A Twisted Tale: BTC-e, AlphaBay and Crypto-Crime

Updated on

The arrest of Alexander Vinnik over a Bitcoin money laundering scheme serves as a reminder to investors, purchasers, and programmers in the cryptocurrency world that the criminal element is always in lockstep with progress and is often further ahead.

Mr. Vinnik, 38, is a central figure in the virtual currency exchange BTC-e, listed as one of the oldest running Bitcoin exchanges in the market. The arrest, carried out in Greece, was in response to a U.S. warrant in relation to his alleged running of a money laundering scheme that had converted $4 billion in illicit cash into virtual currency in what can be best described as an alleged huge Bitcoin money laundering attempt. He will now be extradited to the U.S.

BTC-e had been reporting “technical problems” in recent days, and its Twitter feed had reflected ongoing risks and “unplanned maintenance” in English and Russian throughout July.

The presence of money launderers, hackers and thieves is not new to any area of internet-related business, but Mr. Vinnik’s arrest might also shine a light on one of Bitcoin’s most infamous chapters: the collapse of Mount Gox.

According to Bitcoin security specialist firm WizSecurity, in an official statement, “Vinnik is our chief suspect for involvement in the Mt. Gox theft (or the laundering of the proceeds thereof). This is the result of years of patient work, and these findings were surely independently uncovered by other investigators as well. Everyone who worked on the case have patiently kept quiet while forwarding findings to law enforcement, so as not to tip suspects off and to maximize the chances of arrests.” The former CEO of Mt. Gox, Mark Karpeles, who is still under investigation in Japan, has long maintained his innocence.

Mt. Gox may go down in history as the first of the really big bad news stories about cryptocurrency. After years of writings and discussions about the sophistication of blockchain and of digital currency, the outright theft from, and collapse of its most famous repository shattered its image. Consumers and non-technically minded people have regarded the adoption of “cyber money” with suspicion from the start, and every failure simply compounds the image problem at a critical point in its history.

The arrest of Mr. Vinnik comes on the heels of many recent high-profile failures in the cryptocurrency marketplace, including the CoinDash ICO failure, numerous other thefts from Ethereum and Bitcoin based organizations and an overall slide in value, related both to these failures as well as insecurity over forks, governance issues, and ideological splits.

These activities and the resulting decline in currency performance point to an ongoing reality for new technologies: the ability to come up with a new and efficient technologies will always fall prey to human factors, including criminality, corruption, and incompetence.

The evolution of cryptocurrency processes such as purchase, sale, storage, scalability, and security have not yet reached levels of absolute infallibility, if such a thing is even possible. One need only look at traditional forms of money and transactions to know that fraud, theft, and error are more the norm than the exception.

But with cryptocurrency, the crimes can go unnoticed longer, precisely because its existence is based on a lack of central authority and accountability, paired with daily innovation that continually rewrites its own rules. The regulations and procedures that traditional banks used to identify and thwart money laundering and organized crime simply do not exist in any cohesive way in the crypto world, as demonstrated by this massive Bitcoin money laundering scam .

Bad guys also never go away. They simply come back, bigger, stronger, smarter, and in larger numbers. Evidence of this can be seen in the Department of Justice closure of AlphaBay, a Dark Web marketplace that, according to Acting Director of the FBI Andrew McCabe, was “10 times the size of Silk Road.”  The site went down, and its alleged mastermind, Canadian Alexandre Cazes, was found dead in a Thailand jail cell that same week. Many suspected the site had been scuttled, with the founders escaping with an untold amount of Bitcoin. Although Cazes himself met a gruesome end, supposedly by hanging suicide, the teams of people and the data they had acquired still remains, as does the demand for its services.

Although the money is virtual, it still has value, and $4 billion is a large number. When thieves make off with even a comparatively paltry sum, like $7 million, as was the case with the CoinDash ICO, this becomes a great deal of money, when converted back to U.S. dollars and stored offshore – or kept as virtual currency and used for trading and investment schemes.

The arrest of Mr. Vinnik over the alleged Bitcoin money laundering fraud delivers a few stern warnings. Firstly, there are many more of him out there, operating companies and services that skirt the edges of the law, yet are fully able to exploit weaknesses in both code and human nature. Second, the fact that the crimes took place in the world of virtual currency guarantee less public scrutiny than a brazen daylight bank robber would. It takes a long time for the world and its courts to catch up to the actions of cyber-criminals, as this week’s SEC ruling regarding ICOs and token sales as securities shows. Third, the ongoing evolution of cryptocurrency, with its schisms and rewrites (see the creation of Ethereum Classic, for example) ensure a level of chaos that make policing difficult and covering tracks easy.

In the case of Alexandre Cazes of AlphaBay, a great deal of evidence was found on his computers, which were open in “Admin” status at the time of his arrest. In the case of Mr. Vinnik, little is being said about how he was found, other than it was the result of a “tip-off.” This has a certain irony to it, in that it points to a permanent Achilles heel in organized crime that directly reflects the one they themselves use: that human beings are the biggest security risks in the digital world. Corruption, greed and incompetence might serve to level the playing field back in favor of the good guys – eventually.

Leave a Comment