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Russian Head of $4B Bitcoin Exchange Charged in Massive Money Laundering Scheme

By David Jones
Jul 28, 2017 10:16 AM PT
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A grand jury in the Northern District of California indicted a Russian man for running a massive money laundering operation through the BTC-e bitcoin exchange, a group of federal officials announced Wednesday.

The exchange allegedly received up to US$4 billion in proceeds from various criminal activities, including the 2014 hack of the Mt. Gox bitcoin exchange.

The suspect, 37-year-old Alexander Vinnik, was arrested Tuesday by Greek authorities, and charges in an unsealed indictment were released the following day.

Vinnik was visiting Greece, and U.S. officials were working with Greek authorities on the case, a source familiar with the case told the E-Commerce Times.

Vinnik was charged with operating an unlicensed money service business, conspiracy to commit money laundering, 17 counts of money laundering, and two counts of unlawful monetary transactions.

He faces 20 years in prison and $500,000 in fines on each of the money laundering and conspiracy to commit money laundering charges; 10 years in prison and $500,000 in fines on the monetary transactions charges; and five years on the money service charges.

The company, BTC-e, was assessed a $110 million fine, and Vinnik personally was fined $12 million by the Financial Crimes Enforcement Network, a Treasury Department branch that investigates money laundering and other financial crimes.

"Cryptocurrencies such as bitcoin provide people around the world with new and innovative ways of engaging in legitimate commerce," said U.S. Attorney for the Northern District of California Bryan Stretch. "As this case demonstrates, however, just as new computer technologies continue to change the way we engage each other and experience the world, so too will criminals subvert these new technologies for their own nefarious purposes."

Birth of an Empire

BTC-e, founded in 2011, grew into one of the world's largest digital currency exchanges, with more than 700,000 users worldwide. It relied heavily on criminal money laundering for much of its business, according to the indictment.

Vinnik owned and operated various bitcoin accounts and was the owner of Canton Business Corp., the shell company that operated BTC-e, federal officials said.

There were numerous accounts based in the U.S. and specifically in northern California, according to court documents, but they did not indicate who the account holders were or whether the transactions were of a criminal nature or legitimate.

The company received billions in proceeds from numerous criminal activities, based on the indictment, including the hack of Mt. Gox, a Tokyo-based bitcoin exchange that collapsed in 2014 after intruders stole $460 million from it. The former head of that firm, Mark Karpeles, is on trial in Japan.

Vinnik failed to register the BTC-e exchange with the Treasury Department, officials said.

He allegedly used it, along with his now defunct San Francisco-based bitcoin exchange Tradehill, to launder funds from the Mt. Gox incident and other operations.

The BTC-e website states that the company is registered in Bulgaria but organized according to the laws of Cyprus, officials said.

The firm maintained a base of operations in the Seychelles, and had registered Web domains in Singapore, the British Virgin Islands, France and New Zealand.

The grand jury named Vinnik as one of numerous "known and unknown" people who facilitated the illegal money laundering, according to the indictment.

Solve the Riddle?

The arrest of Vinnik adds a new twist to the case against Karpeles, the former head of Mt. Gox, said Mark Nunnikhoven, vice president of cloud research at Trend Micro.

"Anyone can see money move from point A to point B -- but unless A and B say who they are, they remain anonymous," he told the E-Commerce Times. "In this case, law enforcement is trying to decode a chain that starts with Mt. Gox (A) and ends somewhere (Z). The DoJ is hinting that Mr. Vinnik is in that chain somewhere, which may be a key piece of the puzzle."

The repercussions may extend far beyond Mt. Gox and Karpeles, however.

"Stories like these don't help the bitcoin or blockchain market in terms of reputation," said Jessica Groopman, principal analyst at Tractica.

"Bitcoin was born of individuals intending to securely conduct transactions while circumventing centralized authorities," she told the E-Commerce Times.

However, "the market has bifurcated significantly since early days -- now financial services firms and governments are leading in, or at least heavily influencing research, development, and design of blockchain structures," Groopman pointed out.

"There have been reputation problems since the early days, as bitcoin has been associated with Silk Road, cybercrime, and the dark Web. The arrest of Alexander Vinnik only resurfaces and reinforces these negative associations," she observed.

"This is only exacerbated in light of broader American media coverage of alleged political investigations around money laundering and Russia," noted Groopman. "Whether or not this specific case indicates insecurity in bitcoin or the market is less a matter of how it will be perceived, and surely this does not help bitcoin's public image."


David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.


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