The U.S. Department of Justice is really pushing to get Sam Bankman-Fried back in jail prior to the disgraced FTX founder’s trial. In the DOJ’s second court filing on the matter – kicked off after someone shared former Alameda Research CEO Caroline Ellison’s diary with the New York Times – the agency argued that SBF’s defense isn’t denying its claims that SBF is the leaker. “The record here establishes that the defendant went beyond benignly exercising a constitutional right to speak to the press” and “shared materials…obviously designed to intimidate, harass and embarrass someone he knows is slated to testify against him, and to provoke an emotional response in potential jurors,” the filing said. Bullying a star witness to a massive purported fraud and tampering with jury selection? Those are fightin’ words.
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Coinbase asked a judge to drop the U.S. Securities and Exchange Commission’s lawsuit, alleging the regulator is stepping outside of its jurisdiction in suing the crypto exchange. The SEC sued Coinbase in June, alleging the exchange violated federal securities laws by operating as an unregistered broker, exchange and clearing agency for 13 tokens that are unregistered securities. Coinbase has pushed back saying the SEC is confusing its mandate and hasn’t proven any cryptocurrencies are security assets. The SEC has until Oct. 3 to file a response. Coinbase, once know for its compliant stance, has becomeincreasingly vocalin speaking outagainst the SEC.
Tainted Flows
The exploiter responsible for draining $61 million assets held on decentralized exchange Curve Finance has returned some of the stolen crypto after engaging in talks with one of the victims on Friday, blockchain data shows. The looter transferred almost $10 million of ETH and alETH to Alchemix’s multisignature wallet in multiple transactions, blockchain data shows. Curve, Metronome and Alchemix lost $61.7 million of crypto assets over the weekend when an unknown hacker exploited a coding bug to loot multiple trading pools. It is increasingly common for crypto hackers, who often cannot spend stolen coins without being tracked on the blockchain, to return the money.
Goodbye Revolution
Digital bank Revolut is closing its U.S. crypto platform citing an uncertain regulatory environment. The platform said the “difficult decision” to halt operations impacts less than 1% of its crypto customers globally, and added it’s “actively pursuing alternative means” and hopes to reenter the U.S. “again in the future.” No other market is being affected. Meanwhile, popular decentralized exchange Trader Joe is now also on Ethereum – or at least its stablecoin pools are – after an expansion from Arbitrum, BNB Chain and Avalanche. Finally, the second version of GMX, the most popular decentralized exchange on the Arbitrum L2 network, attracted over $1 million in capital on its first trading day. GMX V2 will exist alongside the current GMX platform, and will expand access to more alternative currencies including dogecoin.
The Takeaway: Dutch Down
(“Crocodile of Wall Street” – Bryan Brinkman/CoinDesk)
We seemingly have an answer to one of crypto’s most enduring mysteries. Ilya Lichtenstein, husband of criminal rapper Razzlekhan (aka Heather Morgan), confessed yesterday to the 2016 hacking theft of 112,000 bitcoins from offshore crypto exchange Bitfinex. But the circumstances of that confession are frankly bizarre – and one of America’s most notorious reformed hackers isn’t buying it.
“Ilya is a f***ing idiot,” argues Brett Johnson. “If you look at the way he was trying to launder money, he was doing absolutely everything wrong.”
Johnson should know – he was the founder and leader of Shadow Crew, a notorious cybercrime cartel, in the early 2000s. After his arrest in 2005, Johnson served as a confidential informant for the Secret Service and, despite some backsliding, has since become a respected white hat cybersecurity expert.
Aside from questions about Lichtenstein’s competence, the circumstances of the confession remain murky. The U.S. Department of Justice did not charge Morgan and Lichtenstein, who Morgan sometimes affectionately referred to as “Dutchie,” with the hack itself, only with attempts to launder the stolen funds.
It is unclear from yesterday’s reporting whether confession to the hack was a condition of Lichtenstein’s plea deal on the money laundering charges, but that would be extremely unusual. The roughly 120,000 BTC hacked from Bitfinex was worth about $70 million in 2016, but ballooned to $4.3 billion by the time of the couple’s arrest last year.
After Lichtenstein and Morgan’s arrests, there were still many unanswered questions as to who actually committed the initial hack. One theory was that Lichtenstein and Morgan may have purchased keys to the stolen bitcoin from the original hacker at a discount, or were holding and laundering it on behalf of a third party. But these were never particularly convincing, and there was broad belief that the couple had committed the hack as well as the attempted laundering.
Brett Johnson is skeptical, though, based on Lichtenstein’s apparent sloppiness on the laundering part of the heist.
“He was doing chain hopping … But the cashout was always coming out to his name. In Shadow Crew, we said, all cybercrime should start with identity theft,” Johnson told me. “[Lichtenstein] even had some Coinbase accounts that were directly connected to him. It simply did not make sense at all that he was doing it like that.”
Lichtenstein also moved some of the stolen funds through darknet market Alphabay. But, Johnson argues, “If he had any experience at all, he knew that market was going to get shut down by law enforcement, or do an exit scam. So it doesn’t make sense to me.”
“What it really reads like is, in theory the guy knows how to launder money, but in practice he had never done it at all,” he added
Another major sign of the duo’s questionable competence: Lichtenstein apparently kept the private keys to billions of dollars’ worth of bitcoin on a cloud drive, which may have allowed law enforcement to seize it.
More broadly, Razzlekhan and Dutchie’s behavior post-2016 was strange for high-profile hackers. Rather than disappearing to some remote non-extradition country, they moved to Wall Street. And while Lichtenstein kept a low profile, Heather Morgan’s behavior was incongruous with someone who had millions of stolen bitcoin on hand. She touted herself as head of an email marketing company, contributed articles to Forbes, gave public presentations on hacking and – last but not least—pursued a possibly theft-subsidized career as a bizarre rapper under the alias “Razzlekhan.”
That may simply indicate that the couple made extremely naïve decisions after committing a major crime. But Brett Johnson thinks there’s a lot more to the story.
The continued popularity of cryptocurrency – and the use of traditional payment rails to invest in, trade or use crypto – means that it is nearly impossible for traditional financial services and virtual asset service providers (VASPs) to operate in isolation from one another. In other words, anyone who wants access to crypto is reliant on traditional banking rails in the first instance.
From the banking perspective, an institution may maintain a direct relationship with a VASP through the provision of direct banking services to an exchange. Banks can also be indirectly exposed to VASPs, as bank clients use their accounts to transfer funds via credit, debit, Automated Clearing House (ACH) or other fiat-denominated mechanisms to fund crypto wallets.
