Problems with the NFT “Insider Trading” Case

Last month the U.S. Attorney’s office for the Southern District of New York announced, with considerable fanfare, that it had brought charges in the “first ever digital asset insider trading scheme.” Prosecutors charged the defendant, Nathaniel Chastain, with using inside information to purchase NFTs that were about to be featured on his employer’s digital marketplace and then resell them at a substantial profit.

The Department of Justice may have been looking to make a splash and send a signal that it is cracking down on crime related to crypto assets. But despite the flashy headlines, this is not an insider trading case. In fact, it’s not clear it should be a criminal case at all.

Picture of different cryptocurrencies

Facts of the Chastain Case

Non-Fungible Tokens, or “NFTs,” are digital assets that are stored on a blockchain, a digital, centralized ledger of transactions. NFTs are unique digital identifier codes that are associated with a particular digital object, such as a piece of digital art. Although digital images can be reproduced, only the owner of the NFT can be said to own the original digital work, which is considered more valuable – sort of like the difference between owning an original Renoir and a print. The Bored Ape Yacht Club, which features thousands of NFTs of cartoon ape characters, is a well-known example.

Chastain worked at OpenSea, the largest online marketplace for the purchase and sale of NFTs. Beginning in May 2021, OpenSea regularly featured particular NFTs at the top of its website’s homepage. Once featured on OpenSea, an NFT usually would rapidly increase in value due to a sudden rise in popularity and demand.

According to the indictment, Chastain was in charge of selecting which NFTs would be featured on OpenSea’s homepage. As OpenSea’s employee, he had an obligation to keep this company information confidential and not exploit it for his own use. But between June and September 2021 he allegedly used this advance knowledge to purchase dozens of NFTs shortly before they were featured on OpenSea. He then sold them at a profit after they were featured and their value rose.

This was not a big-dollar case. The indictment doesn’t specify how much money was involved (which itself is a bit unusual). But in court when he was arraigned, his attorneys claimed that Chastain made only about $65,000 from the scheme.

An interesting aspect of this case is that it appears others in the Crypto-NFT community were the first to figure out what was going on and flag it publicly:

This apparently led OpenSea to fire Chastain and ultimately led to his prosecution. This was possible because what happens on a blockchain is basically public, if you know where to look. (That may have implications for the money laundering charge, as discussed below.)

The Definition of Insider Trading

The very first line of the indictment claims, “This case concerns insider trading in Non-Fungible Tokens or ‘NFTs’ on OpenSea , the largest online marketplace for the purchase and sale of NFTs.” But this is not an insider trading case – at least, not as that term has been used for decades.

Insider trading involves using material, nonpublic information to buy or sell securities in violation of a duty of trust and confidence. Classic or traditional insider trading involves a corporate officer using nonpublic company information to trade shares in her own company, in violation of the duty she owes to her shareholders. Under the “misappropriation theory,” someone who is not a corporate insider but who uses nonpublic information to trade securities in violation of some duty of trust and confidence may also be guilty of insider trading. That duty may arise from trusted relationships such as that between attorney and client or between an employee and an employer.

The Chastain indictment uses some misappropriation theory language that makes the case sound like insider trading. It alleges that Chastain “misappropriated information from his employer, OpenSea, in violation of a duty of trust and confidence that he owed the company, and then used that information to buy and sell the NFTs.”

In an insider trading case the “victim” is the investing public; it’s really a crime against the securities markets. In a true misappropriation theory case the crime is not the breach of a duty (to an employer, in this case) – it’s using the information obtained via that breach to then buy or sell securities. But in this case the government has alleged that the victim is Chastain’s employer, OpenSea. They have charged Chastain with defrauding OpenSea by taking confidential company information and converting it to his own use.

The bull sculpture on Wall Street

NFTs Are Not Securities – and This Isn’t Insider Trading

Insider trading is a species of securities fraud. It’s a crime against the public securities market that damages investor confidence in those markets. As such, it is typically charged as a violation of the Securities Exchange Act of 1934, specifically 15 U.S.C. § 78j and Rule 10b-5 of the Securities Exchange Commission, which prohibit using any manipulative or deceptive device in connection with the purchase or sale of a security. Insider trading may also be charged under a more recent statute, 18 U.S.C. 1348, which also applies to fraud in connection with publicly-traded securities.

The first requirement of these charges is that the fraud was in connection with the purchase or sale of a “security.” But NFTs generally are not considered securities for purposes of these laws.

NFTs obviously are not publicly-listed securities traded on stock exchanges. But other kinds of investments may also qualify as securities under some circumstances. To determine whether an investment is a security, courts apply what is known as the Howey test, named for an early Supreme Court case. Under that test, characteristics of a security include a common enterprise or horizontal connection among various investors whose fortunes are tied to each other, and a vertical connection between investors and the promoters of the investment, with investors depending on profits that will be derived from the efforts of others. Think of the different shareholders investing in a company as the classic example.

Some crypto assets such as cryptocurrencies could potentially qualify as securities — that is currently a matter of considerable debate and uncertainty. But NFTs are more like collectibles or artwork. The closest analogy is buying a painting. If I buy an individual work of art, I am not involved in a common enterprise with any other investors. I may hope that it will increase in value, but I’m not depending on the work of others to make that happen. So when I buy my original Renoir, I am not purchasing a “security” under the Howey test.

Whether the NFTs sold on OpenSea qualify as securities might be a legal issue fought out in some future case (although I think the answer is pretty clear), but it’s not going to be an issue in the Chastain case. For despite calling this an “insider trading” prosecution, the government has not alleged that the NFTs Chastain bought and sold were securities.

If we are not talking about securities, then securities fraud charges — including insider trading — are not an option. And indeed, prosecutors have not employed the statutes that are used to prosecute insider trading. They did not charge Chastain with violating the Securities Exchange Act or other securities fraud statutes. Instead, they charged him with wire fraud.

A final indication that this is not a securities fraud case is the absence of the Securities Exchange Commission. Typically a securities fraud prosecution would involve investigators and agents from the SEC. Here the case is being pursued only by the FBI, working with the DOJ prosecutors.

In short – this is not an insider trading case, despite the headlines and indictment language to the contrary.

Carpenter v. United States

So if this is not an insider trading case, what kind of case is it? Prosecutors have charged Chastain with defrauding his employer, OpenSea, by taking its confidential business information and using that information for his own benefit. The lead charge is good old wire fraud, 18 U.S.C. § 1343 – the prosecutor’s best friend.

There’s no allegation that Chastain harmed any of those who purchased the NFTs after he bought them, or that he owed them any kind of duty. And there’s no evidence that they were actually harmed, since Chastain’s actions didn’t drive up the price and presumably they would have bought the featured NFT regardless of who owned it.

At a court hearing, prosecutors alleged that the landmark 1987 Supreme Court case of Carpenter v. United States supports the wire fraud charge. Carpenter involved a reporter at the Wall Street Journal named R. Foster Winans who wrote a column called “Heard on the Street.” Because of the column’s influence, the stock price of companies he discussed could be expected to rise or fall in response to its publication. Winans entered into a scheme with some stockbrokers to buy and sell stocks before the column was published, using his advance knowledge of the column’s contents. They then profited from changes in the stock prices after the column was published.

Unlike Chastain, Winans actually was prosecuted for insider trading under the misappropriation theory, with the government alleging he had misappropriated the column information in violation of his duty to the Journal. That conviction was upheld by the Second Circuit Court of Appeals, but the Supreme Court evenly divided on the question. When that happens the judgment is affirmed but the case has no value as precedent. (The Supreme Court did not fully embrace the misappropriation theory until ten years later in United States v. O’Hagan.)

But as an alternative theory, prosecutors charged Winans with mail and wire fraud. They alleged he had defrauded the Journal of its intangible business property, in the form of the content of the upcoming column. Unlike with the securities fraud charge, in the mail fraud charge the victim was Winans’ employer, the Journal. His use of the information in the upcoming columns, prosecutors argued, deprived the Journal of its exclusive right to its confidential business property. The Supreme Court upheld this basis of criminal liability.

Image of US Supreme Court, which decided the Bob McDonnell case
United States Supreme Court

Were OpenSea’s Business Plans Property?

On its face, the Chastain case does sound a lot like Carpenter. But prosecutors may face one significant hurdle: proving that the information used by Chastain amounted to “property” for purposes of wire fraud.

The Supreme Court has repeatedly held that fraud requires that the defendant deprived the victim of property. Economic or business interests that do not constitute property cannot form the basis of a fraud charge. The Court’s trend for the past few decades — ever since Carpenter, in fact — has been to limit the reach of the federal fraud statutes by narrowly interpreting this property requirement.

The most recent example was the Court’s 2020 decision in the “Bridgegate” case, Kelly v. United States. There the Court unanimously rejected the government’s theory that the defendants had defrauded the New York/New Jersey Port Authority through a scheme to close traffic lanes on the George Washington Bridge. The Court held that the Port Authority’s power to control access to the bridge, the power of “allocation, exclusion, and control” – although undoubtedly valuable — was not a property interest for purposes of federal fraud laws.

In Carpenter, Winans had argued that the content of the upcoming column was not a property interest and was too intangible to form the basis of a fraud charge. But the Court rejected that claim, holding that the contents of the column amounted to intangible business property, akin to intellectual property such as patents or copyrights.

Prosecutors will argue that Chastain likewise misappropriated the intangible business property of OpenSea. But it’s not clear that argument will fly. A good definition of “property” is a bundle of rights in something that can be possessed, exclusively enjoyed, and transferred to others. That was true of the contents of the “Heard on the Street” column: the Journal owned it exclusively, controlled it, and could have transferred it — by selling the content to another publication, for example. The contents of the column were thus intangible property akin to other intangibles such as patents, which can be exclusively enjoyed or licensed or sold to others.

It’s not clear this is true of OpenSea’s plans for its homepage. The internal plan regarding what NFT to feature is not an asset that could be sold or licensed to someone else. That information may be valuable to OpenSea and it may wish to keep it confidential, but that does not mean it is a property interest for purposes of federal fraud laws. Again, misuse of such information might support an insider trading charge — if we were talking about trading securities. But I’d argue that misuse of internal company plans does not amount to property fraud.

To prove wire fraud, prosecutors will have to prove not merely that Chastain improperly used OpenSea’s private business information, but that he deprived the company of property. I think that will be an uphill battle.

The “Loss of Control” Theory

It’s possible prosecutors intend to rely on the “loss of control” theory to argue that Chastain engaged in fraud. That theory holds that a defendant engages in fraud when he deprives a victim of potentially valuable information that would help the victim decide how to use his assets. The government’s theory might be that Chastain, by deceiving OpenSea and concealing his misuse of its business information, deprived OpenSea of valuable information it otherwise would have use to decide how to control its website, or its business in general.

This “loss of control” theory has been controversial for years. The Second Circuit (where the Southern District of New York is located) has repeatedly approved it, while other circuit courts have disagreed and held it does not amount to fraud. On the final day of its most recent term, the Supreme Court finally granted review in a case, Ciminelli v. United States, where the question presented is whether “loss of control” is a valid fraud theory. In line with the trend over recent decades, I expect the Supreme Court is going to say no. As a result, even if the prosecutors in Chastain were hoping to rely on the theory, that may become impossible.

Picture of $100 bills on a clothesline

The Money Laundering Charge

Prosecutors also charged Chastain with one count of money laundering for allegedly using anonymous OpenSea accounts, rather than the account in his own name, to conceal his purchase and sale of various NFTs. The indictment is pretty vague on this point, but it’s not clear that the money laundering charge will hold up either.

I’ve discussed this issue in connection with other prosecutions, including the Varsity Blues case. Just because you use secret bank accounts or take other sneaky steps to try to conceal what you are doing, that does not constitute money laundering. Money laundering requires that the transactions be in criminal proceeds – funds generated by another criminal activity. In other words, in order to launder money, it needs to be “dirty” in the first place. If Chastain purchased NFTs using his salary or other “clean funds,” that would not be money laundering just because he used an anonymous OpenSea account to do it.

Another crypto-related wrinkle in the money laundering charge is that transactions on a blockchain are public – indeed, that is one of blockchain’s central features. That explains how others in the crypto community were so easily able to see what Chastain was doing and raise questions about it. Given that, does using other blockchain accounts really amount to an effort to conceal transactions sufficient to support a money laundering charge?

It may be that prosecutors will allege that once Chastain bought and sold the first NFTs, all subsequent purchases and sales used the allegedly criminal proceeds of those early transactions. But that would still leave the issue of whether there was really any concealment, given the public nature of blockchain transactions. Again, the indictment is not very specific so it remains to be seen – but as of now, I have my doubts about the money laundering charge as well.

Employee Misconduct Is Not Necessarily Fraud

The indictment alleges that Chastain had a duty to OpenSea to keep the information about featured NFTs confidential and that he violated that duty. But that merely establishes that he was a bad employee. Employee misconduct is not necessarily criminal. As another court of appeals once held, the federal fraud statutes are not supposed to serve as a “draconian personnel regulation.” Chastain may have deserved to lose his job and to be treated with disdain in the crypto community. That doesn’t mean he deserves to go to jail.

I’ll be watching to see how this case unfolds. But if federal prosecutors were trying to show that they are cracking down on crypto-related crime, they picked a pretty lame showcase.

Update: After this post was written, on July 21 the same U.S. Attorney’s Office announced the first “insider trading” case involving cryptocurrency. Prosecutors charged a former Coinbase employee, Ishan Wahi, and two co-defendants with trading on information about which tokens would be listed on Coinbase’s exchange. This case has the same issues discussed above: although prosecutors called it “insider trading,” it really isn’t. Prosecutors have charged wire fraud, not securities fraud, and will face the same hurdles. In Wahi, the SEC has also filed a civil complaint, alleging that the tokens traded do qualify as “securities.” But in the criminal case, just as in Chastain, prosecutors have not charged securities fraud and have not alleged that the cryptocurrencies were securities.

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The Bonnie and Clyde of Crypto Laundering

Last week the Department of Justice arrested a husband and wife, Ilya “Dutch” Lichtenstein and Heather Morgan, and charged them in a massive cryptocurrency money laundering case. The government alleges the defendants were involved in laundering Bitcoin that was stolen in a 2016 hack of Bitfinex, a virtual currency exchange. At the time, the stolen Bitcoin was worth about $71 million; today it would be worth about $4.5 billion. DOJ also announced that law enforcement had seized about $3.6 billion of the stolen cryptocurrency, the largest financial seizure in the Department’s history.

Last October Deputy Attorney General Lisa Monaco announced the formation of the National Cryptocurrency Enforcement Team to strengthen DOJ’s ability to pursue and disrupt criminal activity in the crypto markets, including money laundering. This case is significant evidence of DOJ’s growing ability to trace illegal activities that use blockchain technology. Those who thought crypto markets and blockchain provide a safe haven for criminal activity may need to think again.

These defendants are not charged with the Bitfinex hack, only with the subsequent laundering of a portion of the stolen Bitcoin. Whether they were involved in the actual hack, and whether there are others involved in the attempted laundering, are just a couple of the questions left unanswered by the court filings thus far. It will be interesting to watch this one unfold.

Lichtenstein and Morgan
Lichtenstein and Morgan

Facts of the Case

Lichtenstein, 34, is a citizen of both Russia and the United States. He works as an entrepreneur and technology investor; one of his early companies was supported by the prestigious start-up funder Y-combinator. His wife Morgan, 31, is a U.S. citizen. She apparently wears many hats, promoting herself as an economist, entrepreneur, writer, rapper, artist, and social-media influencer. In a nice bit of irony, she once wrote an article for Forbes magazine about how to protect your business from cyber-criminals. At the time of their arrest the couple were living in Manhattan.

Bitfinex is a large virtual currency exchange, or VCE – a business that allows customers to buy, sell, and trade cryptocurrencies. In 2016, a hacker breached Bitfinex’s system and ultimately stole nearly 120,000 Bitcoin. The stolen Bitcoin were transferred to a digital wallet – basically a secure online account —  that, at least at the time of his arrest, was under Lichtenstein’s control. Starting in 2017, about 25,000 of the stolen Bitcoin were then transferred out of that wallet in a series of complicated transactions, with some of it ultimately ending up in accounts controlled by the defendants.

The criminal complaint alleges the defendants used a variety of methods to move the cryptocurrency around and ultimately have it end up under their control while trying to conceal its origins. These techniques included using computer programs to engage in thousands of transactions between multiple accounts; depositing and then withdrawing the funds at a variety of different VCEs and “dark web” markets; using accounts opened in the name of businesses and fictitious people; converting the Bitcoin to other cryptocurrencies that provide additional anonymity; and splitting large transactions into many smaller ones. Ultimately, according to the complaint, law enforcement traced the stolen funds through thousands of transactions to over a dozen different VCE accounts controlled by the defendants.

The complaint also recounts how on several occasions VCEs the defendants were using questioned them about the source of their funds, pursuant to various “know your customer” (KYC) and anti-money laundering (AML) obligations. The defendants allegedly lied, claiming the funds were the result of their legitimate investment and business activities or, in Morgan’s case, that the Bitcoin was a gift from her husband. On a few occasions, when the defendants could not provide satisfactory answers or when the true owners of accounts involved in the scheme could not be verified, the VCEs froze those accounts. This allowed law enforcement to later seize the funds, and likely directed their attention to these defendants.

In January of 2022, law enforcement officers used a search warrant to obtain access to Lichtenstein’s cloud storage account. They recovered an encrypted document that contained a list of 2,000 virtual currency addresses (basically online account numbers), along with the private keys to unlock those accounts. Virtually all of those accounts ended up being linked to the 2016 Bitfinex hack. In particular, the list included the information required to access the original wallet where the stolen Bitcoin was moved when the hack first took place. This allowed the government to seize that wallet and recover the $3.6 billion in Bitcoin that still remained there. The list also included accounts that different VCEs had frozen and that law enforcement has linked to the 2016 hack, with a notation “frozen” next to them.

The Charges

The complaint charges the defendants with one count of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h), and one count of conspiracy to defraud the United States, in violation of 18 U.S.C. § 371.  The money laundering charge carries a maximum penalty of twenty years in prison, and the 371 conspiracy charge carries a maximum penalty of five years.

These are just the charges in the complaint to support the arrest warrant. Once the case is indicted, it’s likely prosecutors will add additional charges.

The government chose to arrest the defendants based on a complaint, rather than waiting until the case was indicted and issuing arrest warrants at that time. That was likely due to a desire to have the defendants detained as soon as possible to ensure they did not flee the country. Under the Speedy Trial Act, the government will now have thirty days from the date of arrest to obtain an indictment.

Money Laundering Basics

I’ve written about the basics of money laundering before, including posts here and here. The crime takes different forms. But the activity alleged in this case is heartland money laundering: taking “dirty” money and trying to clean it up so you can spend it without arousing suspicion. The blockchain technology is relatively new, but the basic laundering techniques are familiar.

(And as my students will attest, I can’t talk about the basics of money laundering without linking to the classic explanation by noted expert Saul Goodman.)

This kind of laundering charge requires the government to prove four elements:

1) The defendant conducted a financial transaction;

2) The defendant knew that the property involved was proceeds of criminal activity, or “dirty money”;

3) The property being laundered was in fact proceeds of a “Specified Unlawful Activity” (which includes a long list of federal crimes); and

4) The defendant knew the transaction was designed, in whole or in part, to conceal the nature, location, source, ownership, or control of the illegal proceeds.

In this case, the various transfers of Bitcoin and other cryptocurrencies through different accounts would constitute financial transactions. It appears that, by tracing the transactions back through the blockchain, the government can prove that the Bitcoin involved in at least some of those transactions was in fact taken in the Bitfinex hack. That would make it proceeds of an SUA, in this case wire fraud or the computer fraud and abuse act. That takes care of elements one and three. This case is likely to hinge, as so many do, on the evidence of the defendant’s knowledge – elements two and four.

The nature of the transactions would be substantial circumstantial evidence of an intent to conceal the nature, origin, and ownership of the proceeds. Just as when traditional money launderers run their funds through multiple bank accounts in different countries owned by shell corporations, the unnecessarily complicated transactions demonstrate a desire to make it difficult to determine where the funds originated. There’s generally no legitimate reason for such convoluted transactions, and so the very fact that the defendant engages in them is circumstantial evidence of intent to conceal.

The one element where the complaint is a bit light is the evidence that these defendants knew the Bitcoin in question was criminal proceeds. The complaint doesn’t allege they were involved in the initial hack, which would of course give them the requisite knowledge. It says the stolen Bitcoin ended up in a wallet ultimately controlled by Lichtenstein, but doesn’t specify exactly how that happened. When it comes to Morgan in particular, the evidence of her knowledge is actually quite thin. She may be able to defend by basically blaming everything on her husband.

The government is going to have to prove the defendants knew they were dealing with stolen Bitcoin. Once again, the convoluted nature of the transactions themselves can be circumstantial evidence of that knowledge. And clearly they knew the Bitcoin did not just magically appear in their accounts. Their lies to various currency exchanges about the origin of the crypto would be further circumstantial evidence of their knowledge that the money was dirty. And if necessary the government can rely on willful blindness to argue that the defendants deliberately closed their eyes to the fact that the Bitcoin in question was criminal proceeds.

The Conspiracy to Defraud the United States

The second crime charged in the complaint is conspiracy to defraud the United States in violation of 18 U.S.C. § 371. There’s no allegation of a monetary loss to the United States, which would be required for a traditional fraud. But this charge is based on the legal doctrine that one can conspire to defraud the United States by conspiring to impair, obstruct, or defeat the government’s lawful functions. This is the theory that was used, for example, to charge the Russians who conspired to interfere with the 2016 presidential election through social media and other methods – they were charged with conspiring to defeat the lawful functions of DOJ, the State Department, and the Federal Election Commission.

The theory here is that by lying to various virtual currency exchanges, opening accounts in fake names, and through their other laundering activities, the defendants impeded the lawful functions of the Treasury Department to monitor and maintain the integrity of the nation’s financial system and combat criminal activity. Bringing this charge strikes me as a little odd, because it is basically redundant of the money laundering charge – all money laundering, by definition, is designed to defeat those lawful government functions. I’m not clear why the government thought it needed to add this charge.

I’ll be watching to see if prosecutors expand on this theory once the case is indicted, or if the charge ends up getting dropped.

Protect your Passwords!

One surprising aspect of this case is how the government finally cracked it open. When announcing the charges, the government rightly trumpeted its impressive ability to trace thousands of complex transactions on the blockchain. But their big break in the case came from an old-fashioned source: a screw-up by the defendant. A search warrant of Lichtenstein’s cloud storage account discovered his spreadsheet listing all the crypto account addresses and private keys. That was what ultimately allowed the government to link the defendants to most of these accounts, including the one that still held $3.6 billion of the stolen Bitcoin.

This document was a classic “smoking gun” and finding it was a lucky break for the government. Even I, with my limited Boomer-era knowledge of crypto and blockchain technology, know that you never leave your wallet and key information in a cloud document that someone else might be able to hack. This is sort of the digital equivalent of the masked bank robber who hands the teller a stick-up note written on the back of one of his own business cards.

Okay, true, the file was encrypted, so it’s not quite that bad. But still, for someone as tech-savvy as Lichtenstein, this can only be considered a serious security breach and a real bone-headed move – one that will end up being very costly for him and his wife.

The Crypto Launderer’s Dilemma

Deputy Attorney General Monaco, when announcing the arrests, highlighted another important aspect of this case. The VCEs the defendants used in their alleged laundering activities are financial institutions subject to federal regulations, including AML and KYC rules. The defendants could move cryptocurrency around freely on the dark web and between different unhosted wallets, but ultimately if they wanted to cash out and convert it to dollars or other more readily-usable currencies, they had to deal with one of these regulated VCEs. And it was those VCEs, seeing to comply with AML and KYC rules, that led to some of the accounts being frozen and ultimately led law enforcement to the defendants’ door. As Monaco noted, if the government and reputable financial institutions work together, they can defeat a lot of attempted laundering activity.

Despite the new technology, therefore, these defendants still faced the classic money launderer’s dilemma: you can just sit on your money, but what fun is that? If you want to actually spend and enjoy it, at some point your activity will be detected. Indeed, this is the entire point of the crime of money laundering: trying to figure out a way to do that without attracting attention. Even with the new cryptocurrency technologies, for now, at least, this problem remains for the potential launderer — at least unless and until a lot more online merchants start accepting cryptocurrency as payment.

One of the flowcharts from the criminal complaint showing the path of the proceeds

Things to Watch

There are several interesting things I’ll be keeping an eye on as this case progresses.

Were they involved in the hack? 

The complaint doesn’t allege these defendants were involved in the initial hack that stole the Bitcoin from Bitfinex. It will be interesting to see when more blanks get filled in about the connection between these defendants and the hack itself, and how Lichtenstein ended up getting access to the wallet with the stolen Bitcoin.

One relevant detail is that the hack took place in 2016, which is now outside the five-year statute of limitations. Whoever was involved in that hack – whether it was these defendants or someone else – it may no longer be possible to charge them with that offense.

Why so slow? 

I’m curious why so much of the Bitcoin remained in the original wallet to which it was first transferred, allowing the government to seize back $3.6 billion of it. If the defendants were really aggressively laundering all of the funds, it seems like they could have spread much more of it around into different accounts over the past six years.

The headlines you’ve seen may claim the couple is charged with laundering $4.6 billion in Bitcoin, but the amount they are actually accused of laundering is only a fraction of that. That they may have laundered less than 20% of the stolen Bitcoin is kind of curious. It makes me wonder whether something else was going on – were they working for someone else? Were they authorized to transfer only small portions at a time, perhaps in payment for other services?  There has to be more to this part of the story.

Where Did the Money Go?

Typically in a case like this, you might expect to see the government alleging all of the flashy, expensive things the defendants purchased with their laundered funds – the boats, the art, the fancy cars and homes. There is very little of that in this complaint. There are some references to Lichtenstein using some of the Bitcoin to buy gold and NFTs (non-fungible tokens, a very trendy kind of digital art), but there are few specifics.

The most detailed allegations of where the money went are almost comical: the complaint describe how the defendants used some of the accounts funded with stolen Bitcoin to purchase gift cards for Walmart, Uber, and Play Station worth a few hundred dollars. This is hardly “Wolf of Wall Street” stuff.

According to court papers, there are still hundreds of millions in the stolen Bitcoin that are unaccounted for. Will we learn where it is? Do these defendants have access? The government claims they do – part of the reason prosecutors wanted them detained prior to trial is their fear that, with access to those millions, the defendants might flee the country.

Connecting More Dots

The complaint does a painstaking job of demonstrating that at least some of the crypto stolen in the initial hack ended up in accounts controlled by these defendants. It provides a lot less detail on how that actually happened and who made some of the various transfers. I’ll be watching for the indictment and future court developments to shore up the government’s allegations on this point, including whether any others were involved.

Warren Beatty and Faye Dunaway in 1967’s “Bonnie And Clyde”

Conclusion

This will be an interesting case to watch. I’m struck by the fact that, despite the new technologies involved, the challenges for the aspiring money launderer – and for the government in proving allegations of money laundering — remain largely the same. New wine in old bottles, or something like that.

In the meantime, there’s a Netflix series about the couple already in the works — because of course there is.

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