Money Rehab with Nicole Lapin - Bitcoin Thieves Finale: Brilliant or Bozos?

Episode Date: February 26, 2022

Last month, married couple Ilya Lichtenstein and Heather Morgan were arrested and charged with conspiracy to launder just under 120,000 bitcoins that were stolen in a 2016 hack. This is the story our Bitcoin Thieves deep dive has been building toward… it’s time to talk about Razzlekhan. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. And this is the moment we've all been waiting for.

And the story our deep dive has been building toward. It's time to talk about RazzleCon. Last month, married couple Ilya Lichtenstein and Heather Morgan were arrested and charged with conspiracy to launder just under 120,000 bitcoins that were stolen in a 2016 hack. According to Techspot, federal agents were able to access the wallet containing the stolen bitcoin after decrypting a file saved to Ilya's cloud storage account that contained 2,000 wallet addresses and their private keys. Blockchain analysis confirmed that nearly all of the addresses were directly linked to the hack. I know that sounds a little matrixy, but what this basically means was that federal agents were able to find the couple's digital crypto trail and seize the stolen Bitcoin. Federal agents also found documents that the couple had secured new

Russian and Ukrainian identities and were mapping out where to build a new life. I have to say, that is pretty compelling evidence. I mean, who lines up new identities just for the fun of it? Both Ilya and Heather were arrested. Heather ponied up $3 million as bail, but Ilya was denied bail and is in jail awaiting trial. It is a juicy, juicy story, especially because of some of the more bizarre elements, like, well, Heather herself. Specifically, her rapper alter ego she calls Razzlecon. Heather, or Razzlecon, creates the most cringey music you may have ever heard. But cringey as it might be, it also does contain some clues about who she is. She does have a song that starts, This song is for the entrepreneurs and hackers.

Pretty on the nose, am I right? But these bizarre elements distract from the bigger question. Cryptocurrency was created out of a desire for a currency that could be more secure than the dollar. So how can someone steal this ultra secure currency? And truthfully, it's not well understood how this 2016 hack happened, which is surprising given how big of a deal it was at the time. The Bitcoin was stolen when the cryptocurrency exchange Bitfinex was hacked. Vice pulled a quote from an IRS investigator who explained the hack this way. Quote, a hacker breached Bitfinex's security systems and infiltrated its infrastructure.

End quote. Which isn't very helpful. Yes, obviously a hacker breached the security systems. But how? Bitfinex's security system was created collaboratively between them and a company called BitGo. Because of the way the security system was set up, BitGo leadership would have to sign off on large withdrawals. And 120,000 Bitcoin was definitely a big enough withdrawal that someone internally would have

to sign off. So how did this happen? Some people allege that the hack was an inside job. And oddly, Heather Morgan, yes, Ms. Razzlecon herself, published an article quoting the BitGo, chief compliance officer on cybersecurity before the hack. It's unclear whether she interviewed him or she pulled quotes from a prior interview, but the fact that one of the people potentially involved in this hack wrote an article about cybersecurity and quoted someone in leadership at the company that was hacked, that is fishy. The folks who think the hack was an inside job speculate that the hack was connected to the

later discovery of shortfalls at Bitfinex's sister operation, Tether. That theory is somewhat supported by how Bitfinex handled the fallout of the hack. Following the hack, Bitfinex reduced the accounts of every customer by more than 30% to compensate for the loss. Basically, than 30% to compensate for the loss, basically taxing its users for the hack they had nothing to do with. In exchange, the customers got recovery rights tokens, essentially a new coin they call BFX, which they would be able to redeem for dollars once the company was in better financial standing. At this point, all of those tokens have been redeemed. But as Coindesk points out, it's important to note that the BFX token was denominated and paid back in US dollars, not Bitcoin. Bitcoin roughly doubled in price between the hack and the repayment.

And so Bitfinex users lost money even after their BFX tokens were redeemed. The people who believe in this inside job theory think that the account cuts and then the BFX token thing may have just helped smooth over financial trouble at the exchange. But the fact of the matter is, we don't know how the hack happened. It's sure to be the main topic, of course, in Ilya and Heather's case. It will be very interesting to see what unfolds during the trial. But the larger questions here are what are most consequential. On Monday's episode, I told you that cryptocurrency was created to address three problems with our traditional currency system. Government's

control of monetary policy, security, and distrust of big banks. Over the course of the last week, we've taken a deep dive that helps us understand to what extent cryptocurrency has been able to improve upon these three things. Is crypto's volatility worth its decentralized system? Does that make it better than the government-regulated dollar? And does the high transaction fees make the crypto network that different from a big bank? And lastly, as this recent story certainly shows us, crypto is not the airtight, secure system the founders may have hoped for.

For today's tip, you can take straight to the bank. With cryptocurrency, like any other financial concept, it's important to think critically. Even though crypto is marked as this super safe way of transacting money, that's not entirely true. So take precautions to protect yourself. If you have crypto, make sure you're keeping it in a wallet and that you understand how the wallet works. And don't put all your financial aidings in one crypto basket. Diversify your assets so that in the unlikely scenario that something happens to your crypto exchange, you don't lose it all. Money Rehab is a production of iHe radio i'm your host nicole lappin our producers are morgan lavoie and mike coscarelli executive producers are nikki etor and will pearson our mascots are

penny and mimsy huge thanks to og money rehab team michelle lands for her development work katherine law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.