Bitcoin Fog has been offering immense anonymity to its users for a decade. It has been obscuring the destination and source of its customers’ crypto coins. This made transactions pretty smooth on the dark web.
The IRS had clearly mentioned that it could identify the Russian-Swedish administrator of Bitcoin Fog, who has been the mastermind behind the long-ran anonymizing system. The administrator had been charged with the money laundering of millions of dollars valued Bitcoin (BTC). Much of the laundered Bitcoin has been sent to or received from the dark web markets. The trail of his own decade-old digital transactions has given him away.
On Tuesday, the U.S. authorities arrested the culprit Roman Sterlingov in Los Angeles. As per the court records, the feds have charged him with laundering over 1.2 million bitcoins that netted $336 million at the time of payment over the decade of Bitcoin Fog.
As per the IRS criminal investigations division, the accused, a citizen of Sweden and Russia, had permitted the users to mix their transactions with those of the other users. This had led the users from preventing others from examining the Bitcoin blockchain from tracking the payments of any individual. The administrator had also taken the commissions on those transactions at the rate of 2 to 2.5 per cent.
All in all, the administrator had allegedly taken around $8 million BTC via the service. This is based on the exchange rates at the times of the individual transaction, calculated by the IRS. This is even before Bitcoin factored colossal appreciation over the last decade. Ironically, it seems that the Bitcoin Fog administrator had used the 2011 transactions for setting up the platform’s server hosting. This had put the IRS on his crime trail.
“This is yet another example of how investigators with the right tools can leverage the transparency of cryptocurrency to follow the flow of illicit funds,” says Jonathan Levin, co-founder of blockchain analysis company Chainalysis.
On Tuesday afternoon, the platform remained online. However, it is unknown who operates it, not even if there is anyone. Both the Department of Justice (DOJ) and IRS had not responded to their individual requests for comment.
The verse mentioned in the criminal complaint against the alleged Bitcoin Fog administrator commences with his alleged establishment of the site in late 2011. He had promoted the platform under the pseudonym “Akemashite Omedetou”, which is a Japanese phrase meaning “Happy New Year”. The complaint stated, a post on the Bitcoin forum named BitcoinTalk, Akemashite Omedetou had advertised that the –
Bitcoin Fog “(mixes) up your bitcoins in our own pool with the other users”.
“can eliminate any chance of finding your payments and making it impossible to prove any connection between a deposit and a withdrawal inside our service.”
The complaint had accused the alleged administrator of laundering at the minimum of $78 million. This amount had been passed through the service to different dark web drug markets over the years, such as the Silk Road, AlphaBay and Agora markets.
The IRS also seems to have used undercover agents in 2019 for establishing transactions with the Bitcoin Fog. It has been spotted in one instance where sent messages to Bitcoin Fog’s administrator had explicitly mentioned that they had expected to launder proceeds from selling drugs such as Ecstasy. The platform had completed the transaction of the user without a response.
What is most remarkable? The IRS’s account traced down the administrator utilizing the same sort of blockchain analysis that the accused’s service was meant to defeat. The complaint has outlined how the accused had allegedly paid for the server hosting for Bitcoin Fog at a point in 2011 making use of the now-defunct digital currency “Liberty Reserve”.
Furthermore, it showed the blockchain evidence that identified the accused’s purchase from Liberty Reserve currency with BTC. It states that the accused had at first exchanged the euros for Bitcoins on the primitive cryptocurrency exchange Mt. Gox. Next, he moved all of those bitcoins via several subsequent addresses. Finally, he had traded them on a different crypto exchange for the Liberty Reserve funds. These funds are then used to establish the domain for Bitcoin Fog.
The IRS had traced all those financial transactions, after which they could identify Mt. Gox accounts used by the accused. His Mt. Gox accounts also had his address and phone number aside from his Google account. The account contained a document in the Russian language on its Google Drive that offered instructions on “how to obscure Bitcoin payments”. The same document had also described the exact steps that the accused had allegedly adopted for purchasing the Liberty Reserve funds he used.
This case is another instance of how Bitcoin, which used to be the sole anonymous coin at one point, could be traceable and revealing. The ledger for the blockchain of all the Bitcoin transactions since the crypto creation has instead served as an excellent means for law enforcement officials to trace even the age-long primitive transactions.
The Bitcoin Fog administrator arrest based on the blockchain analysis clearly represents how far and past the investigators can reach with just “follow the money” method.
“With blockchain analytics the thing we say over and over is that all this activity is on this ledger forever, and if you did something bad 10 years ago you can be caught and arrested for it today,” says Sarah Meiklejohn, a computer scientist at University College of London whose work had pioneered Bitcoin-tracing techniques in 2013. “The fact that they’re pulling up those transactions is really significant.”
Yet, Meiklejohn remains puzzled over the reason Bitcoin Fog was online after its administrator had been taken into custody. She also notes that law enforcement has aptly taken over several dark web criminal operations in the past. However, it is still unclear if that was the case with the Bitcoin mixing platform, why the criminal complaint against the accused has been unsealed.
“At this point, for anyone who wants to mix their coins, you just have to assume that the service is compromised,” Meiklejohn says.
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