Since it’s launch in 2011, the digital currency exchange website BTC-e has been shrouded in mystery, now officials say they are lifting the veil and revealing a shadowy world of criminal activities hiding in plain sight.
The first signs of trouble for the Bulgarian-based digital currency exchange began on July 25, 2017. Users attempting to access the website were met with a 404 error. Those who were behind BTC-e took to Twitter a short while after their website went down, claiming the site had been undergoing maintenance. Several more tweets would follow, again, claiming their engineers were working on the website issues.
Many more hours would pass with little information on when the website issues would be resolved. Frustrated customers continued to tweet to BTC-e, hoping to receive some answers for the unforeseen circumstances that had befallen the exchange. Finally, users received the news they had all feared. BTC-e’s homepage defaulted to a FBI takedown notice.
By the following day, news reports regarding the arrest of one of the anonymous website’s alleged founders began to roll in. Taken into custody by Greek officials after a lengthy multi-agency investigation spanning the world over, alleged BTC-e founder and Russian National, Alexander Vinnik, had been accused of conspiracies that involved money laundering and the facilitation of criminal enterprises.
In a press release from the US DOJ, IRS Criminal Investigation Chief Don Fort stated:
“Mr. Vinnik is alleged to have committed and facilitated a wide range of crimes that go far beyond the lack of regulation of the bitcoin exchange he operated.”
Though it was acknowledged in the release that many digital currency exchanges have upheld international laws applicable to financial institutions, Chief Fort went on to say that the arrest of Vinnik should send a strong message to other unregulated exchanges around the globe.
Among the allegations against Vinnik, it was claimed that BTC-e had been used as a means to funnel profits from a range of nefarious services including identity theft, dark web marketplaces, and ransomware providers. The biggest bombshell to drop shortly after Vinnik’s arrest, however, involved one of the longest running mysteries within the cryptocurrency community.
In 2010, computer programmer Mark Karpeles purchased one of the first bitcoin exchanges, known as Mt. Gox. After a series of technical blunders by Karpeles, the Japanese currency exchange declared itself insolvent in 2014 and Karpeles was placed under arrest for fraud after millions of dollars worth of bitcoin were found to be missing from Mt. Gox’s server.
As a result of this mismanagement of user funds, over 700,000 people had lost every penny they had invested into the cryptocurrency on the Mt. Gox exchange. Since then, the cryptocurrency community has exhausted extensive efforts in tracing the last known whereabouts of the lost bitcoin via bitcoin’s public ledger, known as the blockchain.
Two days after Vinnik’s arrest, a Japanese bitcoin security group, known as Wizsec, released an official statement regarding their independent investigation into the missing Mt. Gox funds.
“We won’t beat around the bush with it: Vinnik is our chief suspect for involvement in the MtGox theft (or the laundering of the proceeds thereof).”
The statement from Wizsec explains at length why they believe that BTC-e had played an instrumental role in the stolen funds from not only the Mt. Gox exchange but several other now defunct exchanges. The security team claims that missing bitcoin had been stolen after hackers were able to compromise Mt. Gox and funnel money from any wallet housed on the exchange. The use of these wallets by other users resulted in confusing the system, which then began reading the transfers as deposits, causing some users to receive large credits of bitcoin. The funds stolen by hackers were then transferred to wallets Wizsec believes were connected to Vinnik and placed on BTC-e and other exchanges, including Mt. Gox, where that money could then be laundered. It was these transfers back to Mt. Gox that allowed the team to conclude that the stolen funds were at least in part in the possession of Vinnik since the account had been registered to his known online identity. This information was subsequently forwarded to international agencies already investigating BTC-e.
The popular cryptocurrency news blog Coindesk says the takedown of BTC-e could be part of a larger effort by law enforcement to crackdown on dark web marketplaces. Coindesk reports that it is not known if the servers will be back online to allow users who had not been involved in illegal activities to retrieve their funds housed on the exchange. BTC-e has since announced on Twitter that they will be up and running again soon, but there remains substantial doubt within the cryptocurrency community that legitimate users will ever be able to retrieve their seized funds.
Vinnik is currently facing 21 counts including the operation of an unlicensed money service business and money laundering. Each count carries a maximum penalty of five to 20 years in prison if Vinnik is convicted.