On February 8, 2022, the U.S. government arrested Ilya Liechtenstein and Heather Morgan and charged them with conspiracy to launder the proceeds of 119,754 Bitcoin which had been stolen from cryptocurrency exchange Bitfinex in a 2016 hack.  The present value of the theft is approximately $4.5 billion and the U.S. government has seized approximately 94,000 Bitcoin thus far.  The seized Bitcoin is valued at $3.6 billion and represents the DOJ’s largest ever cryptocurrency seizure.

The court documents allege that, during the hack, more than 2,000 unauthorized transactions sent the Bitcoin to a digital wallet controlled by Liechtenstein. Over the past five years, Liechtenstein and Morgan then transferred approximately 25,0000 Bitcoin out of the wallet via complicated money laundering processes resulting in the proceeds ending up in accounts under Liechtenstein or Morgan’s control.  These processes included fictitious identities, deposits into darknet markets and then subsequent withdrawals, and converting the Bitcoin into other virtual currencies.  The remaining approximately 94,000 Bitcoin were kept in a digital wallet under Liechtenstein’s control.

To crack the case, the U.S. federal government employed sophisticated techniques to investigate and gain access to the digital wallet holding the Bitcoin.  After obtaining search warrants, U.S. government agents accessed online accounts controlled by Liechtenstein which contained the private keys required to access the digital wallet.  Federal agents then used those keys to gain control over the digital wallet and seize the remaining 94,000 Bitcoin. 

This investigation and arrest highlights two important developments for enforcement of the digital economy.  First, the U.S. government takes seriously the role of cryptocurrency in the current economic environment.  In the DOJ’s press release of the arrest, U.S. Attorney Matthew M. Graves stated that cryptocurrency is a growing aspect of the U.S. financial system and it is therefore critical to address fraudulent activity so that the public does not lose trust in cryptocurrency.  In October, 2021, the DOJ created its National Cryptocurrency Enforcement Team to tackle these specific types of issues and these arrests demonstrate crypto-related enforcement remains a priority.

Second, the U.S. government has the necessary expertise to track down sophisticated crimes involving cryptocurrency.  The court documents in this case paint an alleged convoluted and complicated money laundering process.  Yet, the U.S. government had the necessary tools to both track the Bitcoin that had been laundered out of the digital wallet, as well as crack the digital wallet under Liechtenstein’s control and seize the remaining Bitcoin. 

Author

Caleb Sainsbury is an associate in the Firm's Z├╝rich office where he is a member of the Global Wealth Management and the Compliance and Investigations practice groups. Prior to joining Baker McKenzie, Caleb was an associate at an international law firm in Boston, Massachusetts.

Author

Lyubomir Georgiev has practiced law since 2003 in the United States and Switzerland. He has assisted banks, insurance companies, fiduciaries, family offices, asset managers, and high net worth individuals. Lyubomir participated in the negotiations of the special arrangements between the Government of the Principality of Liechtenstein and the UK on voluntary disclosure, tax compliance certification and tax information exchange. He heads the International Tax and Global Wealth Management practice in Zurich. Lyubomir has worked in Washington, DC and New York. Previously he was a member of the EMEA Wealth Management Steering Committee and Knowledge Management & Training head. Lyubomir is admitted to practice in Washington, DC, US Tax Court, England and Wales, and Switzerland as a foreign-qualified solicitor. He has been ranked in Chambers Global since 2012 as a foreign expert in practice areas such as UK tax and private clients, US private clients, and Liechtenstein tax and general business law.