AlphaBank as a,
"Sketchy Russian oligarch bank."
Which is definitely not wrong.
And not only that, but Dutch's apartment also contained
a bag labeled "Burner phones."
You know, it really makes law enforcement's job a lot easier
when suspects properly categorize their crimes
and pre-labeled the evidence of their arrest.
It's really considerate.
Now the private sector, aided by government regulation,
was also instrumental in halting
some of the defendants' illegal activities.
Currency exchanges are regulated by the Treasury Department,
which requires such institutions
to establish anti-money laundering, AML, programs
and KYC, Know Your Customer, protocols
to make it harder for anonymous users to transfer money.
In one example of the system working,
the defendants allegedly set up seven AlphaBay accounts
and six from an established exchange
to hold $186,000 in Bitcoin under false names.
However, following these verification protocols,
exchanges were unable to verify defendants' identities
or prove that they owned the accounts.
So the accounts were frozen.
And despite the setbacks,
defendants did successfully launder some of those Bitcoins
out of third party exchanges.
And according to the indictment,
defendants use their ill-gotten gains
to pay for relatively benign items,
such as Uber rides, Hotel.com stays, a PlayStation, NFTs,
a $500 Walmart gift card, and even gold.
But the defendants' alleged sloppiness,
which allegedly bordered on stupidity,
continued to hinder their efforts at money laundering
while also at the same time helping law enforcement
to track them down.
The gold that Dutch purchased with stolen Bitcoin?
Well, he purchased it
from an online currency exchange account
which he verified with his real driver's license,
which he sent with a selfie-style photograph,
and he registered that to his real email address,
and then Dutch had the gold shipped to his real home address
at the time in San Francisco.
Then again, I guess this is exactly what one might expect
from someone who kept the keys to $3.6 billion
in cryptocurrency in one cloud file.
Or who married Morgan.
Now, Morgan's less-than-genius behavior
also raised some red flags.
In response to one currency exchange
asking follow-up questions about the origins
of the tens of thousands of dollars in digital assets
that were to be deposited
into Morgan's newly created business account,
Morgan gave the following not at all suspicious answer.
"My boyfriend, now husband, gifted me cryptocurrency
"over several years, 2014, 2015, which have appreciated.
"I have been keeping them in cold storage."
That obviously cagey answer
is the money laundering equivalent of,
"My boyfriend, why he goes to a different school in Canada.
"You wouldn't know him."
Another red flag?
Well, "The Wall Street Journal" reports
that a friend of Ms. Morgan's noted how she
and her husband's lifestyle did not match
their purported wealth.
While planning to buy a $2 million condo in New York,
the defendants had a modest wedding
and the couple used airline miles to fly.
You know, just like the rest of us.
Now, maybe the best part about this entire case
is that whether you a crypto skeptic or a crypto booster,
there's plenty of material for both camps.
Crypto critics have often noted
that less than desirable groups, like white supremacists,
have embraced crypto as a means of evading law enforcement
and avoiding legal judgements.
Furthermore, in 2021, it marked an all-time high
of $14 billion in cryptocurrency theft
with the innocent suffering brunt of the consequences.
And of course the Bitfinex hack
and subsequent money laundering only reinforces
critics' argument that cryptocurrency is not just ripe
for criminal conduct, but is also not nearly as secure
and unhackable as its boosters claim.
But at the same time, crypto advocates show
that the blockchain's secure technology
is working exactly as intended.
In the words of crypto boosters,
"It's further proof that the nature blockchain,
"and it being always public, allows investigators
"to follow the money in ways that would be impossible
"in complex webs of shell companies and cash smuggling
"that exist with normal financial tools."
Crypto advocates argue that the public nature
of blockchain technology not only serves as self-regulating,
an anti-fraud measure, but that the global blockchain ledger
allows police to track down the stolen cryptocurrency
in ways that would not be possible with fiat money.
"Bloomberg" columnist Matt Levine highlights
this inherent contradiction perfectly, as usual,
saying, "You might think that a federal criminal indictment
"for $4.5 billion of Bitcoin money laundering
"would be vindication
"of the 'Bitcoin is for money launderers' side.
"But I want to tell you, no, it is not.
"What allegedly happened here is that hackers stole
"4.5 billion of Bitcoin from a crypto exchange,
"and stealing from exchanges absolutely
"is a major function of crypto,
"and then they had a horrible time laundering it.
"They managed to extract only a relatively small portion
"of the money for actual spending,
"and each time they got money out
"the feds were able to trace it from the hack
"all the way to legitimate accounts with their names on it."
Matt Levine goes on to analogize,
"If you rob a bank and steal a sack of money
"and the bills are sequentially numbered
"and a dye pack explodes in the sack
"and you drive directly to another bank
"and hand them a dye-stain sack and say,
"'I'd like to make a deposit, please,'
"you will totally get arrested
"and you will probably get charged with money laundering.
"But in no meaningful sense did you launder the money.
"It still has the dye on it.
"That's what happened here."
And as another crypto expert said,
"The problem with laundering cryptocurrency
"is that if you make a mistake five years ago,
"that's still on the blockchain for everyone to see."
But I guess one thing that we can all agree
is that whatever your take on cryptocurrency,
remember that talking about it constantly
does not make you cool.
Now, admittedly, we've all had our fun,
engaged in a whole bunch of schadenfreude
over Razzlekhan and Dutch.
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