Tracing Mt. Gox’s stolen coins led feds to Alexander Vinnik

  This week, one of Bitcoin’s largest and most notorious coin exchanges

was brought down by law enforcement — and police and prosecutors are now beginning to explain why. On Thursday, the Department of Justice unsealed an indictment against Alexander Vinnik — thought to be the operator, or one of the operators of Bitcoin exchange BTC-e — charging him with 21 counts of money laundering and other related financial crimes. The counts range from operating an unlicensed money transmittal business to a variety of money laundering charges, including laundering associated with ransomware payouts and a theft from the now-defunct Mt Gox exchange. More generally, the indictment paints BTC-e as a hub of criminal activity, laundering the proceeds of everything from drug trafficking to ransomware attacks.

As some suspected, Vinnik’s alleged crimes go beyond just operating the exchange. Feds believe he played a role in the theft of more 800,000 bitcoin — about $400 million at the time — from Mt. Gox, a staggering loss that ultimately shuttered the exchange. According to the indictment, 530,000 of those bitcoin ended up passing through wallets controlled by or associated with Vinnik, although his role in the larger scheme remains unclear.Vinnik’s alleged crimes go beyond just operating a Bitcoin exchange

Vinnik himself is in custody, arrested while on vacation in Greece, but the Bitcoin world is still sorting through the larger implications of his arrest. BTC-e was one of the last major exchanges outside the reach of conventional finance, and now that it’s gone, it’s unclear what might replace it. There are many legitimate uses of Bitcoin, but Bitcoin transactions have also become essential for online crime — whether it’s ransomware or Silk-Road-style online marketplaces. There will continue to be demand for exchanges like BTC-e, and ____. With feds directly targeting exchanges that don’t play by the book, the split between the two halves of Bitcoin is becoming starker and starker.

BTC-e, founded in 2011, always stood out as an anomaly among the major Bitcoin exchanges. Even a cursory look at BTC-e flagged it as a little strange. “Their exchange prices always seemed weird and out of line with every other exchange, and I had wondered why,” Matthew Green, a professor at Johns Hopkins University told The Verge in an email.

Nicholas Weaver wrote at Lawfare that BTC-e was noted for its “sketchy ownership and control.” The exchange was supposedly located in Eastern Europe, but there were no clues as to who ran it — until now.300,000 bitcoin from Mt. Gox went to wallets tied to “BTC-e administrative accounts” But the big surprise in the indictment is how closely tied BTC-e is to a massive theft at Mt. Gox, one that eventually bankrupted the exchange in 2014. Founded in 2010, Mt. Gox dominated the Bitcoin world for years, at one point processing 80 percent of all bitcoin-to-currency transactions. Mt. Gox first suffered a multimillion-dollar theft in June 2011. When the exchange collapsed in 2014, the equivalent of nearly half a billion dollars was unaccounted for.

On Wednesday, in the wake of the arrest of Vinnik, WizSec published a blogpost presenting the findings of an investigation into the Mt. Gox thefts that they have apparently been preparing for years. According to WizSec, the Mt. Gox hot wallet private keys were stolen sometime in 2011, and the hacker (or multiple hackers) continued to steal bitcoin through 2012 and 2013. The bitcoin were laundered through wallets controlled by Alexander Vinnik. The indictment claims that 300,000 bitcoin were stolen from Mt. Gox went directly to three connected BTC-e accounts “directly linked” to “BTC-e administrative accounts” that only BTC-e admins and operators could have had access to.

At least one of the accounts — under the name “Vamnedam” — was controlled by Vinnik and “others known and unknown.” (The “others known” are either not named in the indictment or have been redacted from the published document.)Many of the charges allege more straightforward money laundering" More bitcoin from the theft were sent to other Mt. Gox wallets and wallets at a third exchange — the now-defunct Tradehill, which operated out of San Francisco, California. From there, they eventually ended up at BTC-e, in an account that was directly controlled by Vinnik. WizSec also claims that the wallets that laundered Mt. Gox coins also handled “coins stolen from Bitcoinica, Bitfloor and several other thefts from back in 2011 and 2012.”

It’s not clear whether Vinnik was directly involved in the Mt. Gox theft, or how close he is to any of those previous thefts, or even the CryptoWall ransomware hackers whose funds he is accused of laundering. But when it comes to Mt. Gox, at least, BTC-e’s proximity to the theft is fairly suspicious.“Anybody who thought about this for a second understood that law enforcement was working on a case against BTC-e" While the Mt. Gox allegations are the most eye-catching, many of the charges that brought down BTC-e allege more straightforward money laundering. The very first count listed in the indictment is for operating an unlicensed money-transmitting business: a criminal charge based on failing to register with FinCEN, an intelligence network that’s mandatory for all financial companies dealing with US customers.

Participating in FinCEN comes with a range of requirements, from registration to internal anti-money laundering programs. Since 2013, it’s been clear that Bitcoin exchanges had to follow those same rules, and for the most part, exchanges have complied — and prosecutors haven’t been shy about filing charges against services that don’t. In recent years, BTC-e has been the largest Bitcoin exchange not registered with FinCEN, a distinction that made it an obvious target for law enforcement, even without Vinnik’s alleged Mt. Gox involvement. “Anybody who thought about this for a second understood that law enforcement was working on a case against BTC-e,” said Jerry Brito, executive director of Coin Center. “The question was just whether the government would catch them.”“designed so that criminals could effect financial transactions under multiple layers of anonymity”

Where other counts in the indictment focus on money transfers linked to theft and ransomware, the first two — operation of an unlicensed money transmitter and conspiracy to commit money-laundering — focus on the technological capabilities of BTC-e itself, claiming that the exchange had a “criminal design.” “BTC-e’s system was designed so that criminals could accomplish financial transactions with anonymity and thereby avoid apprehension by law enforcement or seizure of funds,” the indictment says, pointing out that BTC-e only required “a username, password, and an email address,” unlike “legitimate payment processors or digital currency exchangers.” The indictment also points to suspicious usernames like “ISIS,” “CocaineCowboys,” “blackhathackers,” “dzkillerhacker,” and “hacker4hire” as additional support for the money-laundering allegations.

The language in the indictment about BTC-e’s “criminal design” mimics the indictment against Liberty Reserve — an anonymous currency service taken down by law enforcement in 2013 — which also accused the online exchange of having a “criminal design” and a system “designed so that criminals could effect financial transactions under multiple layers of anonymity.” (The Liberty Reserve indictment also took the time to point out that account names on the site included “Russia Hackers” and “Hacker Accounts.”) BTC-e’s website claimed that they required customers to provide proof of identity — namely, a scanned ID card and a scanned utility bill or bank statement — and forbid any US customers, letting them off the hook for FinCEN registration. But neither turned out to be true, according to the indictment.“Exchanges will go one of two ways. Either they’ll clean up their act… or they’ll go fully underground.”

Now that BTC-e is down for good, it could have a profound impact on the criminal ecosystem more broadly. BTC-e handled about 5 percent of total Bitcoin transactions, but recent research found that as much as 95 percent of ransomware cashouts happened through the platform. With most comparably sized exchanges already registered under FinCEN, the takedown could make it both harder and riskier for criminals to cash out — something law enforcement seems to be counting on. In the same Lawfare piece, Weaver says he thinks taking down BTC-e “will probably prove more important than the AlphaBay and Hansa takedowns” in fighting online crime. For Bitcoiners less invested in law enforcement’s war on dark web marketplaces, the lesson is a more ambiguous one. Cornell professor Emin Gun Sirer says the focus on FinCEN compliance could lead to a lasting split in Bitcoin markets, as exchanges face the choice of whether to comply with US government demands.

“Exchanges will go one of two ways,” Sirer says. “Either they will clean their act, by first shopping for the most lenient jurisdictions and complying with relevant KYC/AML laws, or they'll go ‘fully underground,’ and operate with no rules, behind Tor and other anonymous communication technologies. The most colorful drama ahead will involve exchanges, such as Bitfinex, that operate in the gray zone, where they seem to neither comply with relevant laws nor go fully underground.” For a technology with a surrounding community built on libertarian ideas, that may be a difficult pill to swallow. But as the past week has made clear, those that don’t will be taking a very serious risk.

Chuck Reynolds

Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

Alan Zibluk – Markethive Founding Member

Bitcoin's scaling debate finally seems to be shaking out,

but some users aren't happy with the results. After a few years of debate, it was perhaps to be expected that at least some were going to come away empty-handed. Controversial scaling proposal Segwit2x tried to remedy this by joining two code change ideas – the code optimization Segregated Witness (SegWit) and a block size increase. Today, SegWit is just a couple of steps away from activating on bitcoin, but some bitcoin users are unhappy about the outcome.

Others who originally backed the Segwit2x proposal appear to be losing confidence in an eventual block size increase and are now taking matters into their own hands by making their own version of bitcoin – and they're doing so on a short timeline. On August 1, at precisely 12:20 UTC, the group claims that they will split off from bitcoin, creating a new cryptocurrency called Bitcoin Cash. Developer Calin Culianu, who's contributing code to an implementation of Bitcoin Cash, is one user who doesn't like SegWit, suspecting that others feel the same way.

Culianu told CoinDesk:

”If the Segwit2x agreement fails to implement the 2x part, which is not entirely unreasonable, and only ends up being being basically SegWit without the 2x, many miners will likely defect to Bitcoin Cash."

What is Bitcoin Cash?

So, what is it? And how does it differ from bitcoin? There are two main changes of note:

• It increases the block size to 8 MB.
• It removes SegWit, a code change that might activate on the bitcoin blockchain by the end of August.

Some, including a few of the project's supporters, call Bitcoin Cash an "altcoin," a term that usually denotes a fork of the software that creates a new cryptocurrency, with its own market. Indeed, the cryptocurrency is currently trading at $461, meaning it's worth about 18% of bitcoin's current price of $2,568, in an already-open futures market. Unlike other altcoins, though, Bitcoin Cash's transaction history would be the same as bitcoin's – at least up until the point of the split. So, if and when Bitcoin Cash splits off, users would have bitcoin on both blockchains.

Another difference is the project says it will support multiple implementations of its software, a move that's not surprising given the criticism that Bitcoin Core's software is too dominant on the bitcoin network. BitcoinABC is the first software to implement the Bitcoin Cash protocol, but the goal is for there to be many implementations. Culianu said that both Bitcoin Unlimited and Bitcoin Classic, other implementations that aim to increase bitcoin’s block size, are working on a version compatible with Bitcoin Cash. These might or might not be ready for August 1.

Who's involved?

So far, most bitcoin companies, mining pools, users and bitcoin developers seem uninterested in the effort. Yet, there are some eager supporters.Beijing-based mining firm ViaBTC, which boasts roughly 4% of bitcoin’s computing power, is the clear ringleader. The firm, which also operates an exchange, has become the first to list the cryptocurrency and also has plans to launch a new mining pool dedicated solely to Bitcoin Cash. (Though, so far, it's not clear how much of its 4% mining hashrate it will commit to the effort.) Asked if he believed Segwit2x would fulfill its roadmap, CEO Haipo Yang responded: "I doubt it."

Further, Bitcoin Cash has attracted support from some users who want a block size increase, as well as developers of other proposals such as Bitcoin Classic and Bitcoin Unlimited. What might be more surprising, though, is who's not involved. Even former supporters, including mining firms Bitcoin.com and Bitmain, seem hesitant to back the effort. For now, they remain committed to controversial scaling proposal Segwit2x. Mining company Bitmain even inspired Bitcoin Cash. Yet, the firm said that they only planned on going through with making the switch under certain conditions. Still, the firm might support both Segwit2x and Bitcoin Cash in the future.

In a PSA statement, Bitcoin.com said that it will allow miners in its pool to choose if they want to mine the Bitcoin Cash token BCC. For now, though, it will mine on Segwit2x chain, though it said it "will immediately shift all company resources to supporting Bitcoin Cash exclusively" if the block size increase part of SegWit, scheduled for roughly three months from now, falls through.

Wait, but why?

There are a few reasons users and mining pools might like to break off from bitcoin:

• These users want an increase in bitcoin's block size parameter, and believe that the cryptocurrency's future depends on it.
• SegWit is likely going to activate soon and some users want to avoid the feature.
• There's a possibility that Segwit2x's block size parameter increase will ultimately fall through.

This mix of ideological and technical reasons was also on display in conversations with users. When asked by CoinDesk what BitcoinABC's goal is,

Culianu responded:

"To save bitcoin. We want to scale bitcoin up so that it won't die. It's already a bit sick and dying."

What's different here?

Many other efforts over the last couple of years have said they would split off from bitcoin, if they gained enough support from those operating the computers that secure the network. But, to date, no group has actually carried through with this plan so far. Bitcoin Cash might be unique in that it's actually committing to a deadline to split bitcoin into two, and that deadline is less than a week away.

If miners and users indeed go ahead with the split, it would mark the first time a cryptocurrency split off from bitcoin, carrying with it bitcoin’s transaction history. Like past efforts intended to replace the bitcoin used today with a new bitcoin, however, Bitcoin Cash has the same goal, but it seems willing to wait and see if users join the effort. Rather than call it bitcoin, ViaBTC, as well as a group of bitcoin companies in China, signed an agreement to label it a "competitive currency," not the "real" bitcoin. The move could set up the split to happen more quickly, as in the past exchanges have expressed confusion over how to handle a fork.

What's next?

If a new cryptocurrency splits off from the main bitcoin network, it will mark a first. So, some users are curious to see what happens. Still, without much support from miners and users, it might not end up having that much of an impact on the course of the main network. Nonetheless, it might if be worth watching if the second half of Segwit2x falls through. That's when it might see some more supporters.

Culianu, for example, concluded on an optimistic note:

”My secret gut feeling is Bitcoin Cash may surprise all of us. It is not entirely impossible that it will be the de-facto bitcoin after a few months. The much roomier 8 MB block space is attractive."

Chuck Reynolds

Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

Alan Zibluk – Markethive Founding Member

Investors are mesmerized with AMD's impressive second quarter

as cryptocurrency mining demand drove the company's financial results above Wall Street's expectations. The chipmaker reported better-than-expected second-quarter earnings and guidance Tuesday. Its shares surged more than 10 percent in after-hours trading following the report and were up more than 9 percent in early regular trading Wednesday.

"AMD turned in a solid beat to our and consensus estimates as the company's new Ryzen desktop CPU ramped into production and GPU demand outstripped supply," Stifel analyst Kevin Cassidy wrote in a note to clients Wednesday. "While management wasn't specific on how much, the GPU revenue upside was driven by cryptocurrency applications."
AMD shares have rallied 102 percent through Tuesday in the previous 12 months compared with the S&P 500's 14 percent return. That performance ranks No. 4 in the entire S&P 500, according to FactSet. Cryptocurrency miners use graphics cards from AMD and Nvidia to "mine" new coins, which can then be sold or held for future appreciation. AMD traditionally has a better reputation for mining cryptocurrencies.

Ethereum cryptocurrency is up over 2,400 percent year-to-date through Wednesday, while Bitcoin is up about 160 percent this year, according to data from industry website CoinDesk. In June, AMD shares jumped after the company told CNBC that the dramatic rise in digital currency prices has driven demand for its graphics cards. At the time, major computer hardware retailers had sold out of AMD's recently launched RX 570 and RX 580 models. Digital currency mining was the key topic during AMD's earnings conference call with Wall Street Tuesday evening. Analysts asked company management three times for clarification on the magnitude and sustainability of cryptocurrency mining demand.

One analyst noted the company is working to mitigate future downside risk and is not incorporating continued digital currency mining outperformance in its guidance. "Crypto mining helped stimulate demand for AMD GPUs in Q2, which we think could translate to a risk should cryptocurrency values decline, AMD is working to manage the crypto risk by targeting supply to the core GPU gaming market, and working with some of its AIB [add in board] partners to offer specific feature sets to segment the market between gaming & mining," Jefferies analyst Mark Lipacis wrote Wednesday. "AMD is not including upside from mining in its outlook."

Lipacis reiterated his buy rating on the company and raised his price target to $19 from $16, representing 35 percent upside from Tuesday's close. To be sure, some analysts are still skeptical on AMD after its big run. "We were surprised at the aftermarket reaction for the stock," Morgan Stanley analyst Joseph Moore wrote Wednesday. "We continue to be somewhat cynical on the long term intrinsic value of the stock, despite being excited about Zen and maintaining numbers that are above the Street. As street numbers start to catch up, absolute valuation levels are going to matter more." Moore reiterated his equal-weight rating and $11 price target for AMD shares.

Chuck Reynolds

Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

Alan Zibluk – Markethive Founding Member

 

Russia’s chief presidential advisor on the Internet

has stated a Bitcoin mining virus has infected up to 30 percent of Russian computers. Speaking in interviews with RNS and RBC, Herman Klimenko said that although infection rates varied by region and device, it involved at least 20 percent of machines. “In regions with lower bandwidth instances are reduced, but we’re looking at 20 to 30 percent of devices being infected – iPhones and Macs are less prone,” he commented.

The figures, if true, are alarming, yet Klimenko’s assessment has already come under public criticism. Speaking to RBC in light of the findings, Internet Ombudsman Dmitry Marinichev called them “rubbish.” “These viruses appear for example on devices of users who have given permission for them to start running,” he said, adding the issue was not about Bitcoin mining but stolen credit card details and similar characteristics. Klimenko, meanwhile, also chimed in on the motives of the hackers behind the recent international WannaCry cyberattack. “In the case of WannaCry, the perpetrators managed to accrue around $50-100,000,”

he told RNS.

“I’m therefore convinced the perpetrators of WannaCry were children because they do not understand where they can earn money in the Internet sector.”

Earlier this month, Russian research lab Group-IB warned of a domestic Android virus circulating consumer devices which would gain access to and empty any associated bank accounts.

Bitcoin, Altcoins Meet London Art As ‘Gray’ Artsy Nets $50 Million
 

 

London’s “tradition-bound” Cork Street art empire is getting an innovation injection

as customers meet Bitcoin and even Monero as payment options. As the BBC reports Tuesday, one gallery, Dadiani Fine Arts, has begun accepting cryptocurrency in what its owner describes as an “intuitive” move. "This is not a demand-driven decision at all, it's intuitive based on the way things are going," Elena Dadiani told the publication. With the global art market worth around $60 bln and average purchase amounts high, the benefits of additional payment channels are obvious. The gallery is not stopping at Bitcoin; Ethereum, Ethereum Classic, Dash, Litecoin, and soon Monero will also be featured. "For me, the Blockchain is going to be the biggest thing since the Internet,” nonetheless hinting she intends to convert at least part of the payments to fiat currency as a matter of course.

Like Blockchain, meanwhile, the art industry itself is undergoing rapid change. Artsy, the online art marketplace seeing huge expansion, this week announced the closure of a $50 mln funding round, something already causing suspicion in a manner strikingly similar to some recent Ethereum-based ICOs. “The news has left many in the industry with two questions,” industry news resource Artnet reports describing the platform as a “gray market.” “First, since Artsy has chosen to keep its actual valuation pitch-black to the public, how much is the company really worth? Second, and just as important, how is that valuation justifiable?”

Chuck Reynolds

Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

Alan Zibluk – Markethive Founding Member

The governor of the US state best known as the home

to a majority of the country's incorporated businesses has officially signed a bill making it explicitly legal for those entities to use blockchain for stock trading and record-keeping. After weeks of anticipation, Delaware governor John C. Carney Jr. signed the bill on Friday, effectively bringing closure to an effort that began in May 2016 when his predecessor, Jack Markell, launched an initiative to promote blockchain efficiencies in government.

First publicized in March this year and introduced formally in May, the bill, which amends Delaware's General Corporation Law, saw a swift passage by state lawmakers. The move further comes weeks after it passed a key vote in the state legislature, a milestone advocates sought to label as "historic" given the state's history and the increase in experimentation that could result from legal certainty. Just how impactful could the law be? Industry analysts suggest that by giving the greenlight to experimentation, the law could make it possible for the custodianship, issuance, redemption and trading to take place on a distributed ledger.

Equity Markets on a Blockchain: Delaware's Potential Impact

Noelle Acheson is a 10-year veteran of company analysis and the author of CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to CoinDesk subscribers.Last week, Delaware passed amendments to state legislation that, once signed into law by the end of July, will give corporations registered in the state the right to issue and trade shares on a blockchain platform.While this may on the surface sound like a small modification, it is a big deal. Companies and exchanges around the world have been investigating how distributed ledgers could help with issuance, execution and settlement (some have even issued shares on a blockchain). However, they have been doing so under a cloud of regulatory uncertainty, unsure of whether the stakeholders – including the relevant governing bodies – would allow the innovations to take hold.

For the first time, businesses will be able to experiment with new processes knowing they have the protection of the law. This is likely to pave the way for the entire life cycle of a share – the issuance, custodianship, trading, shareholder communication and redemption – to be enacted on a blockchain. The result could be a reframing of the global securities network, one of the cornerstones of our modern capitalist economy. The equity infrastructure used in most markets today evolved around paper-based issuance, and essentially has the same conceptual backbone as in the 17th century. Processes are complex, involving several steps, each with fees. Centralized clearing creates systemic risk by presenting a single point of failure, and since in most jurisdictions legal ownership rests with the transfer agents, true ownership can be obfuscated – in turn, this can violate rules that limit shareholdings. Furthermore, a paper-based system – even a digitized one – is vulnerable to fraud, and centralized databases can suffer security breaches.

Settle for less

With a blockchain system, investors and issuers can interact directly with each other, in theory cutting out brokers, custodians and clearing houses, thus reducing transaction costs. Settlement can happen within hours instead of days, releasing funds and lowering carrying fees. Legal ownership would be restored to investors and companies, and would be more transparent. Dividends and stock splits could be automated, reducing cost and error.

Also, a distributed ledger platform would remove the single point of failure risk, help make proxy voting more transparent and accurate and make it easier to manage cap tables as well as collateralisation. There are disadvantages. Transparency, for one: not all investors want their positions to be visible. Error resolution is another: mistakes happen, and on an immutable ledger, how do you fix them? What’s more, counterparty risk doesn’t go away, it just shifts. But as work on services and solutions picks up in the light of regulatory approval, so will the development of solutions.

Share the benefits

That this milestone was reached in Delaware is significant. The state is 49th in the nation in terms of size and 45th in population, but it boasts two-thirds of US listed companies and 85% of IPOs. It has more registered legal entities than it has residents. This is due to its relatively flexible business legislation and tax framework, and to its reputation for being a standards bearer in corporate law. What’s more, the recent amendment is part of a larger initiative to streamline corporate and governmental processes. The Delaware Blockchain Initiative, launched over a year ago, commits the state’s government to incorporating blockchain technology in the handling of official documents such as land titles, birth and death certificates, professional licenses, collateral claims and company filings.

So, here we have the US state with the largest concentration of registered corporations, and a reputation for supporting innovation, offering businesses the chance to test a new form of financing and governance. While adoption will probably be slow, at least at first, the pace is likely to pick up as the benefits become even more apparent. Other jurisdictions could follow suit to avoid losing a chunk of their domiciled businesses. And the structure of financial markets could start to gradually, but fundamentally, change. While the Delaware amendment won’t create a market revolution overnight, it does raise a question which highlights the systemic importance of the move: Will traditional equity markets still exist 10 years from now?

Chuck Reynolds

Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

Alan Zibluk – Markethive Founding Member