It’s a Very Crypto Scandal, But the Charges Are Serious

Here is the worst possible way to become a social media star. In her 2019 rap video, Heather “Razzlekhan” Morgan dances on the steps of Federal Hall in New York’s Financial District, wearing a shiny gold jacket and a wide-brim cap and proclaiming herself the “Crocodile of Wall Street.” You probably missed it when it came out. This February, however, Morgan and her husband, Ilya Lichtenstein, co-founder of a Y Combinator-backed tech startup, have been charged by federal prosecutors with conspiring to launder 119,754 Bitcoins that were stolen in a 2016 crypto exchange hack. Pretty soon, Razzlekhan was all over Twitter.

The charges Morgan and Lichtenstein face are serious—if convicted, they could go to prison for 20 years. The money is serious, too: The hoard of stolen Bitcoins was estimated by the U.S. Department of Justice to be worth $4.5 billion at recent market prices. The couple wasn’t accused of the theft. In a memo on bail conditions, their lawyers said the government’s complaint “depends on circumstantial inferences drawn from so-called ‘tracing’ analysis of a confusing series of blockchain transactions” that don’t prove criminal intent.

Stakes aside, it’s hard to get your mind around the sheer weirdness of the case. Of course, there’s the couple’s social media trail, with flashy photos of a fun-if-eccentric pair that now contrasts with their somber courtroom sketches. Lichtenstein proposed to Morgan kneeling in the middle of Times Square as surrounding billboards lit up with her face. Morgan, an entrepreneur and artist who also contributed to gave a talk in 2019 called “How to Social Engineer Your Way Into Anything.”

It’s not just the outsize personalities that are so striking. The numbers involved underscore how crypto can be a fun-house mirror of ordinary finance. Take all those billions of dollars’ worth of Bitcoin. Prosecutors said in their press release that they’ve so far managed to recover more than 94,000 of them, worth $3.6 billion—making it the department’s largest financial seizure ever. The huge dollar values reflect the speculative boom in crypto over the six years since the coins were originally stolen by still-unknown hackers from an exchange called Bitfinex. At the time, the haul was worth only about $71 million.

What do you do with recovered assets that have racked up a 6,200% increase in value since they were stolen? That’s where the story gets even more complicated. It’s unclear what Bitfinex users who lost assets in the hack will get back. Bitfinex said in a statement that it will “follow appropriate legal processes to establish our rights to a return of the stolen Bitcoin.”

In the exchange’s eyes, it compensated users affected by the lost crypto in 2016—not with a direct replacement of Bitcoin, but through BFX, IOU tokens that were later redeemed at a ratio of one for every dollar lost. Some traded those assets on the market for a time, while others converted them into capital stock of Bitfinex parent firm iFinex, which gave some the option of receiving yet another token that would benefit from a potential recovery of funds. It’s head-spinning, in the way that crypto tends to be.

Some customers want their original coins back, arguing that if they had those instead of replacement tokens, they’d be a lot better off. (Having your coins temporarily pilfered would be a novel way to HODL.) In any case, there’s likely a long legal process ahead. “The world has changed dramatically since 2016, and everyone is going to lay claim to this newfound bag of Bitcoins,” says David Silver, a lawyer who specializes in financial and crypto-related fraud.

Whatever their value, it seems these Bitcoins were hard to spend. In some cases, Morgan and Lichtenstein allegedly turned to gift card providers who would turn crypto into money spendable at such businesses as Uber and Hotels.com. The prosecutor’s statement also mentions a $500 Walmart gift card. Some alleged attempts by Morgan and Lichtenstein to move their Bitcoins on exchanges and cash them in resulted in probing questions about the tokens’ origins.

Crypto isn’t as anonymous as many think. On Twitter, some in cryptoland Lichtenstein’s alleged use of a cloud server to store the private keys for a crypto wallet. While U.S. law enforcement noted that the public nature of blockchain helped them follow the money, the desire for privacy is only growing stronger in parts of the crypto community. For example, traders have normalized the use of “privacy mixer” protocols, which obfuscate the trail of crypto transactions. Crypto’s libertarian faith in the freedom to be hidden reinforces the perception that digital currencies are a haven for money launderers. Even if some of them allegedly aren’t very good at it. —With Olga Kharif