Alleged MtGox bitcoin launderer caught – thoughts

Today’s big news is that Russian national Alexander Vinnik was arrested in Greece for alleged laundering of $4bn of money which included most of the lost MtGox bitcoins. The Greek police said that he ran a huge criminal enterprise and they claim that a specific website, believed to be the popular bitcoin exchange BTC-e, is a major part of this enterprise. The US authorities are seeking to extradite him.

The MtGox coins were sent to various exchanges for laundering, but most notably around half went to BTC-e. Some of those BTC-e coins were said to have been apparently stored directly by administrators of BTC-e, implicating the exchange in possible collusion.
Btc-e has now gone offline, and the fate of the money held in that exchange is unknown.

For more details of how this relates to MtGox, please see Kim Nilsson’s blog post on this. Kim has worked hard for years uncovering what happened to the coins but has had to keep much of it quiet until now to avoid disturbing any official investigation.

What does this tell us?

This confirms that the bulk of the missing bitcoins at MtGox were taken out of the exchange by an individual or small group over a period of time from 2011-2013, and that the money was subsequently laundered. The identity of the alleged launderer of that money is known, and there are strong alleged links to the BTC-e exchange. It appears that the launderer may actually be the operator of BTC-e. It now seems that the MtGox theft was in some way linked to a wider network of thefts from various exchanges – at least in how the money was laundered.

What this does not tell us

Vinnik is being accused of being the launderer, not the thief who took the money in the first place. The relationship between the launderer and the thief is at the moment unknown. This is the uncovering of a giant stepping-stone in the story but where that stone leads is still not quite certain.

Does this mean Karpeles did not steal the MtGox coins? Will it affect the trial?

Karpeles is on trial for embezzlement and for the large-scale trading of non-existent assets. He is not on trial for stealing the bulk of the MtGox bitcoins because there is not enough evidence for such a case. This new information should not affect the trial, and it’s almost certain that the prosecutors had this information before the start of the trial.

Assuming the laundering allegations are true, there is still an unknown link between Vinnik and MtGox. That link is the thief who supposedly compromised the hot wallet and arranged for the bitcoins to be drained over time.
It could have been Vinnik himself, it could have been Karpeles, or it could have been someone different. Perhaps Vinnik was a part of a small gang which hacked exchanges.
One big question which remains is how Karpeles could not have noticed the draining of such a massive amount of bicoins over a period of years until the exchange was almost bled dry, and also how security could have been so lax over a period of years.
I can’t imagine a situation where an exchange owner would avoid doing a quick check on exchange-held assets for a period of years, especially if that person was actively transferring them between bitcoins and USD on an industrial scale.

Might MtGox creditors see any money back if funds are seized?

It’s too early to tell based on limited information, but I think it’s pretty unlikely that we will see anything from this – and even if it did happen it would probably be years in the future.

Will there be any other implications?

I have my doubts that the $4 billion sum is a realistic figure, more likely it’s vastly inflated for impact using some carefully-picked method of measuring it. But my thoughts are that the US government could use this as the opening justification for a regulation-war with the crypto industry, especially if they manage to get hold of BTC-e’s internal records.
We could see US-led pushes for cryptocurrency regulation and prosecutions around the world, intended to help keep tabs on the flow of crypto money. It could end up being a pivotal point for the industry and for the users.

What next?

If Vinnik is extradited to the US, he’ll have the book thrown at him. A very, very heavy book thrown by the Statue of Liberty herself. The US does not like anyone who facilitates money laundering or anyone even remotely connected to such a thing. If the allegations are true then he’s likely to know the identity of the thief and other people in the network and we might see a plea deal happening which sheds more light on things.
We might learn about all sorts of related people and exchange hacks over the past few years. If someone is writing a movie script about MtGox, it’s now back to the drawing board to drink a few very long cups of tea and possibly change the focus of the story.


Thoughts go out to the BTC-e customers who must right now be panicking about their money.

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