With 2024 bringing about another boom in the greater cryptocurrency markets, the challenge in regulating decentralized currencies remains a major international issue, and one that is arguably the key obstacle in recognizing these assets as legitimate stores of value. Following decades of litigation, the Securities and Exchange Commission’s (SEC) recent decision to approve spot Bitcoin ETF’s has led to even greater institutional and mainstream investment into the crypto space early in the new year, sending Bitcoin and various other altcoins surging to new all-time highs as the highly-anticipated Bitcoin “halving” approaches in mid-April. However, oversight on this sector as a whole remains challenging given that regulation is largely dependent on how and where crypto is used. Variations in this regard have contributed to the continued misuse of crypto platforms by bad actors and politically exposed persons (PEPs) both domestically and abroad, using cryptocurrency transactions to facilitate illicit financial activity such as fraud and ransomware attacks, as well as money laundering and terrorism financing. Recent large-scale crypto scandals – such as the collapse of FTX, Binance CEO Changpeng Zhao pleading guilty to federal money laundering charges, and ongoing shutdowns of prominent crypto exchanges and “mixers” that were used as tools in financial crime schemes – all seen over the last year alone have all dominated global headlines, adding additional fuel to the fire for crypto opponents and legislators arguing against widespread adoption of crypto as a legitimate payment form.

The misuse of crypto mixing and blending services remains one of the top priorities in the Biden Administration’s ongoing battle against illicit finance. The process has grown exponentially over the past decade, much in line with the run on cryptocurrencies as a whole seen over this span. The premise of these operations is to further decrease detection for individuals making transactions in a space that is already synonymous with anonymity. Via the use of third-party outlets often found on the darknet, various entities are effectively able to mix their identifiable coins – of legitimate or illegitimate origins – with other privately-pooled funds so as to obscure the trail back to the fund’s original source. Once pooled and subsequently randomized, the now-washed funds are ultimately transferred to their designated receivers – generally other members of an individual’s organization, outside entities as a means of payment for oft-illicit goods/services, or simply transferred to other accounts held by the individual originating the transaction. The platform offering these services also receives a fee (generally 1-to-3 percent of the total value of the transaction), making them not only the primary facilitator but also a beneficiary of the ploy, all the while contributing to further destabilizing financial activity across international borders.

Unfortunately the trend of abuse of these outlets appears to be continuing into 2024, though tangible results of the U.S. crackdown continue to be seen. Last week, the founder of a notorious cryptocurrency mixer named “Bitcoin Fog” was found guilty of helping to launder hundreds of millions of dollars and over 1.2 million Bitcoins originating from darknet markets and actors profiting from the sale of illicit narcotics. On Tuesday, March 12^th, a United States District Court convicted the head of Fog, Roman Sterlingov, on charges of money laundering, money laundering conspiracy, operating an unlicensed money-transmitting business, and violations of the D.C. Money Transmitters Act. According to court documents and trial evidence, Sterlingov operated and openly marketed his mixing platform directly as a service to criminals looking to launder their illicit funds. According to court evidence, Sterlingov ran Fog from October 2011 through April 2021, leaving behind an unprecedented trail of international financial destruction over the span of nearly a decade. It is no surprise that such a service drew the attention of thousands of bad actors while reportedly amassing over $400 million in laundered funds. The bulk of said funds were ultimately discovered to have ties to lucrative criminal enterprises operating in narcotics, cybercrime, and fraud.

Despite the evidence presented at the trial, Sterlingov denied he ran the platform and also denied collection of any fees from the service, banking on a flawed defense that he was simply just another user of the mixer. Since his ruling, his attorney has echoed these sentiments and voiced their plans to appeal the verdict. U.S. Federal law enforcement is not buying it however.

“Roman Sterlingov thought he could use the shadows of the internet to launder hundreds of millions of dollars in bitcoin without getting caught. But he was wrong,” said Deputy Attorney General Lisa Monaco. “Our team of agents, analysts, and prosecutors were relentless in their pursuit of justice, painstakingly tracing bitcoin through the blockchain to hold Sterlingov and his Bitcoin Fog enterprise to account. Today, a jury returned guilty verdicts on all counts — showing that no matter where you operate, if your cryptocurrency service reaches the United States, you must abide by U.S. law.”¹

Both the U.S. Federal Bureau of Investigation (FBI) and Internal Revenue Service Criminal Investigation units were involved in the investigation into Sterlingov, with his conviction signaling a commitment towards holding individuals accountable for their financial crimes committed, regardless of area of incorporation. The charges against Sterlingov each carry a maximum penalty of 20 years in prison, with the charge of operating an unlicensed money transmitting business and money transmission without a license in the District of Columbia carrying a maximum penalty of five years in prison.¹ Sentencing has been set for July 15, 2024.  

This latest conviction is yet another positive development for the U.S. government in its recent crackdown on the cryptocurrency industry. All signs point to a continuation of this trend, with the FBI dedicating more resources to taking on abusers of cryptocurrency exchange technology. “The FBI’s cyber workforce remains relentless in the pursuit of criminals who leverage technology to conduct and facilitate illegal activity,” said FBI Deputy Director Paul Abbate. “Today’s conviction is the result of close collaboration between the FBI and our federal and international partners to impose consequences on Bitcoin Fog and its operator for their money laundering activities. The FBI will continue to use all available tools and resources to impose costs on cybercriminals, no matter where they operate.”¹

Citations

1. “Bitcoin Fog Operator Convicted of Money Laundering Conspiracy.” Office of Public Affairs, United States Department of Justice, 14 Mar. 2024.