Today, Explained - Bitcoin Bonnie and Clyde

Episode Date: February 17, 2022

A tech investor and his rapper wife were busted for a multi-billion dollar bitcoin heist. They couldn’t really spend any of the money. This episode was produced by Victoria Chamberlin edited by Matt Collette, engineered by Paul Mounsey, fact-checked by Laura Bullard and hosted by Sean Rameswaram. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. Warning. Today's show is about the Bonnie and Clyde of Bitcoin. Bonnie has a bit of a potty mouth. Listener discretion is advised. My name is Devlin Barrett. I cover the FBI and Justice Department for The Washington Post.

So on February 8th, a pretty amazing arrest happened of a couple in New York in their 30s arrested on charges of trying to launder $4.5 billion worth of Bitcoin. Today, the Department of Justice has dealt a major blow to cyber criminals looking to exploit cryptocurrency. The Justice Department says that's the largest seizure they've ever done. The Department of Justice has seized over $3.6 billion worth of that stolen cryptocurrency. Largest ever, like bigger than an Al Capone, comparatively, relatively bigger than a Bernie Madoff, anything like that. Madoff wasn't chump change, but this is just an astronomical amount of money in the form of Bitcoin. It's funny, though, because Al Capone, Bernie Madoff became household names. I don't know if you could find an American who could name the two people who got arrested for

this $4.5 billion scheme here. Who are they? A 34-year-old man named Ilya Lichtenstein. He is essentially a tech entrepreneur. He's had, you know, a fairly observable career in the world of tech and startups. We help the little scrappy startups compete with the big incumbents. And his wife, named Heather Morgan, Heather Morgan is 31, started some of her own businesses in that space. I am a serial software entrepreneur, an investor, a copywriter for more than a decade, a former economist. But I think what was sort of more eye-popping about his wife's background is that she also is some sort of aspiring rapper.

Do you ever have people in your life who just suck? Well, this song's about them. Bitch, you suck like a vacuum cleaner. Well, this song's about them. It's an amazing couple of characters to be at the center of the biggest seizure in U.S. Justice Department history. What's her nom de plume, you know? What's her rapper pseudonym? I believe she goes by Razzlecon. Razzlecon. She refers to herself as the Crocodile of Wall Street.

What does that mean? I, boy, you know, I guess, I guess the wolf was already taken. I've been a rich man and I have been a poor man and I choose rich every fucking time. His public profile seems to be a little more straightforward. He has both U.S. and Russian citizenship. He describes himself as basically an angel investor. Her sort of more official work is a little different. She started a company that she calls Salesfolk, which describes itself as a cold email marketing company.

So if you want to be successful in today's world, whether you're in sales or not, you need to know how to build relationships online as well as offline through the power of email outreach. She postures the company as advising clients on how to make more successful cold emails to people. I think most of us would call that spamming. One of the things that's interesting about them is they have a very extensive online life. It's a little strange to see that according to the feds, these folks were involved in trying to launder just a massive amount of Bitcoin and being, you know, allegedly some of the biggest criminals the Justice Department has ever caught. How do this angel investor tech entrepreneur and his rapper wife spam email marketer end up seizing $4.5 billion of Bitcoin? How does that happen exactly? So far, the government has not accused them of the actual theft. But it's a very interesting criminal complaint that was filed against them because it seems to suggest that from the moment this Bitcoin was stolen from a cryptocurrency exchange called Bitfinex in 2016.

This money was essentially under the control of Lichtenstein and Morgan pretty much from the moment it was taken. So they don't know if they took it, but they certainly received it. The government is very confident they can prove that these two tried to launder the money. Okay. I think what they're not saying is if they think they can prove that these two actually stole it. Huh. It's the kind of theft that really could only happen in the modern world, which means they

basically went into Bitfinex and they were able to hack their way into creating 2,000 separate unauthorized transactions. Meaning they basically took a lot of bytes out of other people's accounts. They were able to manipulate other people's accounts and send Bitcoin wherever they wanted it to go. And through those 2,000 different transactions, the hackers, whoever the hackers may be, the hackers were able to take off close to 120,000 Bitcoin. One of the amazing parts of this whole story, right, is that at the time in 2016 when this is done, 120,000 Bitcoin was worth roughly $71 million.

But because Bitcoin and cryptocurrency in general has been exploding in value in the years since, that 71 million of Bitcoin is now worth about $4.5 billion. And the government just grabbed $3.6 billion of that. The prosecutors and investigators from the Justice Department, IRS criminal investigation, Homeland Security investigations, and the FBI followed the stolen money on its complex journey through a labyrinth of virtual currency exchanges and wallets based here and abroad. And that's a huge sum of money in itself. There will be some really interesting decisions that you have to make in terms of the government

has said they will give that out to the people from whom it was taken. But that's a process that has to go through the court system. So people are going to have to come forward and say, well, this was taken from me and I want my Bitcoin back. So do we know how Ilya and his wife, Razalkhan, get their hands on the money? Some of this stuff has to be, you to be sort of aired out in court. What the government alleges is that they have controlled the accounts that hold this money for years. They may have had some role in the actual theft and hacking of it, but the government isn't accusing them of that. I think from the government's point of view, from prosecutors' point of view, from the IRS's point of view, and the FBI's point of view, they just look at it as, well, we have enough evidence to prove that they tried to launder

this money. They controlled it and they tried to launder it, and we can prove that. There will likely be an indictment, a formal indictment that comes out of this investigation. It'll be interesting to see if the DOJ adds additional charges in that indictment. I mean, what do you do with that kind of money when you're holding it and laundering it? Potentially, allegedly. The government charges that part of what this couple were doing was they were trying to cover up the actual original source of the money being stolen

by just moving it, hopping it from account to account to account. And the government hasn't alleged that they actually spent much of it at all. The charging document that's filed now basically says they bought a $500 Walmart gift card, they spent some money on PlayStation, they spent some money on Hotels.com and Uber. So with, sorry, with $4.5 billion, they lived like a, maybe like an upper middle class American. Exactly. That's the whole point of Bitcoin, right?

Is that there's this ledger that's tracking everything and it's constantly changing. And it's one of the real ironies, I think, of this case. Someone stole so much money that it was almost unusable. It may be a little like stealing the Mona Lisa. The first time you try to sell it, everyone's going to know what you're up to. It may be in some ways unspendable money. Thank you. back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the end of every month. And now you can get $250 when you join Ramp.

You can go to ramp.com slash explained, ramp.com slash explained, R-A-M-P dot com slash explained. Cards issued by Sutton Bank, member FDIC. Terms and conditions apply. BetMGM, authorized gaming partner of the NBA, has your back all season long. From tip-off to the final buzzer, you're always taken care of with a sportsbook born in Vegas. That's a feeling you can only get with BetMGM.

And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM. Download the app today and discover why BetMGM is your basketball home for the season. Raise your game to the next level this year with BetMGM, a sportsbook worth a slam dunk and authorized gaming partner of the NBA. BetMGM.com for terms and conditions. Must be 19 years of age or older to wager. Ontario only. Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge.

BetMGM operates pursuant to an operating agreement with iGaming Ontario. What's it like? Want to be in prison? No. Armed robbery. It ain't like anything. I knew you'd have a a place, you faker. Devlin, it sounds like this crime was ultimately historic and huge, but kind of dumb.

Like someone did something here that was literally traceable. They left like a trail, a very literal trail online. Is that fair? Dumb may be a little harsh only because I think everyone's learning how Bitcoin really works, how cryptocurrency really works. It's a learning curve for everyone. And it's a learning curve for criminals. It's a learning curve for law enforcement. And, you know, that's true of any new technology that comes around. But I think what you see in this case in particular is it shows you that this is a learning curve that involves potentially billions and billions of dollars. But the government wasn't really ultimately caught flat-footed here.

How did they trace this crime? They don't say exactly how they got onto this couple, but there's a really interesting hint dropped in the court papers. When the government seized a dark web marketplace in 2017 that was called AlphaBay. This is the largest dark market web place takedown in world history. Most of this activity was in illegal drugs, pouring fuel on the fire of the national drug epidemic. AlphaBay was basically a place where, according to the government, people used cryptocurrency to buy drugs, guns, and fake IDs, essentially. And it was a place that sort of built itself as you can spend crypto here and it won't be traceable like the rest of crypto is. Taking down Alphabay, they were able to see some of the transactions that this couple were making as they tried to move and launder and hide

and use the money stolen from Bitfinex. And just to be clear, they don't outright say, you know, the takedown of Alphabay led to these arrests. But if you put the dots together, they seem to all point to that. So they're willing to sort of show their hand a little bit? Yeah, and that's part of the cat and mouse game of cops and robbers, to be honest. Every case requires the government usually to say a little bit about how they cracked it. This is a really interesting moment, I think, in the law enforcement and criminal contest around cryptocurrency and

Bitcoin, because a lot of criminals, I think, are going to look at this case and think, oh, this could be bad for us down the road, because the government has clearly figured out how to do something here. Because for a long time, law enforcement feared that it couldn't follow these kind of transactions. And I think this case proves that they can. How is it different as far as we know than the way the DOJ or FBI typically investigates financial crimes? Pre-crypto and frankly, pre-internet, a lot of financial crime investigations started because someone picked up the phone and called the FBI.

Someone, a human being said something to an investigator like, you should really look at this or that. And sometimes it was the victim of a crime, like if it's a fraud. Sometimes it was someone who worked alongside someone who was committing fraud. Here, there's a really interesting dynamic that I think points to how future crimes involving crypto are going to be solved, which is the investigators and prosecutors ran a kind of software called clustering software, pulls out similar transactions and says, these transactions seem to be related to each other. You might look at these as possibly involving money laundering or some other crime. And so early in this investigation, what happened was the government went to a judge

seeking approval for searches of this couple's accounts. And they basically said, look, the clustering software we use suggests that the users of these accounts are the people who are moving the money that was stolen back in 2016. And the judge spent a lot of time chewing on that and basically said that this computer program is a confidential source in another form. And that's really something new and different. The government has used different types of software to help them solve different types of crimes before. But I think this is really a big moment in terms of how software is used as a tip, essentially, to point to possible financial crimes. And in this case, the tip leads to this tech investor, rapper, spammer in New York City? What happens when it leads to, you know, some dingy warehouse in Moscow? That's a big problem with cybercrime in general.

What FBI agents and others say all the time is how frustrating it is that a lot of their evidence trails lead to places where they can't make arrests, where local authorities won't help them. It's a particular problem in a different way regarding crypto because, you know, a lot of crypto is used by people who do ransomware. And part of the reason the Justice Department is spending so much more time and energy learning how to trace cryptocurrency transactions is that ransomware is out of control in some parts of the economy. And, you know, if they can harness this technology, it might go a long way to reducing the problem of ransomware. The challenge is, frankly, that a lot of the folks who are doing that live in places that do not cooperate with

U.S. law enforcement. Right. In which case, they'll sort of be powerless? Powerless up to a point. You know, what U.S. officials always like to say is, we have a long memory and long arms, meaning you, you know, ransomware criminal may think you have gotten away with it. And you may think we don't know who you are, but we do know who you are. And if you ever take a vacation to Thailand, just use a random example, but it actually happens fairly often, we're going to have you arrested, and then we're going to have you extradited, and then you're going to be in a US prison. So that's the hope that law enforcement brings to these types of investigations. But you know, not everyone vacations in Thailand. And smart criminals know you shouldn't probably travel to places that have

extradition treaties with the United States. You know, I heard once that after 9-11, the government dedicated so much of its law enforcement and intelligence agencies to terrorism that it became a really good time to commit a financial crime. Is there some kind of shift going on within the law enforcement apparatus in the United States right now with crypto, where so much attention's moving to crypto that it's becoming a really good time to commit a different kind of crime? I would say two things. One, it is true that there is a significant concern among current and former federal law enforcement officials that the post 9-11 era had a debilitating effect on the FBI and the DOJ

and their ability to investigate and prosecute white collar crime. What's interesting about the sort of the crypto era, we may be in sort of the first generation of cryptocurrency crime. And I think in that era, the FBI and Justice Department have two challenges. One, they're not necessarily as good as they used to be at pursuing financial crimes. And two, they have to pursue it in this digital landscape that they are still learning. It's a big score. Any criminal would look at that and be like, well, that's the biggest score that you could ever get and not be able to spend. A $500 Walmart gift card may await you. And that's evidence against them, right? You could argue that even that Walmart $500 gift card

was a bad idea. Brutal. Just a brutal payoff. It's tough out there. Tough out there. It's like the worst heist movie ever because once they get the money, they go to Walmart and buy a gift card. I'm curious as a reporter. I'm sort of waiting to figure out, like, did they get that Walmart card because they actually needed or wanted to spend something or were they sort of testing the system? If it's a test, it failed, right? But either way, it was $500.

All of your tradecraft and all of your cleverness and all of the tricks you use to get away with something all look brilliant until the moment the handcuffs come on you. And then it all looks really dumb because it didn't work and because they saw you. So if you're a spy who's leaving something under a rock, if the FBI is already sitting there behind a bush with a camera, you look pretty dumb. But if they're not sitting there behind a bush with a camera, you're a genius. You can read Devlin Barrett's reporting on the Bonnie and Clyde of Bitcoin over at the Washington Post. I'm Sean Ramos from our episode was produced by Victoria Chamberlain, edited by Matthew Collette, engineered by Paul Mounsey, and fact-checked by Laura Bullard.

We used music by Razzlecon. The Versace better win Come real far but don't know where I'm heading Motherfucking crocodile of Wall Street Silver on my fingers and boots on my feet Always be a goat, not a goddamn sheep Email me, fuck your message at the beep Beep, beep, beep, beep you