This analysis was first published in SvD Näringsliv, in Swedish, on February 17th, 2022.
A rapper and a startup entrepreneur are suspected of laundering SEK 42 billion in cryptocurrency. The case is a problem for a crypto world that is trying to shake off its association with organized crime.
New York, January 5th, 2022. A group of criminal investigators is holding a search warrant. They knock on the door of an apartment in lower Manhattan. On the inside is a married couple — a Russian-American entrepreneur, and a writer and part-time rapper. The two are suspects in one of the largest cryptocurrency money-laundering cases ever, worth the equivalent of SEK 42 billion.
While the investigators search the apartment, the couple offers to leave. But first they want to take the cat. As the woman lies down on the floor to coax it out from under the bed, she also grabs her phone and tries frantically to lock it. On the phone, most likely, is information she doesn’t want the authorities to find.
In total, more than 50 other electronic devices are seized, along with around SEK 370,000 in cash, and two books whose pages had been cut out by hand so they could serve as secret hiding places. If that sounds like it is straight out of a movie, others agree — Netflix has already commissioned a documentary about the rather improbable couple’s attempt to launder billions.
Beneath the spectacular surface is an interesting lesson. Cryptocurrencies have often been associated with organized crime because the anonymity and absence of official institutions have made it easy to move money without getting caught. But even if something is anonymous, it can still be traceable. Unlike cash, the flow of money here can be followed relatively clearly, because every transaction is recorded in a blockchain — a kind of digital ledger that underpins cryptocurrencies. You don’t see who owns the money, but you do see where it goes.
In a 20-page document, an investigator at the IRS, the US tax authority, explains how they managed to identify the couple. Through flow charts and detailed technical explanations, a complex picture is painted of how fictitious people and companies were used, and how thousands of small transactions were carried out to make the trail harder to follow.
The IRS investigators were able to track the money through thousands of transactions — all the way from the initial theft in 2016 to the last account that held the cryptocurrency.
In the end, the couple seems to have been uncovered because of what is a common critique of cryptocurrencies — there still isn’t that much to do with them. So at some point the currency had to be moved to marketplaces where it could be swapped for something more useful, like regular money. The couple used bitcoin ATMs, bought digital artworks (so-called NFTs), and invested in physical gold in order to put the cryptocurrency to use. But some of these transactions required some form of ID, such as registering a driver’s license. That is how the IRS investigators were able to trace the money through thousands of transactions — all the way from the initial theft in 2016 to the final account. That the couple was behind the original theft has not been proven.
To curb this kind of crime, a new type of analysis firm is emerging. Companies like Chainalysis and Ciphertrace (recently acquired by Mastercard) map the relationships between flows of cryptocurrency on different blockchains — something that can make laundering harder. The need is enormous. In a combination of hacker attacks and more ordinary fraud, one estimate suggested that over SEK 130 billion was stolen using cryptocurrency in 2021, according to Chainalysis. The real number, it should be said, is probably much higher.
The suspicions against the couple — which have attracted wide media attention, the theft being called the heist of the century — are a problem for both the crypto and the finance world, both trying to clean themselves up from associations with the darker side of society. New processes and tools have allowed several high-profile cases to be investigated, and much of the stolen money recovered. Large players like Mastercard realize that they need the latest analytical tools to avoid becoming a tool for money laundering, which in the end is a question worth many billions.
A problem like this can ripple outward — even in the more traditional US finance industry, there are now over 15 exchange-traded funds that invest in bitcoin.
During last weekend’s Super Bowl in the US, many crypto exchanges bought expensive TV ads trying to attract retail investors. But if you don’t feel your assets are safe, the ad spend may well be wasted. A problem like this can ripple outward — even in the more traditional US finance industry, there are now over 15 exchange-traded funds that invest in bitcoin.
The example from New York shows, though, that there is a good way to go when it comes to security and trust. It wasn’t drug cartels that laundered billions in this case, but an entrepreneur with a background from the storied startup accelerator Y Combinator. His wife wrote columns in the business magazine Forbes — and rapped in her spare time. If this media-savvy middle-class couple almost got away with a billion-dollar crime, how many more are going on right now?