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BTC-E’s Role in Mt. Gox Hack: Laundered $4 Billion Proceeds of Bitcoin Theft

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WizSecurity’s report which revealed BTC-E’s long lasting involvement in the Mt. Gox hack came as a shock to the Bitcoin community and industry. The unsettled case of Mt. Gox is finally set to come to an end and BTC-E is at the epicenter of a series of thefts that led to the loss of billions of dollars worth of bitcoin for Mt. Gox and Bitcoinica users.

WizSec Reveals BTC-E Laundered $2.21 Billion of Mt. Gox Funds

WizSecurity, a group of Bitcoin specialists based in Japan, have been collaborating with law enforcement agencies and authorities, leading covert investigations over the past few years. Security researchers at WizSec essentially reversed engineered transactions initiated with the stolen Mt. Gox funds and after years of research, the group established a connection between the stolen Mt. Gox coins and the online identity WME.

Hackers, that collaborated with BTC-E and its owner Alexander Vinnik, simply stole the wallet.dat file stored in the centralized databases of Mt. Gox and gained access to nearly 630,000 bitcoin. The wallet.dat file was stolen in September 2011 and the hackers moved the coins from Mt. Gox to BTC-E owner Vinnik’s personal wallet in mid-2013.

“After the coins entered Vinnik's wallets, most were moved to BTC-e and presumably sold off or laundered. In total some 300,000 BTC ended up on BTC-e, while other coins were deposited to other exchanges, including MtGox itself. Some of the funds moved to BTC-e seem to have moved straight to internal storage rather than customer deposit addresses, hinting at a relationship between Vinnik and BTC-e,” wrote the WizSecurity team.

Tracking down the identity of WME was key and the WizSecurity team actively investigated into BTC-E’s connection with the online identity. In the past, BTC-E vouched for WME when offering bitcoin mixing services, which have been popular amongst bitcoin users that wanted to anonymize their transactions for privacy purposes.

At the later stage of the investigation, WizSecurity researchers were able to link the online identity WME to Vinnik and also discovered that Vinnik laundered bitcoin or user funds stolen from Bitcoinica and Bitfloor.

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“Moving coins back onto MtGox was what let us identify Vinnik, as the MtGox accounts he used could be linked to his online identity "WME." As WME, Vinnik had previously made a public outcry that coins had been confiscated from him,” read the paper of WizSecurity.

Potentially Billions More Laundered, Massive Bitcoinica Hack

Some of bitcoin’s most influential figures including Roger Ver lost large amounts of bitcoin in the Bitcoinica hack. In early 2012, when the Bitcoin industry and exchange market were significantly less mature, Bitcoinica was the largest bitcoin brokerage and trading platform that enabled users to trade US dollars for the cryptocurrency.

In March 2011, Bitcoinica revealed that it had lost more than 43 bitcoin in an attack conducted by an undisclosed group of hackers, which is worth over $111 million at the time of writing. Immediately after the security breach, bitcoin investors and traders filed lawsuit against Bitcoinica for the stolen cryptocurrency.

"In a public announcement following said breaches, Bitcoinica assured its users, among other things, that: the overwhelming majority of its Bitcoin deposits were not stolen; monies were stolen from Bitcoinica, not from its users; and that all withdrawal requests would continue to be honored,” the complaint submitted in 2012 read.

The crackdown of BTC-E owner Vinnik and his involvement in Mt. Gox, Bitcoinica and Bitfloor will likely lead to the closure of other massive bitcoin hacking attacks that had occurred in the past. Vinnik was arrested July 25 in Greece, where Greek authorities described him as an 'internationally sought mastermind of a criminal organization.' Vinnik's arrest will also lead to the end of the investigation into Mark Karpeles, the former CEO of the now-defunct bitcoin exchange Mt. Gox, who recently plead not guilty in a trial in Japan.

Future Precedent of Bitcoin Laundering and Mixing Service Providers

In an official announcement released on July 23, the development team behind BitMixer, arguably the most popular bitcoin mixing service provider in the market, announced that it will terminate BitMixer for the good of the industry.

“Now I grasped that Bitcoin is transparent non-anonymous system by design. Blockchain is a great open book. I believe that Bitcoin will have a great future without dark market transactions. You may use Dash or Zerocoin if you want to buy some weed. Not Bitcoin. I hope our decision will help to make Bitcoin ecosystem more clean and transparent,” said the BitMixer team.

Some analysts praised the decision of BitMixer for shutting the platform on their own terms, rather than running into conflict with law enforcement agencies. BTC-E owner Vinnik was officially charged for laundering over $4 billion with a bitcoin transaction mixing tool he developed.