$3.6B BTC Seizure from Bitfinex Hack: Good or Bad for the Industry?

Time Stamp: February 18, 2022 8:20 AM
Source Node: 1611594

In the early hours of February 1, $3.55 billion worth of Bitcoin from the 2016 Bitfinex hack suddenly moved after years. A week later, the United States Department of Justice officially announced the seizure of around $3.6 billion in Bitcoin related to the same crypto exchange hack.

That on-chain movement of    Bitcoin  was reportedly conducted by federal agents as a part of its seizure.

The identity of the hackers still remains unknown, but the authorities arrested a New York married couple, Ilya ‘Dutch’ Lichtenstein and Heather Morgan, for laundering these Bitcoins from that hack. They were charged with conspiring to launder money and defraud the federal government, but many believe that they could also be hackers.

But why is it so hard to launder cryptocurrencies, specifically Bitcoin?

Well, several industry experts told Finance Magnates that it was Bitcoin’s open ledger that make it hard for criminals to get away with these ill-gotten proceeds.

“It is difficult to launder crypto because of the immutable nature of ledger transactions,” the Chief Technology Officer at CEX.IO, Dmytro Volkov explained. He pointed out analytics teams with sophisticated monitoring tools are a headache for hackers and launderers.

“Although digital footprints are difficult to trace, consistent proactive efforts to stay a step ahead of cybercrime are absolutely critical to the ongoing success and growth of crypto ecosystems. Especially, as it relates to areas of known vulnerabilities like hot wallet storage, proactive due diligence and    risk management  can prevent attacks from occurring in the first place. But, there are also opportunities here. Robust security teams energized by the expanding capabilities of blockchain technology are well-positioned to thwart attacks,” Volkov said.
But, hackers and launderers are modifying their tactics in washing Bitcoins tainted with the marks of illicit activities. Bitcoin mixers are widely used to break cryptocurrencies into pieces and clean their transaction records.

Despite the technological advancements on both sides, human behavior remains one of the major vulnerabilities for hackers and launderers.

“I don’t think it is hard to launder crypto, but people by nature make mistakes. Often you’ll find scammers interacting with centralized exchanges or showing off their lavish lifestyles on social media, which all points to something suspicious,” said Mark Basa, the Global Brand and Business Manager at HOKK Finance.

How the Seizure will Impact the Industry?

The US authorities seized about 94,000 Bitcoins from the Bitfinex hack. In total, some 120,000 BTC were stolen in the 2016 attack. Though not fully recovered, it is still the US Justice Department’s largest financial seizure ever.

The hacks reveal vulnerabilities of the exchanges, but these seizures prove that the decentralized ecosystem is not beyond anyone’s reach.

“I think it is a great boon for the industry,” said Eric Chen, the CEO and Co-Founder of Injective Labs. “Thousands of individuals were impacted by this hack, and they can finally begin to recoup some of their funds. I expect most of these parties to again join the ecosystem when previously they may have shunned it to an extent after suffering from such a large capital loss.”

Though these seizures are good in one way, it puts a massive amount of Bitcoin in the hands of the governments. The United States and Chinese governments have become two of the largest holders of cryptocurrencies.

The drama around the seizure might not be over yet as Bitfinex said that it has compensated the victims and will “follow appropriate legal processes to establish our rights to a return of the stolen Bitcoin.”

Violations of Bitcoin’s Fundamental Property

So, are these seizures and government control violating the fundamental property of Bitcoin?

“Although many believe major hacks like these are evidence that Bitcoin has deviated from its fundamental privacy properties, we understand and believe in the incredible potential this technology has to overcome on-chain privacy issues,” Volkov added.

But, these attacks might prompt the governments to accelerate their efforts to recognize Bitcoin.

“As the Security and Exchange Commission (SEC) has made clear relative to crypto from Day One, its purpose is to protect investors. Unfortunately, the Bitfinex attack is far from novel. Cybercrime is becoming ubiquitous across industries,” Volkov said. “We expect the government to look more closely than ever at the digital asset space as it continues to mature and evolve. Indeed, SEC Chair Gary Gensler recently said crypto exchanges will be a chief focus on his agency’s crackdown on digital assets this year.”

In the early hours of February 1, $3.55 billion worth of Bitcoin from the 2016 Bitfinex hack suddenly moved after years. A week later, the United States Department of Justice officially announced the seizure of around $3.6 billion in Bitcoin related to the same crypto exchange hack.

That on-chain movement of    Bitcoin  was reportedly conducted by federal agents as a part of its seizure.

The identity of the hackers still remains unknown, but the authorities arrested a New York married couple, Ilya ‘Dutch’ Lichtenstein and Heather Morgan, for laundering these Bitcoins from that hack. They were charged with conspiring to launder money and defraud the federal government, but many believe that they could also be hackers.

But why is it so hard to launder cryptocurrencies, specifically Bitcoin?

Well, several industry experts told Finance Magnates that it was Bitcoin’s open ledger that make it hard for criminals to get away with these ill-gotten proceeds.

“It is difficult to launder crypto because of the immutable nature of ledger transactions,” the Chief Technology Officer at CEX.IO, Dmytro Volkov explained. He pointed out analytics teams with sophisticated monitoring tools are a headache for hackers and launderers.

“Although digital footprints are difficult to trace, consistent proactive efforts to stay a step ahead of cybercrime are absolutely critical to the ongoing success and growth of crypto ecosystems. Especially, as it relates to areas of known vulnerabilities like hot wallet storage, proactive due diligence and    risk management  can prevent attacks from occurring in the first place. But, there are also opportunities here. Robust security teams energized by the expanding capabilities of blockchain technology are well-positioned to thwart attacks,” Volkov said.
But, hackers and launderers are modifying their tactics in washing Bitcoins tainted with the marks of illicit activities. Bitcoin mixers are widely used to break cryptocurrencies into pieces and clean their transaction records.

Despite the technological advancements on both sides, human behavior remains one of the major vulnerabilities for hackers and launderers.

“I don’t think it is hard to launder crypto, but people by nature make mistakes. Often you’ll find scammers interacting with centralized exchanges or showing off their lavish lifestyles on social media, which all points to something suspicious,” said Mark Basa, the Global Brand and Business Manager at HOKK Finance.

How the Seizure will Impact the Industry?

The US authorities seized about 94,000 Bitcoins from the Bitfinex hack. In total, some 120,000 BTC were stolen in the 2016 attack. Though not fully recovered, it is still the US Justice Department’s largest financial seizure ever.

The hacks reveal vulnerabilities of the exchanges, but these seizures prove that the decentralized ecosystem is not beyond anyone’s reach.

“I think it is a great boon for the industry,” said Eric Chen, the CEO and Co-Founder of Injective Labs. “Thousands of individuals were impacted by this hack, and they can finally begin to recoup some of their funds. I expect most of these parties to again join the ecosystem when previously they may have shunned it to an extent after suffering from such a large capital loss.”

Though these seizures are good in one way, it puts a massive amount of Bitcoin in the hands of the governments. The United States and Chinese governments have become two of the largest holders of cryptocurrencies.

The drama around the seizure might not be over yet as Bitfinex said that it has compensated the victims and will “follow appropriate legal processes to establish our rights to a return of the stolen Bitcoin.”

Violations of Bitcoin’s Fundamental Property

So, are these seizures and government control violating the fundamental property of Bitcoin?

“Although many believe major hacks like these are evidence that Bitcoin has deviated from its fundamental privacy properties, we understand and believe in the incredible potential this technology has to overcome on-chain privacy issues,” Volkov added.

But, these attacks might prompt the governments to accelerate their efforts to recognize Bitcoin.

“As the Security and Exchange Commission (SEC) has made clear relative to crypto from Day One, its purpose is to protect investors. Unfortunately, the Bitfinex attack is far from novel. Cybercrime is becoming ubiquitous across industries,” Volkov said. “We expect the government to look more closely than ever at the digital asset space as it continues to mature and evolve. Indeed, SEC Chair Gary Gensler recently said crypto exchanges will be a chief focus on his agency’s crackdown on digital assets this year.”

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