Casey Wagner

Voyager gained approval to be acquired by Binance.US only two days ago, but the Department of Justice (DOJ) has now filed an appeal in New York in a bid to block the deal.&nbsp;



U.S. Bankruptcy Judge Michael Wiles greenlit Voyager’s <a href="https://blockworks.co/news/voyager-binance-us-takeover" target="_blank" rel="noreferrer noopener">restructuring plan on Tuesday</a>, which includes Binance.US paying $20 million to take on Voyager client assets, which were initially valued at $1.3 billion last July.



SEC officials opposed the plan during this week’s hearing, alleging that Binance.US is operating a securities exchange without registration.&nbsp;



“We have creditors who are waiting and who in the midst of all of this uncertainty have no access to property in which they’ve invested, in some cases, their life savings, so we have to take some kind of action,” Wiles said in response to the concerns.&nbsp;



In the appeal, the DOJ claims the SEC has every right to step in in order to ensure securities laws are being followed with regard to the handling of Voyager crypto assets.



“Nothing in this Confirmation Order or the Plan grants this Court jurisdiction over any police and regulatory actions by the SEC, and the SEC shall retain the power and authority to commence and continue any such actions against any person or entity, including without limitation, the Debtors,” the appeal filing read. 



Even if the appeal is dropped or dismissed, Voyager could still back out of the deal with Binance.US in the event the bankrupt company finds issues with the exchange’s compliance or security. Proponents of the plan say it can get more than 70% of Voyager debts repaid to creditors.&nbsp;



If the deal goes through (and once it&#8217;s closed), Voyager customers will have their assets accessible for the first time since July 2022 when the company froze accounts.&nbsp;



Voyager creditors, estimated to be more than 100,000, will have assets transferred into Binance.US accounts under the acquisition terms.



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DOJ Wants To Stop Binance.US Buying Voyager — Because SEC

The US Department of Justice has charged the founder of a Hong Kong-based crypto exchange for allegedly processing more than $700 million of illicit funds.&nbsp;



In documents unsealed Wednesday, the DOJ said they charged Anatoly Legkodymov, a Russian national and senior executive of Bitzlato cryptocurrency exchange. Bitzlato is alleged to have “sold itself to criminals as a no-questions-asked cryptocurrency exchange, and reaped hundreds of millions of dollars’ worth of deposits as a result,” US Attorney Breon Peace said in a <a href="https://www.justice.gov/usao-edny/pr/founder-and-majority-owner-bitzlato-cryptocurrency-exchange-charged-unlicensed-money" target="_blank" rel="noreferrer noopener">statement</a>.&nbsp;



<a href="https://twitter.com/hashtag/Bitzlato?src=hashtag_click" target="_blank" rel="noreferrer noopener">Bitzlato</a> worked in conjunction with the previously disrupted <a href="https://twitter.com/hashtag/Hydra?src=hashtag_click" target="_blank" rel="noreferrer noopener">Hydra</a> network that the DOJ and German authorities took down in 2022, the agency added. Hydra was “an anonymous, illicit online marketplace for narcotics, stolen financial information, fraudulent identification documents, and money laundering services that was the largest and longest running darknet market in the world,” the DOJ said.&nbsp;



“The Bitzlato takedown is the coup fatal in destroying the joint network that operated with impunity across the darkweb to facilitate money laundering,” <a href="https://twitter.com/Bl0ckchainMike" target="_blank" rel="noreferrer noopener">Michael Fasanello</a>, chief compliance officer of AnChain.AI said, in a <a href="https://twitter.com/Bl0ckchainMike/status/1615767217903370240?s=20&amp;t=-Kq7NhUSGfTc3L4BuuCeDw" target="_blank" rel="noreferrer noopener">tweet</a>. 



The charges highlight the agency’s ability to act internationally when it comes to cryptocurrency and prohibiting money laundering, Deputy Attorney General Lisa Monaco said in a press conference Wednesday.&nbsp;



“Institutions that trade in cryptocurrency are not above the law and their owners are not beyond our reach,” Peace added.&nbsp;



The crypto industry reacted with surprise, with many industry leaders taking to <a href="https://twitter.com/search?q=bitzlato&amp;src=typed_query" target="_blank" rel="noreferrer noopener">Twitter</a> to say they had never heard of the Chinese exchange managed from Moscow.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Never heard of <a href="https://twitter.com/hashtag/bitzlato?src=hash&amp;ref_src=twsrc%5Etfw">#bitzlato</a> &#8211; the exchange that <a href="https://twitter.com/hashtag/DOJ?src=hash&amp;ref_src=twsrc%5Etfw">#DOJ</a> just held a noon press conference on and I have been in the space since 2015. Apparently $700m laundered through it between 2018-2022. Glad they shut it down but would like focus on some bigger issues.&mdash; Margaret Rosenfeld (@RosenfeldM) <a href="https://twitter.com/RosenfeldM/status/1615761078880698382?ref_src=twsrc%5Etfw">January 18, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The exchange is not listed among markets tracked by CoinGecko or CoinMarketCap, and its known on-chain history is extremely limited.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Bitzlato tagged wallets have $11k in them. At peak they had $6M. <a href="https://t.co/CF7yjYfEIS">https://t.co/CF7yjYfEIS</a> <a href="https://t.co/JHEtAFuPfB">pic.twitter.com/JHEtAFuPfB</a>&mdash; Conor (@jconorgrogan) <a href="https://twitter.com/jconorgrogan/status/1615757494764163072?ref_src=twsrc%5Etfw">January 18, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Meme tokens were <a href="https://www.geckoterminal.com/eth/pools/0xd4762f0a9e637944841ce8d0a8dd7eb5e0b86624" target="_blank" rel="noreferrer noopener">already launched</a> on Uniswap within minutes of the start of the DOJ press conference.



The DOJ did not elaborate on how many customers the exchange allegedly interacted with or what the “illicit activities” laundered funds were used for are. When asked if the exchange had any role in assisting Russian entities with evading sanctions, Monaco said the investigation is ongoing. 



“What we do know is that Russia is an ecosystem that is permissive for cyber criminals and for the ecosystem that allows them to finance those crimes,” Monaco added. “Our goal is to ensure that Russia can use cryptocurrency or other means to circumvent our sanctions.”



According to <a href="https://blog.chainalysis.com/reports/pro-russian-crypto-donations-war-in-ukraine/" target="_blank" rel="noreferrer noopener">a Chainalysis blog post</a>, &#8220;[Bitzlato] has facilitated approximately $1 billion worth of crypto money laundering since 2019,&#8221; and is linked to Project Terricon, a Russian operation funneling funds to militia groups in the Donbas region of Ukraine.



This story was updated at 2:45 p.m. ET with additional detail, and at 5:00 p.m. ET to correct a title.



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DOJ Busts Crypto Exchange No One Has Heard Of

Shalini Nagarajan

Victims of the BitConnect fraud, one of the largest cryptocurrency scams ever, are set to recover some of their losses under a court order.



The Department of Justice <a href="https://www.justice.gov/opa/pr/crypto-fraud-victims-receive-over-17-million-restitution-bitconnect-scheme" target="_blank" rel="noreferrer noopener">said</a> on Thursday that a federal district court in San Diego has ordered the restitution of $17 million to 800 victims from over 40 countries, more than a year after the exchange’s top promoter pleaded guilty to wire fraud charges.



Federal prosecutors <a href="https://www.sec.gov/news/press-release/2021-172" target="_blank" rel="noreferrer noopener">charged</a> BitConnect, founder Satish Kumbhani and its top promoter Glenn Arcao in Sept. 2021 of defrauding amateur investors out of $2 billion through an unregistered securities offering. 



The Securities and Exchange Commission alleged that BitConnect made investors believe they could generate exorbitant returns through its proprietary “volatility software trading bot.”



Instead, BitConnect and its founders used investor funds for their personal benefit and sent them to digital wallets under the founders’ own control.&nbsp;



Arcaro was last year <a href="https://www.justice.gov/usao-sdca/pr/us-promoter-foreign-cryptocurrency-company-sentenced-prison-role-fraud-scheme" target="_blank" rel="noreferrer noopener">sentenced</a> to a little over 3 years in prison for allegedly marketing BitConnect’s lending program as a lucrative investment. Arcaro, along with his associates, made sure that 15% of the funds going into BitConnect were directed to a slush fund used for the benefit of the owner and promoters, US attorneys said.



Prosecutors further said Arcaro operated a “textbook Ponzi scheme” by using money from new investors to pay those who joined earlier. He allegedly created a website called Future Money to attract investors to the exchange’s lending program.&nbsp;



The scheme allegedly trapped over 4,000 victims from 95 countries.



In Nov. 2021, the Department of Justice was granted a request to sell about <a href="https://www.justice.gov/opa/pr/56-million-seized-cryptocurrency-being-sold-first-step-compensate-victims-bitconnect-fraud" target="_blank" rel="noreferrer noopener">$56 million</a> in fraud proceeds tied to BitConnect. The government said it sought to make investors whole by selling the cryptoassets, then holding the proceeds in US dollars in order to provide restitution.



The DOJ didn’t mention when it sold the funds it seized, but evidently it was not before the 2022 crypto crash which began in May, as the distribution of $17 million reflects substantial changes in <a href="https://blockworks.co/prices">cryptoasset prices</a>.



Still, it is worth noting that the $17 million is just 0.7% of the total $2.4 billion BitConnect <a href="https://blockworks.co/tag/fraud">fraud</a>. BitConnect’s founder Satish Kumbhani was <a href="https://www.justice.gov/opa/pr/bitconnect-founder-indicted-global-24-billion-cryptocurrency-scheme" target="_blank" rel="noreferrer noopener">indicted</a> last year for orchestrating the “global Ponzi scheme.” But prosecutors have said he remains at large, and it’s likely that he left his native country India to an as-yet unknown location.

Remember BitConnect? Victims of $2.4B Fraud To Recoup a Mere $17M.

<div id="highlights-block_63601587044c0" class="highlights">
 <ul>
 <li>US Attorney Damian Williams has led several crypto federal complaints</li>
 <li>New York has one of the most comprehensive crypto policies in the country</li>
 </ul>
 
</div>



The US Department of Justice has tapped a new head for its longstanding probe of <a href="https://cms.blockworks.co/us-judge-orders-tether-to-prove-what-backs-usdt/" target="_blank" rel="noreferrer noopener">stablecoin issuer Tether</a>, Bloomberg reported Monday.&nbsp;



US Attorney Damian Williams of the Southern District of New York has taken over the investigation, according to Bloomberg. The DOJ first began investigating the stablecoin issuer for suspected fraud in July 2021.&nbsp;



The impetus for the move is not clear. <a href="https://www.bloomberg.com/news/articles/2022-10-31/tether-bank-fraud-probe-gets-fresh-look-by-justice-department" target="_blank" rel="noreferrer noopener">Bloomberg</a> reported the Southern District’s deep experience with technological monetary fraud and evolving digital assets know-how likely play a role.&nbsp;



Though federal regulations — or state, for that matter — are scant at the moment and a work in progress, Tether and related stablecoin heavyweights have faced skepticism from industry participants around their reserves. Tether, for its part, has increased its disclosures and said it has moved away from backing its stablecoin with illiquid assets.&nbsp;



The Southern District of New York has become a magnet for crypto cases. Between 2020 and 2021, more than 25% of all federal complaints related to cryptocurrencies were filed in the district, according to <a href="https://www.uscourts.gov/statistics/table/c-3/federal-judicial-caseload-statistics/2021/03/31" target="_blank" rel="noreferrer noopener">federal data</a>.&nbsp;



It would not be Williams’ first legal foray into digital assets. He has been the lead attorney on the <a href="https://cms.blockworks.co/ex-coinbase-employee-accused-of-insider-trading-pleads-not-guilty/" target="_blank" rel="noreferrer noopener">charges against</a> a former Coinbase employee for alleged insider trading <a href="https://www.justice.gov/usao-sdny/pr/three-charged-first-ever-cryptocurrency-insider-trading-tipping-scheme" target="_blank" rel="noreferrer noopener">filed</a> in July.&nbsp;



He also led the investigation into charges against BitMEX employee Gregory Dwyer, who <a href="https://www.justice.gov/usao-sdny/pr/high-ranking-employee-cryptocurrency-exchange-pleads-guilty-bank-secrecy-act-violations" target="_blank" rel="noreferrer noopener">pleaded guilty</a> to bank secrecy act violations in August. Williams was also behind the <a href="https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme" target="_blank" rel="noreferrer noopener">first-ever</a> charges brought against an NFT marketplace employee for alleged insider trading.&nbsp;



“Web3 is not a law-free zone,” Williams said at the time. “Our message with these charges is clear: Fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street. And the Southern District of New York will continue to be relentless in bringing fraudsters to justice, wherever we may find them.”



New York — which handles many patent, bankruptcy and other financial-related investigations at the federal level — is known for having one of the most comprehensive crypto policies in the country. The New York State Department of Financial Services established its stringent regulatory process, BitLicense, in 2015.&nbsp;



By the end of 2016, many crypto companies had halted operations within the state.&nbsp;



“When the New York crypto regulations were first enacted, many crypto businesses found the requirements overly expensive and onerous,” cryptocurrency exchange Gemini wrote in a <a href="https://www.gemini.com/cryptopedia/new-york-cryptocurrency-regulations#section-adoption-and-approval" target="_blank" rel="noreferrer noopener">regulatory report</a>. “This led to what some termed the ‘Great Bitcoin Exodus,’ with companies including Shapeshift and Kraken deciding to stop serving customers in New York.”&nbsp;



The Department of Justice did not immediately return requests for comment.



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Tether Fraud Investigation Gets New Leader: Bloomberg

Ornella Hernandez

<div id="highlights-block_63594d397f388" class="highlights">
 <ul>
 <li>The case fuels debate over whether US tech companies should turn over data held on systems outside the country</li>
 <li>A compliance monitor will ensure Google fulfills its legal obligations</li>
 </ul>
 
</div>



The US Department of Justice and Alphabet Inc.’s Google <a href="https://www.justice.gov/opa/pr/google-enters-stipulated-agreement-improve-legal-process-compliance-program" target="_blank" rel="noreferrer noopener">filed</a> a joint stipulated agreement on Tuesday to close a dispute ongoing since 2016 in California federal court.



US District Judge Richard Seeborg signed the resolution in which Google admitted to a loss of data in response to a 2016 search warrant. The government agency sought data related to a criminal probe into the cryptocurrency exchange BTC-e.



Under the agreement, Google must reform and upgrade the compliance program that handles responses to legal demands such as subpoenas and search warrants.



Google has reportedly already spent over $90 million on additional resources, systems and staffing to improve its legal process compliance program, as stated in the press release.



The tech giant will also be required to bring on an independent compliance professional, serving as an outside third party, to assess Google’s adherence to the agreement and verify the accuracy of its update reports. These reports must be submitted to the government, the Google Compliance Steering Committee and the Audit and Compliance Committee of the Alphabet Board of Directors.



“The warrant underlying this agreement was sought in connection with a significant criminal investigation,” said US Attorney Stephanie Hinds for the Northern District of California, referring to a now defunct BTC-e.



The exchange has been shut down since July 2017, after the arrest of key staff members who were charged with being involved in money laundering schemes. <a href="https://cms.blockworks.co/tag/alexander-Vinnik/" target="_blank" rel="noreferrer noopener">Alexander Vinnik</a>, the alleged Russian operator of BTC-e, was sentenced to a five-year prison term by a Parisian court in June 2021. 



“This agreement will help to ensure that, moving forward, Google will maintain the technical capability and resources necessary to comply with lawful warrants and orders, such as the one at issue in this case, that are critical to federal criminal investigations,” Hinds added.



<h3>A Big Tech dilemma</h3>



The warrant was issued under the Stored Communication Act (SCA) statute that requires tech companies such as Google to disclose customer communications if there is probable cause.



The DOJ claimed that Google failed to turn over data stored outside the United States.



However, when the US Court of Appeals for the Second Circuit ruled in 2017 that foreign-held data couldn’t be reached under the SCA, Google only provided information stored in the United States, according to the DOJ.&nbsp;



The legal battle over the warrant between Google and the government carried into 2018, when Congress clarified the SCA did in fact require US providers to report any data stored abroad.



The Department of Justice said that “in the intervening time, data responsive to the warrant was lost.”



The press release noted that this agreement does not provide the US government with access to Google user data.



Even as Google’s compliance costs are on the rise, its ad revenue has gone the other way, <a href="https://cms.blockworks.co/google-summer-ad-business-falls-after-crypto-winter/" target="_blank" rel="noreferrer noopener">dropping 2% to $7.1 billion in the last quarter</a> as advertisers slashed budgets.



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Google Agrees To Boost Compliance Program in DOJ Legal Battle

Ben Strack

<div id="highlights-block_6324da90fccd9" class="highlights">
 <ul>
 <li>Blockchain analytics provider names chief legal officer</li>
 <li>Creator of crypto-focused team at US Department of Justice is reportedly leaving his post</li>
 </ul>
 
</div>



PolySign subsidiary MG Stover recently appointed several executives to meet the growing demand for its digital asset services. The fund administration firm services hedge funds, private equity funds and venture capital funds.



The hires included <a href="https://www.linkedin.com/in/keepingitpc/" target="_blank" rel="noreferrer noopener">Patrick Clancy</a> as head of digital asset strategy; <a href="https://www.linkedin.com/in/kennybroom/" target="_blank" rel="noreferrer noopener">Kenny Broom</a> as director of venture capital; <a href="https://www.linkedin.com/in/ray-kamrath-67560111/" target="_blank" rel="noreferrer noopener">Ray Kamrath</a> as chief revenue officer; <a href="https://www.linkedin.com/in/nik-rowlston-14a92a28/" target="_blank" rel="noreferrer noopener">Nik Rowlston</a> as head of fund services for Canada; and <a href="https://www.linkedin.com/in/brian-wolf-3665a513/" target="_blank" rel="noreferrer noopener">Brian Wolf</a> as senior vice president of people and culture. 



Clancy and Broom both previously worked at consulting firm Armanino. Clancy was a managing director of digital assets, while Broom was a senior manager who performed financial statement audits of digital asset funds.



Kamrath was most recently Amber Group’s head of institutional prime services and also previously was in foreign exchange trading roles at Jefferies and Goldman Sachs.



Rowlston, who joined the firm to build a team of accountants and investor services professionals in Halifax, was formerly a managing director of fund administration at SS&amp;C.



Wolf comes from Mediaocean, where he was also a senior vice president of people and culture and has worked at Kraken and Northern Trust.



Blockchain analytics provider Elliptic, meanwhile, tapped <a href="https://www.linkedin.com/in/john-melican-91b613a3/" target="_blank" rel="noreferrer noopener">John Melican</a> as its new chief legal officer after the executive had joined the firm in January as chief of external affairs. 



Melican has led teams focused on anti-money laundering, sanctions and anti-corruption compliance at financial institutions, most recently overseeing global financial crimes consulting at Exiger. He has also led compliance functions at American Express, Bear Stearns and Bank of Tokyo-Mitsubishi.



Earlier in his career, Melican was an assistant district attorney in New York focused on money laundering and other financial crimes prosecutions. He also spent time as trial counsel for the New York Stock Exchange.



“The crypto analytics tools that are used in this industry to implement effective and efficient compliance programs, as well as the tools used by governments to regulate and investigate the industry, are essential for ensuring that crypto is a mature and well-regulated part of the global financial system,” Melican said in a statement.



Toposware, the lead developer of open interoperability protocol Topos, recently created its Technology Advisory Council to boost expertise in distributed systems, cryptoeconomics and business.



The first advisers of the unit are <a href="https://cts.businesswire.com/ct/CT?id=smartlink&amp;url=https%3A%2F%2Fwww.linkedin.com%2Fin%2Fraovj%2F&amp;esheet=52856456&amp;newsitemid=20220907005047&amp;lan=en-US&amp;anchor=Vijay+Rao&amp;index=2&amp;md5=fcd2988318b1b39d8ddc247796cbe729" target="_blank" rel="noreferrer noopener">Vijay Rao</a>, director of infrastructure at Meta, and <a href="https://cts.businesswire.com/ct/CT?id=smartlink&amp;url=https%3A%2F%2Fwww.linkedin.com%2Fin%2Fsara-tucci-piergiovanni-1582672%2F%3ForiginalSubdomain%3Dfr&amp;esheet=52856456&amp;newsitemid=20220907005047&amp;lan=en-US&amp;anchor=Sara+Tucci-Piergiovanni&amp;index=3&amp;md5=3bc0f2a9ba3e50fd8ae7c46ba11e5b73" target="_blank" rel="noreferrer noopener">Sara Tucci-Piergiovanni</a>, the head of laboratory and a senior research engineer at CEA List at Paris-Saclay University.



“Blockchain interoperability is a feature increasingly important to make the vision of the future Internet a reality, but it is still a big challenge to address,” Tucci-Piergiovanni said in a statement. “Toposware is working today on very promising ideas, always grounded on solid research, to make inter-chain interactions scalable and secure.”



<a href="https://www.linkedin.com/in/nicholas-mcquaid-b0977a4a/" target="_blank" rel="noreferrer noopener">Nicholas McQuaid</a>, a principal deputy assistant attorney general for the US Department of Justice’s criminal division, is leaving his post, <a href="https://news.bloomberglaw.com/us-law-week/justice-departments-criminal-division-deputy-mcquaid-departing" target="_blank" rel="noreferrer noopener">Bloomberg reported</a>.



McQuaid created and led a team dedicated to investigating and prosecuting crypto-related schemes at the government agency, the outlet reported.&nbsp;



He worked at the White House from April 2013 to January 2017 as a deputy counsel and deputy assistant to the president, according to his LinkedIn profile. He had spent the next few years as a partner at law firm Latham &amp; Watkins.



It is unclear where McQuaid is headed. He did not immediately return a request for comment.



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Latest in Crypto Hiring: Fund Admin Firm Adds Execs To Expand Digital Asset Services

<div id="highlights-block_631af7251aa93" class="highlights">
 <ul>
 <li>Chief Trader pleaded guilty to one count of conspiracy to commit securities fraud</li>
 <li>Founders Emerson Pires and Glavio Goncalves have allegedly fled to their home country, Brazil</li>
 </ul>
 
</div>



A Florida-based head trader of cryptocurrency platform EmpiresX pleaded guilty to an alleged Ponzi scheme that collected $100 million from investors.



28-year-old Joshua David Nicholas admitted to promoting a company-operated trading bot along with co-conspirators, claiming that it used artificial and human intelligence to maximize gains for investors, the Department of Justice (DOJ) said in a <a href="https://www.justice.gov/opa/pr/empiresx-head-trader-pleads-guilty-global-cryptocurrency-investment-fraud-scheme-amassed" target="_blank" rel="noreferrer noopener">statement</a> Thursday.


<div class="wp-block-image">
<figure class="alignright size-full"><img decoding="async" loading="lazy" width="278" height="283" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png" alt="" class="wp-image-30610" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=278 278w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=252 252w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=256 256w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=215 215w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Joshua-David-Nicholas.png?w=50 50w" sizes="(max-width: 278px) 100vw, 278px" /><figcaption>Joshua David Nicholas</figcaption></figure></div>


Prosecutors allege that, instead of providing a profitable service, they rewarded earlier investors with money collected from later investors. EmpiresX also never registered its investment program as an offering with the Securities and Exchange Commission (SEC), nor did it have an exemption to do so, the DOJ said.



Nicholas pleaded guilty to one count of conspiracy to commit securities fraud. He faces a maximum penalty of five years in prison.&nbsp;



The plea follows a <a href="https://www.justice.gov/usao-sdfl/pr/three-men-charged-100-million-cryptocurrency-fraud" target="_blank" rel="noreferrer noopener">June indictment</a>, when DOJ officials charged Nicholas along with the founders of the firm, Emerson Pires and Flavio Goncalves, with conspiracy to commit wire fraud and securities fraud. The latter two were also charged with conspiracy to commit international money laundering.



On the same day as the DOJ’s indictment, the SEC also <a href="https://www.sec.gov/news/press-release/2022-119" target="_blank" rel="noreferrer noopener">charged</a> all three individuals over allegations of luring investors with false claims of 1% daily profits and misappropriating investor money for personal use.



Pires and Goncalves, both Brazilian nationals, have allegedly fled to their home country.


<div class="wp-block-image">
<figure class="aligncenter size-full"><img decoding="async" loading="lazy" width="830" height="450" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png" alt="" class="wp-image-30609" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=830 830w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/09/2022-09-09-Emerson-Pires-and-Flavio-Goncalves.png?w=50 50w" sizes="(max-width: 830px) 100vw, 830px" /><figcaption>Emerson Pires and Flavio Goncalves</figcaption></figure></div>


A sentencing date for Nicholas hasn’t yet been scheduled. Julie Holt, the public defender representing Nicholas, didn’t return Blockworks’ request for comment by press time.



The debate over which cryptocurrencies, and therefore which adjacent businesses, are considered securities currently shrouds the entire industry.



SEC Chair Gary Gensler <a href="https://cms.blockworks.co/gensler-on-board-with-cftc-taking-over-bitcoin-oversight/" target="_blank" rel="noreferrer noopener">said</a> on Thursday that he would support a growing consensus that cryptocurrencies such as bitcoin — which he terms non-security tokens — to be handled by the Commodity Futures Trading Commission, rather than the SEC. Still, he said a majority of crypto tokens are securities that should come under his jurisdiction.



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Bogus Trading Bot Operator Guilty of $100M Fraud

Sebastian Sinclair

<div id="highlights-block_62ff5190fdb38" class="highlights">
 <ul>
 <li>The independent examiner will attempt to peer into the lender’s business practices, as well as the value and type of crypto it holds</li>
 <li>A committee representing Celsius users has publicly objected to the appointment</li>
 </ul>
 
</div>



The US Trustee’s office is seeking the appointment of an independent examiner to investigate crypto lender Celsius’ bankruptcy proceedings.



According to a <a href="https://cases.stretto.com/public/x191/11749/PLEADINGS/1174908182280000000104.pdf" target="_blank" rel="noreferrer noopener">court filing</a> on Wednesday, the Office of the United States Trustee is attempting to address “a lack of transparency” surrounding the lender’s bankruptcy case.



“The addition of social media, in this case, has amplified [Celsius’] transparency issues because there is a lot of information on the internet, but it is not vetted or explained,” the filing reads. “The result has been confusion and anxiety. An examiner can fix this.”



The agency, part of the Department of Justice, is responsible for overseeing the administration of bankruptcy cases and private trustees in the US.&nbsp;



The Celsius Official Committee of Unsecured Creditors&#8217; Twitter account <a href="https://twitter.com/CelsiusUcc/status/1560384563326595073?s=20&amp;t=P9tRz-f413T2X8avIz0-_Q" target="_blank" rel="noreferrer noopener">voiced its concerns</a> Thursday, claiming the appointment of an examiner would “run up millions in costs” for the lender.



“Let <a href="https://twitter.com/CelsiusUcc" target="_blank" rel="noreferrer noopener">@CelsiusUcc</a> do its job for account holders,” the account tweeted, tagging the Department of Justice’s Twitter handle in the process.&nbsp;



Celsius did not immediately return a request for comment.



The committee, formed in late July, represents Celsius users and consists of five individuals and two entities. It submitted its first <a href="https://cms.blockworks.co/celsius-creditor-committee-takes-aim-at-ceo-mashinsky-other-insiders/" target="_blank" rel="noreferrer noopener">official mission statement</a> earlier this month, pledging to put the interests of Celsius’ account holders and unsecured creditors first.



<h3>Trust issues and transparency</h3>



There is no understanding among customers, interested parties and the public relating to the value or type of crypto held by the lender, the office argues. An independent examiner is “necessary” to investigate and report clearly on Celsius’ operations as well as its lending transactions, it said.



“The divergent interests of the various estates, the extreme financial irregularities that have taken place and the extensive mistrust of [Celsius’] customers, all make the appointment of an independent and disinterested examiner in the best interests of creditors, equity security holders, and the bankruptcy estates,” staff at the Trustee’s office wrote in their filing.



The appointment — mandatory for cases exceeding $5 million dollars under US law — would restore public confidence in the integrity of the bankruptcy system by addressing the “inherent distrust” creditors and associate parties have, the court document says.



“Numerous questions” in the New Jersey-based lender’s case also remain unanswered, the office said, including Celsius’ failure to “adequately collateralize” their loans as well as allegations relating to the offering of unregistered securities.



Celsius <a href="https://cms.blockworks.co/celsius-to-file-for-bankruptcy-imminently-report/" target="_blank" rel="noreferrer noopener">filed for Chapter 11 bankruptcy</a> protection in mid-July in a bid to “stabilize” its business following a halt to withdrawals in the month prior where it cited “extreme market conditions” as its reason following a steep decline in cryptocurrency prices, partly fueled by the collapse of Terra.



The lender had resisted calls from its previous lawyers at Akin Gump Strauss Hauer &amp; Feld LLP to file for bankruptcy before conceding on advice from its new counsel, Kirkland &amp; Ellis LLP.



<h3>Prospects for customers to recover funds</h3>



On Sunday, the New Jersey-based firm released its budget over a three-month horizon, reporting that it anticipates its net cash flow would reach more than $137 million in negative territory by the end of October.



Last month, Celsius reported a deficit of <a href="https://cms.blockworks.co/celsius-net-liabilities-surpass-2-8-billion-new-bankruptcy-filing/" target="_blank" rel="noreferrer noopener">$2.84 billion</a> owing to a total of $6.7 billion in token liabilities with roughly $3.8 billion in token assets, including $761 million of its native token CEL.



At its height, Celsius managed around $8 billion in crypto loans with around $11.8 billion in assets for around <a href="https://celsius.network/" target="_blank" rel="noreferrer noopener">1.7 million users</a>.



“The numbers will move around based on what happens in the court, but right now first day declaration looks like something like 50-60 cents on the dollar for a general Earn account,” bankruptcy specialist Thomas Braziel said on <a href="https://youtu.be/pkuLYz1PHKM" target="_blank" rel="noreferrer noopener">a livestream</a> Wednesday.



“I don’t see how they’re ever going to get back to a crypto 100% repay, but I think it’s possible they could do a fiat 100% repay if the market picks up, mining goes well, they get some good bids for parts of the business or the whole business — and you could see some good outcomes,” he said.



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Celsius Bankruptcy Investigated by Independent Examiner

<div id="highlights-block_62fa11710b204" class="highlights">
 <ul>
 <li>Recent regulator actions are the culmination of efforts to bolster authority in the space made in the past year</li>
 <li>Defendants in current case against alleged crypto scheme Forsage could challenge SEC’s jurisdiction, lawyers say</li>
 </ul>
 
</div>



Regulation by enforcement will continue in the absence of concrete crypto legal frameworks, according to industry executives and lawyers, as regulators are seeking to spotlight recent investor protection issues in the space.&nbsp;



Crypto-related cases and enforcement actions have picked up in recent weeks. The SEC most recently charged 11 people for allegedly creating and promoting <a href="https://cms.blockworks.co/sec-charges-11-in-alleged-300m-crypto-pyramid-scheme-forsage/" target="_blank" rel="noreferrer noopener">a fraudulent crypto pyramid and Ponzi scheme, called Forsage</a>, that raised more than $300 million from retail investors.



The regulator, along with the US Department of Justice (DOJ) also <a href="https://cms.blockworks.co/sec-charges-former-coinbase-product-manager-with-insider-trading/" target="_blank" rel="noreferrer noopener">charged a former Coinbase employee</a>, along with his brother and his friend, with insider trading last month. The SEC alleges in the complaint that <a href="https://cms.blockworks.co/qa-the-sec-classified-9-tokens-as-securities-now-what/">nine different crypto tokens are securities</a>.



On June 30, the DOJ charged six people with crypto fraud offenses in cases involving more than $100 million in losses. One was the largest known NFT scheme charged to date, involving an alleged so-called “rug pull” scheme involving the Baller Ape Club NFTs.&nbsp;&nbsp;



Much of the latest enforcement activity has been in the works for a while, according to Ari Redbord, head of government affairs at <a href="https://www.trmlabs.com" target="_blank" rel="noreferrer noopener">TRM Labs</a>.&nbsp;&nbsp;



“These aren’t necessarily new frauds or scams; they’re frauds or scams that are now finding their way through the enforcement system or the criminal justice system,” he said. “It feels very much like a lot is going on right now, but some of it is the culmination of what started six months or a year ago.”&nbsp;



<h3>Regulation by enforcement on a backdrop of regulatory uncertainty</h3>



The SEC renamed its cyber team in the agency’s Division of Enforcement to the Crypto Assets and Cyber Unit, in May. The regulator revealed at the time that it would add 20 people to the team responsible for protecting investors in crypto markets and cyber-related threats, bringing its headcount to 50.



“The SEC has already turned up the heat, and I would expect that heat to continue and possibly get even hotter as the SEC attempts to expand its authority over an industry already inundated with regulatory uncertainty,” said <a href="https://www.linkedin.com/in/adam-pollet-8168073/" target="_blank" rel="noreferrer noopener">Adam Pollet</a>, a partner in Eversheds Sutherland’s securities enforcement and litigation practices.



<a href="https://www.linkedin.com/in/patrick-daugherty-232701b/" target="_blank" rel="noreferrer noopener">Patrick Daugherty</a>, a former SEC lawyer and partner at Foley &amp; Lardner, added: “Fraud cases are easy cases. I expect the SEC to bring easy cases to chalk up easy wins.”



The Department of Justice in February <a href="https://cms.blockworks.co/fbi-doubles-down-on-crypto-crimes-with-new-unit/" target="_blank" rel="noreferrer noopener">named a director for its National Cryptocurrency Enforcement Team</a> — a new unit focused on digital asset seizure and blockchain-based lawbreaking.



<a href="https://www.linkedin.com/in/ari-redbord-4054381b4/" target="_blank" rel="noreferrer noopener">Redbord</a>, who, before TRM Labs, was a US prosecutor and an official at both the DOJ and the US Department of the Treasury, said that recent events such as the collapse of <a href="https://cms.blockworks.co/tag/terra/" target="_blank" rel="noreferrer noopener">Terra’s algorithmic stablecoin UST</a> and the LUNA token have spurred regulators to want to shine a light on consumer protection issues and stability risk in the space.



“It’s difficult to get anything through Congress, so you’re not necessarily going to get any clear legal framework any time soon,” he added.



<blockquote class="wp-block-quote">“You see regulation by enforcement action for better or worse because without clear legal frameworks, regulators are going to sort of interpret their own authorities themselves.”</blockquote>



Though guidelines are fairly clear in the anti-money laundering space, having a clear regulatory framework in place is critical in the securities space, Redbord said.&nbsp;



Unlike the DOJ, which must prove wire fraud, he added, the SEC must also show that the co-conspirators traded on insider information involving securities.



Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., in June <a href="https://cms.blockworks.co/bipartisan-crypto-bill-hits-congress-with-focus-on-cftc-jurisdiction-taxes/" target="_blank" rel="noreferrer noopener">introduced</a> the <a href="https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Responsible%20Financial%20Innovation%20Act%20%5bFinal%5d.pdf" target="_blank" rel="noreferrer noopener">Responsible Financial Innovation Act</a>, which has a section on “securities innovation.”



“That is something that is going to be negotiated and iterated on and discussed for some time,” he said.&nbsp;



<h3>What’s next in the Forsage case?</h3>



Though industry watchers expect the SEC to ramp up enforcement actions within the crypto space, they acknowledged not all cases will be easy.&nbsp;



Forsage, for example, continued to operate despite receiving cease-and-desist actions from the <a href="https://www.sec.gov.ph/pr-2020/sec-issues-cease-and-desist-order-against-forsage/" target="_blank" rel="noreferrer noopener">SEC of the Philippines</a> in September 2020 and the <a href="https://csimt.gov/news/commissioner-downing-orders-forsage-to-cease-and-desist/" target="_blank" rel="noreferrer noopener">Montana Commissioner of Securities and Insurance</a> in March 2021.



The <a href="https://forsage.io" target="_blank" rel="noreferrer noopener">alleged scheme’s website</a>, which was operating at the time the charges were filed, now appears to be shut down.&nbsp;



Founders of Forsage were last known to be living in Russia, the Republic of Georgia and Indonesia. Pollet said the defendants may challenge the jurisdiction of the SEC, to the extent that they surface at all.



The SEC can ask the court to enter a temporary restraining order or an asset freeze against operators of an alleged fraudulent scheme to prevent further dissipation of investor funds while the litigation proceeds, he added. But it does not appear the regulator has done so, Pollet said, noting that it could be because the relevant assets reside outside the US.



An SEC spokesperson declined to comment beyond <a href="https://www.sec.gov/litigation/complaints/2022/comp-pr2022-134.pdf">the complaint</a>.



Redbord said getting Forsage co-founders Mikail Sergeev and Sergey Maslakov— last known to be living in Russia — into a US courtroom would be especially difficult.



Sergeev, along with another defendant in the SEC case, Lola Ferrari, moved on to a new and similarly suspect project, dubbed Express Smart Game, while another Forsage creator, Vladimir “Lado” Okhotnikov, funneled traffic from the Forsage YouTube channel to his new (alleged) scam, Meta Force, the complaint notes.



“It becomes something of a sort of name and shame,” Redbord said, “where you want to ensure that these individuals — and Forsage in particular — are known out there as entities not to do business with.”



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Crypto Industry Eyes SEC’s ‘Regulation by Enforcement’ Ramp Up

<div id="highlights-block_62da89dc71a08" class="highlights">
 <ul>
 <li>Crater falsely promoted My Big Coin as a virtual currency backed by gold, oil and other valuable assets, the DOJ said</li>
 <li>He claimed to have a partnership with MasterCard and that the coins could be exchanged for fiat money</li>
 </ul>
 
</div>



The founder of obsolete cryptocurrency business My Big Coin was convicted Thursday on charges he made false claims to investors by marketing and selling a fraudulent virtual currency that netted him $6 million.



Randall Crater, a 51-year-old resident of East Hampton, New York, offered virtual payment services through a fake digital asset which he promoted to investors through fabrications about its nature and value, the US Department of Justice said in an <a href="https://www.justice.gov/opa/pr/my-big-coin-founder-convicted-cryptocurrency-fraud-scheme" target="_blank" rel="noreferrer noopener">announcement</a> Thursday.



Crater and his associates claimed “My Big Coin” was backed by $300 million in gold, oil and other valuable assets, the DOJ said. He also claimed to have a partnership with payments giant <a href="https://cms.blockworks.co/tag/mastercard/" target="_blank" rel="noreferrer noopener">Mastercard</a> and that the currencies could easily be exchanged for fiat money or other virtual assets. 



<blockquote class="wp-block-quote">“In reality, Coins were not backed by gold or other valuable assets, did not have a partnership with MasterCard and were not readily transferable,” the DOJ statement said.</blockquote>



He is believed to have spent hundreds of thousands of investor funds on antiques, artwork and jewelry. Crater has now been convicted of four counts of wire fraud and three counts of money laundering. His sentencing is scheduled for Oct. 27.



Thursday’s charge emerged from a 2018 lawsuit by the <a href="https://cms.blockworks.co/tag/cftc/" target="_blank" rel="noreferrer noopener">Commodity Futures Trading Commission</a>, which led to one of the first court rulings that decided that virtual currencies <a href="https://www.cftc.gov/PressRoom/PressReleases/7820-18" target="_blank" rel="noreferrer noopener">meet the definition of a commodity</a>. Virtual currency frauds have been subject to regulation by several agencies. 



The CFTC had sued the company, CEO John Roche, Crater and three others on accusations that they participated in a fraudulent scheme. 



Crater was arrested in Florida in February 2019 on charges he took part in a $6 million scheme to defraud people who wanted to buy My Big Coin, <a href="https://www.reuters.com/article/us-crypto-currency-mybigcoin-idUSKCN1QG2HY" target="_blank" rel="noreferrer noopener">Reuters</a> reported.&nbsp;



Scott Lopez from Lawson &amp; Weitzen, Crater’s lawyer, did not return Blockworks’ request for comment by press time.



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DOJ Charges Virtual Asset Firm Founder With $6M Investor Fraud

<div id="highlights-block_621ff5f176270" class="highlights">
 <ul>
 <li>The Department of Justice claims the case should be dismissed because the refund has been issued</li>
 <li>The couple said in February they would refuse the tax refund offered</li>
 </ul>
 
</div>



The Department of Justice has urged a judge to dismiss a Nashville couple’s bid to take a dispute over taxes related to unsold Tezos tokens to court.



In December 2021, the IRS <a href="https://cms.blockworks.co/in-win-for-crypto-stakers-irs-offers-refund-on-untraded-token-rewards/" target="_blank" rel="noreferrer noopener">offered to refund</a> Joshua and Jessica Jarrett taxes paid on rewards gained — but not redeemed — from staking on the Tezos blockchain, the couple said. The Jarretts said they would refuse the refund of $3,793, plus $208.03 in interest, opting instead to try for a court ruling in their favor.



Industry participants have closely watched the outcome of the case, which has broad implications for the financing of crypto staking.



“The Jarretts&#8217; suggestion that they can refuse a full refund to seek a ruling about the taxability of tezos reward tokens has no merit,” the Department of Justice wrote in a Friday court <a href="https://drive.google.com/file/d/1ueIdPt6gT3DNtSQf56dDo-m2PpeAweWt/view" target="_blank" rel="noreferrer noopener">filing</a>.



The Jarretts requested the refund in May 2021 for income tax paid in 2019 for the receipt of 8,876 Tezos tokens, according to a <a href="https://www.scribd.com/document/509435727/Jarrett-Compl?secret_password=LFIAqtDNw9i5loKXdjB4" target="_blank" rel="noreferrer noopener">complaint</a> filed on May 26, 2021. 



At the time of the refusal, industry group Proof of Stake Alliance (POSA), a partial funder of the initial lawsuit, said that in turning down the reimbursement, the Jarretts set the stage for a wide-sweeping legal precedent.



“POSA, and the broad coalition it represents, applauds Jarrett’s decision to continue his lawsuit,” POSA said in a February <a href="https://www.prnewswire.com/news-releases/irs-waves-white-flag-in-lawsuit-over-taxability-of-cryptocurrency-staking-rewards-301474899.html" target="_blank" rel="noreferrer noopener">statement</a>. “He has rejected the IRS’s offer of a refund, opening up the possibility of a court ruling that will give him, and millions of other taxpayers in the same position, the ability to confidently plan for the future.”



The refund and dismissal — if it happens — still does not set a precedent in terms of tax clarity around staking more broadly, digital assets accountants say.&nbsp;



“[It’s] too early to say when staking income should be taxed or if you can rely on this case,” said Shehan Chandrasekera, and head of tax at crypto accounting firm Coin Tracker. “I&#8217;d default to the conservative approach [taxed at the time of receipt] until we get clear guidance.”



A spokesperson for the Jarretts and a representative for the Department of Justice did not immediately respond to a request for comment.



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DOJ Moves To Dismiss Tezos Staking Tax Case in Closely Watched Crypto Dispute

<div id="highlights-block_6218113695fc1" class="highlights">
 <ul>
 <li>Arthur Hayes and Ben Delo have been ordered to pay $10 million each in addition to their sentences</li>
 <li>Greg Dwyer, BitMEX&#8217;s first official employee and former head of business development, will face a criminal trial on similar charges in October</li>
 </ul>
 
</div>



Two co-founders of the controversial crypto derivatives exchange BitMEX pled guilty to charges of violating the US Bank Secrecy Act (BSA). Had the case gone to trial, the pair would have been staring down a potential maximum penalty of five years in prison, but now face a sentence of six to 12 months each.



According to a <a href="https://www.justice.gov/usao-sdny/pr/founders-cryptocurrency-exchange-plead-guilty-bank-secrecy-act-violations" target="_blank" rel="noreferrer noopener">press release</a> by the Department of Justice (DOJ) on Thursday, Arthur Hayes and Ben Delo have pleaded guilty for their involvement in &#8220;willfully failing&#8221; to implement and maintain anti-money laundering (AML) measures at BitMEX.



As part of the plea agreement, the co-founders have been ordered to pay $10 million each as a criminal fine that represents financial gains stemming from their offense.



The Southern District Court of New York heard of how the exchange&#8217;s founders, including co-defendant Sam Reed, allegedly failed to establish a &#8220;program for verifying the identity of BitMEX’s customers.&#8221; Reed has not yet formally pleaded guilty to charges, and as such, his involvement has only been alleged by US prosecutors.



Australian Greg Dwyer, BitMEX&#8217;s first official employee and former head of business development, will face a criminal trial on similar charges in October following a delayed proceeding originally scheduled for March.



From September 2015 through to September 2020, the DOJ alleges that BitMEX&#8217;s was &#8220;in effect, a money-laundering platform&#8221; as a result of the exchange&#8217;s failure to implement AML and Know-Your-Customer programs.



Under the country&#8217;s BSA, US law requires financial institutions to monitor, detect and report money-laundering activity to government agencies in a bid to curb related crime. Documentation and transaction histories are generally required from financial institutions to US agencies whenever they suspect clients of transacting illicitly above $10,000.



&#8220;Hayes and&#8230;Delo built a company designed to flout those obligations; they willfully failed to implement and maintain even basic anti-money laundering policies,&#8221; US Attorney Damian Williams said in the release. &#8220;They allowed BitMEX to operate as a platform in the shadows of the financial markets.&#8221;



The guilty pleas partly conclude a long-drawn-out saga where Reed, Dwyer and Hayes fled in 2020 following criminal charges. Hayes, who was located in Singapore shortly after, negotiated extradition back to the US, as did Dwyer. Delo, a Hong Kong resident, <a href="https://www.vanityfair.com/news/2021/02/the-rise-and-fall-of-bitcoin-billionaire-arthur-hayes" target="_blank" rel="noreferrer noopener">was in the U.K.</a> at the time of the indictment and later <a href="https://www.bloomberg.com/news/articles/2022-02-24/bitmex-founders-hayes-and-delo-plead-guilty-in-us-prosecution" target="_blank" rel="noreferrer noopener">voluntarily appeared</a> in the US to face the charges. Reed was arrested in Massachusetts in October 2020. He was&nbsp;later released&nbsp;on an appearance bond of $5 million.



Correction — March 4, 2022: Hayes and Delo face a maximum of one year in prison. Delo was indicted while outside the US; he did not flee.



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<hr class="wp-block-separator">

BitMEX Founders Hayes, Delo Plead Guilty to Violating US Bank Secrecy Act

Jacquelyn Melinek

<div id="highlights-block_6202a9e31b921" class="highlights">
 <ul>
 <li>Both crimes carry a total maximum sentence of 25 years in prison</li>
 <li>It’s the department’s largest financial seizure ever, Deputy Attorney General Lisa Monaco said in a statement</li>
 </ul>
 
</div>



The US government has recovered the majority of the cryptocurrency stolen during the 2016 Bitfinex hack and arrested a married couple allegedly linked to it.



In 2016, hackers stole 119,755 bitcoin, worth approximately $5.3 billion at the current price, from the cryptocurrency exchange. The <a href="https://www.justice.gov/opa/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency" target="_blank" rel="noreferrer noopener">Department of Justice said</a> Tuesday that law enforcement had recouped more than $3.6 billion so far. 



This is the department’s largest financial seizure ever, Deputy Attorney General Lisa Monaco said in a statement. “[Today’s arrests] show that cryptocurrency is not a safe haven for criminals,” Monaco said.



New York residents Ilya Lichtenstein, 34, and Heather Morgan, 31, were arrested for conspiracy to launder cryptocurrency and money that was stolen during the hack six years ago. They were also charged with conspiracy to defraud the US.



Both crimes can carry a total maximum sentence of 25 years in prison. They are scheduled to make their first appearances in a Manhattan federal court Tuesday afternoon.



<blockquote class="wp-block-quote">“In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions,” Monaco said. “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.”</blockquote>



Lichtenstein and Morgan allegedly conspired to launder 119,754 bitcoins that were stolen from the platform after a hacker breached the systems and made over 2,000 unauthorized transactions.&nbsp;



“Those unauthorized transactions sent the stolen bitcoin to a digital wallet under Lichtenstein’s control,” according to court documents. “Over the last five years, approximately 25,000 of those stolen bitcoin were transferred out of Lichtenstein’s wallet via a complicated money laundering process that ended with some of the stolen funds being deposited into financial accounts controlled by Lichtenstein and Morgan.”



The remainder of the stolen funds, about 94,000 bitcoins, remain in the wallet used in the hack.



At the time of the theft, bitcoin was trading at $612, valuing the heist at $73.39 million — less than one 70th of its current worth.



Bitfinex <a href="http://12:37https://support.bitfinex.com/hc/en-us/articles/4417401349657-2016-Security-Breach-Bitcoin-Recovery-Frequently-Asked-Questions-FAQ-" target="_blank" rel="noreferrer noopener">said</a> it hoped to work with the U.S. Department of Justice to retrieve the stolen bitcoin. &#8220;We will provide further updates on our efforts to obtain a return of the stolen bitcoin as and when those updates are available,&#8221; the company said.



Prior to this, global law enforcement and other private sectors helped Bitfinex recover about 27.66 and 6.5 bitcoin in February 2019 and December 2021, respectively.



The complaint alleges the couple used a handful of laundering techniques, including using fictitious identities to set up online accounts and utilizing computer programs to automate transactions.



“Financial crime strikes at the core of our national and economic security,” Acting Executive Associate Director Steve Francis of Homeland Security Investigations said in a statement. “With a hack of this magnitude, public and private sector collaboration is crucial to ensure continued consumer confidence in our financial system.”



Crypto platforms in general have been struck by a number of exploits, including several that took place this year.&nbsp;



Earlier this month, hackers stole <a href="https://cms.blockworks.co/in-second-largest-defi-hack-ever-blockchain-bridge-loses-320m-ether/" target="_blank" rel="noreferrer noopener">120 ether, or $320 million</a>, from the Wormhole protocol in the <a href="https://defiyield.app/rekt-database" target="_blank" rel="noreferrer noopener">second-largest</a> DeFi hack to date.&nbsp;



At the end of January, DeFi (decentralized finance) protocol Qubit Finance lost millions of dollars to a hack after 206,809 Binance Coin, roughly <a href="https://cms.blockworks.co/defi-protocol-qubit-finance-loses-80m-in-hack/" target="_blank" rel="noreferrer noopener">$80 million</a>, were stolen.



The DOJ was not available for comment on Tuesday.



This story was updated on Feb. 9, 2022, at 12:50pm ET, with additional details on the stolen funds and Bitfinex&#8217;s efforts to recover them.



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Couple Arrested as Government Recovers $3.6B in Stolen Bitcoin

Sam Reynolds

<div id="highlights-block_60ff1dffeb963" class="highlights">
 <ul>
 <li>Department of Justice probe said to be in regards to Tether’s banking relationships in its early days </li>
 <li>Tether execs said in a statement that it routinely has an open dialogue with law enforcement agencies and its business as usual</li>
 </ul>
 
</div>



The market has shaken off the notion that reports of a possible criminal probe into Tether by the US Department of Justice will have a material impact on the stablecoin as its price remains stable, according to data from <a href="https://www.coingecko.com/en/coins/tether" target="_blank" rel="noreferrer noopener">CoinGecko</a>. 



Tether occasionally gets knocked off its one-to-one peg with the US dollar when material events transpire in the digital assets market.



<a href="https://cms.blockworks.co/crypto-crash-when-musk-the-environment-tax-day-and-china-collide/" target="_blank" rel="noreferrer noopener">During May’s crypto crash</a>, Tether briefly went down to 87 cents on misguided fears that China would totally block access to digital assets. Because of China’s strict capital controls regarding CNY-USD conversion, Tether is used by everyone from crypto traders to cross-border businessmen in-country as a reliable way to move capital around the world. But <a href="https://www.bloomberg.com/news/articles/2021-07-26/tether-executives-said-to-face-criminal-probe-into-bank-fraud" target="_blank" rel="noreferrer noopener">allegations from Bloomberg</a> that a criminal probe is underway don’t seem to be enough to sway the market’s perception of the token’s integrity as it&#8217;s currently trading between just under $1 on some exchanges, and at a slight premium on others.



For its part, Tether dismisses the report as clickbait based on years-old allegations.&nbsp;



“Today, Bloomberg published an article based on unnamed sources and years-old allegations, patently designed to generate clicks. This article follows a pattern of repackaging stale claims as ‘news.’ The continued efforts to discredit Tether will not change our determination to remain leaders in the community,” the company said in a post.&nbsp;&nbsp;



Tether said that it “routinely has open dialogue with law enforcement agencies, including the US Department of Justice, as part of our commitment to cooperation, transparency, and accountability.”



<h3>Tether’s nomadic bank accounts</h3>



Tether currently banks with Bahamas-based bank Deltec, but at one time it had accounts at institutions all over the world — from Quebec’s Bank of Montreal to Puerto Rico’s Noble Bank, and a collection of local banks on the island of Taiwan.&nbsp;



Interestingly, the alleged probe of Tether doesn’t focus on whether there were sufficient cash reserves to account for the tokens in circulation; that’s been dealt with already in a <a href="https://cms.blockworks.co/tethers-settlement-with-the-nyag-a-positive-for-industry/" target="_blank" rel="noreferrer noopener">settlement</a> with the New York Attorney General.



<a href="https://www.bnnbloomberg.ca/crypto-mystery-clues-suggest-tether-has-the-billions-it-promised-1.1184903" target="_blank" rel="noreferrer noopener">Reports</a> from 2018 all point to (mostly) enough funds being available no matter their nomadism to handle tokens in circulation. The question is, did the banks know whom they were dealing with?



Particularly, Tether’s large US dollar holdings it had at one time in Taiwan raise some questions. With comparatively high taxes and a strict, conservative, financial regulator, Taiwan isn’t known to be an offshore hub in the same way that Hong Kong and Singapore are. Its banks are considered to be slow moving and archaic compared to their peers like HSBC and DBS. Foreigners and locals alike call banking a “<a href="https://www.foreignersintaiwan.com/blog-370963385326684/taiwan-banking-faq" target="_blank" rel="noreferrer noopener">frustrating experience</a>” given the paperwork required for a mundane transaction, and a lack of modern e-banking options. 



But Tether deemed the island’s banks as robust enough to be home to over $50 million of its deposits between 2016-2018, according to <a href="https://tether.to/wp-content/uploads/2017/09/Tether-Ltd-20170331.pdf" target="_blank" rel="noreferrer noopener">published audits</a>, and later which peaked at $430 million between Tether and its parent Bitfinex as revealed in a <a href="https://www.docdroid.net/jx1WRHX/bitfinex-vs-wells-fargo-pdf#page=6" target="_blank" rel="noreferrer noopener">lawsuit</a> the two companies filed against Wells Fargo — the correspondent bank that acted as a go-between from Taiwan to the US — when it cut off their access.     



Nick Chang, a former General Manager at Taipei-based exchange MaiCoin, said that while many banks in Taiwan are not crypto friendly they are highly regulated and take a high standard as far as compliance goes, thoroughly thinking through any new business relationship.



Chang also notes that Taiwan’s banking regulator, the Financial and Supervisory Commission, had “relatively vague instructions on crypto AML compliance because the existing one was focused on traditional banking.”



While it might seem surprising that these relatively unknown and behind-the-times banks were home to part of Tether’s fortune this all might seem weird, it&#8217;s also not entirely out of the realm of possibility either.&nbsp; “When I first learned about Tether operation team banking with Taiwan banks, I was pretty surprised,” he told Blockworks. “Then I met more financial industry people and realized that some of these Taiwan banks and companies just quietly do impactful things. I don&#8217;t know whether these banks or companies realize it or not.”



For its part the DoJ is being tight-lipped about what it&#8217;s investigating, but Tether’s statement about “years-old allegations” point to its prior relationships with foreign banks likely being of interest. However, it also could be much ado about nothing as well.