Bitcoin Fog is a ghost of the past

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week, we’re taking a look at a reminder of bitcoin’s past.

It’s easy to find glowing media coverage about bitcoin.

Bitcoin hit a record high earlier this week of $73,803, although has since pulled back, and more than $10bn has been pulled in by the US’s newly approved group of spot bitcoin exchange traded funds, issued by stalwarts of Wall Street including the world’s largest asset manager BlackRock.

As a consequence, industry watchers and financial market pundits are lining up to declare bitcoin’s coming of age. What was once a punk rock technology for libertarians and criminals has grown up and earned its place in serious portfolios like any other respected investment asset.

Well, not so fast. Bitcoin is still crypto, and when it comes to crypto, scandal is never too far away.

This week Roman Sterlingov, founder of bitcoin mixing service Bitcoin Fog, was found guilty in the US of money laundering conspiracy and sting money laundering. Both carry a maximum penalty of 20 years’ imprisonment. He was also convicted of two more charges relating to money transmission, each of which carry maximum penalties of five years in prison. He will be sentenced later.

The jury decided Sterlingov’s platform, which obscured the trail bitcoin deals left on a digital ledger, helped launder more than 1mn bitcoins.

At the time of the transactions, this came to roughly $400mn, but by today’s sky-high prices it equates to roughly $84bn. The justice department labelled Bitcoin Fog, which ran from 2011 to 2021, as the “longest-running” mixer and gained notoriety as a “go-to money laundering service for criminals”.

“The defendant and his customers believed they could use Bitcoin Fog to conceal these illicit transactions,” said Nicole M Argentieri, acting assistant attorney-general of the justice department’s criminal division. “As the jury’s guilty verdict shows, that belief was mistaken.”

Before I go further, it’s important to point out that in absolute terms more money is laundered via sovereign currencies than bitcoin.

It’s a common industry defence but it’s not particularly compelling: not only are dollars and pounds far more widely traded than bitcoin — as SEC chair Gary Gensler pointed out recently — they’re also not being pitched as rehabilitated currencies in the same way bitcoin is by its industry backers.

“People are getting complacent about bitcoin because it has hit an all-time high, and because mainstream names have jumped on the bandwagon,” said Aidan Larkin, founder and chief executive of Asset Reality, a company that seizes and manages assets for law enforcement agencies.

“We have to remember it’s still the Wild West,” he added.

Crypto mixing services allow users to obfuscate transaction activity that would otherwise be available on a public ledger blockchain. Thus unsurprisingly, mixers have been a focus for US prosecutors and law enforcement, and this is far from the first time the technology has come up against the long arm of American justice.

But Sterlingov’s case is of particular interest because it goes to one of the industry’s most common talking points: that bitcoin and crypto are not one and the same. The position is that bitcoin as a form of “digital gold” has persevered for its nearly a decade and a half history, while thousands of knock-off alternatives come and go without gaining anywhere near as much traction.

The distinction is made by bitcoin’s advocates — often labelled bitcoin maximalists — whenever a niche corner of the crypto world runs into trouble.

This is true. North Korean hackers stole more than $600mn via a crypto-linked video game built on an ethereum network. Bitcoin had nothing to do with the implosion of FTX or the TerraLuna stablecoin.

The US Treasury has long been targeting crypto mixers and in 2022 imposed sanctions on Tornado Cash, a platform built on ethereum that allegedly helped launder more than $7bn and that helped North Korean hackers evade economic penalties.

But Sterlingov’s conviction is a reminder that bitcoin also has a blemished past. It was central to the historic cases of Mt. Gox and Silk Road, and more recently the infamous crypto couple Heather Morgan and Ilya Lichtenstein pleaded guilty after attempting to launder more than $4bn worth of bitcoin. Lichtenstein later testified that he used Bitcoin Fog several times to aid his laundering efforts, Bloomberg reported.

“This rhetoric of bitcoin being more pure than other cryptocurrencies is pretty hollow, there’s no reason to distinguish between them,” Hilary Allen, professor of law at American University, told me.

Today, Bitcoin Fog’s case is the latest reminder to investors that the world’s largest cryptocurrency remains just as appealing to criminality as it does to Wall Street.

“The bulk of this cryptocurrency came from dark net marketplaces and was tied to illegal narcotics, computer crimes, identity theft and child sexual abuse material,” the justice department said.

“On one hand, bitcoiners are asking for legitimacy while on the other they’re asking to be treated as special, and different from the rest of crypto,” added Larkin. “You have to pick a lane.”

What’s your take on bitcoin and crypto mixers? As always, email me your thoughts at scott.chipolina@ft.com.

Join me and fellow colleagues at FT’s flagship Crypto and Digital Assets Summit on May 8-9 in London. Hear from some of the leading players in the industry including Julia Hoggett, chief executive, London Stock Exchange, Bim Afolami, economic secretary to the Treasury and City minister, UK government, Michael Sonnenshein, CEO, Grayscale Investments, and many more. Secure your seat now at crypto.live.ft.com

Weekly highlights

My colleague Aanu Adeoye and I revealed that Nigeria is pressing Binance for information on its top 100 users in the west African countries. It’s part of a stand-off between Binance and Nigeria, which is holding two Binance executives until a hearing on March 20. Nigerian authorities have previously blocked access to crypto exchanges in a bid to claw back control over the collapsing naira currency. In separate Binance news, Bloomberg reported the exchange had spun off its $10bn venture capital arm, which was now an independent entity.
I see your spot bitcoin ETFs, and I raise you . . . bitcoin and ethereum-backed exchange traded notes for professional investors. The UK’s Financial Conduct Authority this week softened its stance on crypto investment products as it said it would allow some crypto-linked securities on the stock market.

Soundbite of the week: Dr No You Aren’t

The longest-running mystery in crypto is who is Satoshi Nakamoto, the author of the 2008 white paper that laid the foundations of bitcoin.

For years Craig Wright, an Australian computer scientist, has claimed he is bitcoin’s creator. In London the Crypto Open Patent Alliance, a group that is backed by Coinbase and Twitter founder Jack Dorsey, sued him to stop making the claims.

This week the judge ruled in Copa’s favour. As the Guardian newspaper noted, in a highly unusual move the judge issued the verdict within seconds of the case concluding. The evidence is “overwhelming”, the judge said.

“First, Dr Wright is not the author of the Bitcoin White Paper. Second, Dr Wright is not the person who adopted or operated under the pseudonym Satoshi Nakamoto in the period 2008 to 2011. Third, Dr Wright is not the person who created the Bitcoin System. And, fourth, he is not the author of the initial versions of the Bitcoin software.”

Data mining: Bybit volume surges

Demand for bitcoin coming from ETFs but trading the coin itself takes places on crypto exchanges. Bybit, an Asian exchange whose base is hard to pin down, has become the second-largest venue, behind Binance and ahead of Coinbase and OKX. Last month it traded $95.7bn, a record high, according to CCData.

So it was particularly noteworthy that this week Hong Kong’s Securities and Futures Commission warned consumers that Bybit was unlicensed in the region. It also added 11 Bybit products to its Suspicious Investment Products list, reserved for products that display “suspicious features or are sold by unlicensed entities to Hong Kong investors”.