While cryptocurrency and trading virtual currency exchanges comprise an expanding part of the US financial system, digital currency heists executed through complex money laundering schemes could undermine confidence in cryptocurrency, US authorities warned.

The US Justice Department has uncovered its largest cryptocurrency theft to date, seizing an unprecedented £3.6 billion in bitcoin stolen during the 2016 hack of virtual currency exchange Bitfinex. A Manhattan couple have been arrested on money laundering charges.

Deputy attorney general Lisa Monaco labeled the operation as the department’s “largest financial seizure ever.”

Ilya Lichtenstein, 34, and his wife, Heather Morgan (pictured), 31, both of New York, appeared in federal court in Manhattan yesterday charged with conspiring 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 breach was the second largest to hit a major exchange, according to Reuters.

The unauthorized transactions sent the stolen bitcoin into a digital wallet under Lichtenstein’s control. Over the last five years, around 25,000 of the stolen bitcoin were transferred from Lichtenstein’s wallet via a complicated money laundering process that ended with some of the stolen funds being deposited in financial accounts controlled by the married couple, 

The remainder of the stolen funds, comprising more than 94,000 bitcoin, remained in the wallet used to receive and store the illegal proceeds from the hack. After the execution of court-authorized search warrants of online accounts controlled by Lichtenstein and Morgan, special agents obtained access to files within an online account controlled by Lichtenstein. 

Those files contained the private keys required to access the digital wallet that directly received the funds stolen from Bitfinex, and allowed special agents to lawfully seize and recover more than 94,000 bitcoin that had been stolen from the currency exchange. The recovered bitcoin was valued at over $3.6 billion at the time of seizure.

“Today’s arrests, and the department’s largest financial seizure ever, show that cryptocurrency is not a safe haven for criminals,” Lisa Monaco said. “In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions. Thanks to the meticulous work of law enforcement, the department once again showed how it can and will follow the money, no matter what form it takes.”

"Sophisticated" laundering technique
The US Internal Revenue Service’s cyber crimes unit “unraveled a sophisticated laundering technique” used by the couple, including using fictitious identities to set up online accounts; utilizing computer programs to automate 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 and then withdrawing the funds, which obfuscates the trail of the transaction history by breaking up the fund flow; converting bitcoin into other forms of virtual currency, including anonymity-enhanced virtual currency, in a practice known as “chain hopping,” using US-based business accounts to legitimize their banking activity.

“Today, federal law enforcement demonstrates once again that we can follow money through the blockchain, and that 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 Polite Jr of the Justice Department’s criminal division. “The arrests today show that we will take a firm stand against those who allegedly try to use virtual currencies for criminal purposes.”

“Criminals always leave tracks, and today’s case is a reminder that the FBI has the tools to follow the digital trail, wherever it may lead,” FBI deputy director Paul M Abbate said. 

Conspiracy to commit money laundering carries a maximum sentence of 20 years in prison, and conspiracy to defraud the US carries a maximum sentence of five years in prison. 

US magistrate judge Debra Freeman set the bond at $5 million for Lichtenstein and at $3 million for Morgan and ordered their parents to post their homes as security for the couple's return to court. Morgan, from Californnia, and Lichtenstein, a dual US-Russian national from Illinois, were warned of severe consequences if they tried to flee. Both will be placed on house arrest, with electronic monitoring, and will be barred from engaging in cryptocurrency transactions pending trial, Freeman ordered. 

Morgan is an entrepreneur, investor, writer and rapper, according to her LinkedIn profile which shows her as having 12,544 followers. Her self-description on the site states: “With words and software, you can write your own destiny.” Lichtenstein describes himself as a technology entrepreneur, coder and investor "interested in blockchain technology, automation, and big data," on the networking site.