You Can Run But You Can’t Hide: U.S. Government’s Cryptocurrency Tracing Capacity on Full Display in Civil Forfeiture Action
The U.S. Department of Justice (“DOJ”) filed a civil forfeiture complaint detailing two hacks of virtual currency exchanges by North Korean actors. These actors stole millions of dollars’ worth of cryptocurrency and ultimately laundered the funds through Chinese over-the-counter (“OTC”) cryptocurrency traders.1 The complaint filed in federal court in Washington identified 280 accounts that were used to launder the stolen funds.
The complaint details two related hacks of virtual currency exchanges. In the summer of 2019, a virtual currency exchange was hacked by an actor tied to North Korea, who stole over $272,000 worth of alternative cryptocurrencies and tokens, including Proton Tokens, PlayGame tokens, and IHT Real Estate Protocol tokens. The funds were laundered over several months through multiple intermediary addresses and other virtual currency exchanges in a process known as “chain-hopping.” In an effort to obfuscate the transaction path, the defendants converted the traceable cryptocurrency into Bitcoin, Tether, or other forms of cryptocurrency that are more difficult to trace. Despite the sophisticated laundering techniques used, law enforcement was able to trace the funds.
The second hack, which involved a U.S. based company focused on the Algorand blockchain, occurred in September 2019. In this instance, the North Korea associated hacker gained access to the company’s virtual currency wallets, funds held by the company on other platforms, and funds held by the company’s partners. The hacker stole nearly $2.5 million and laundered it through more than 100 different accounts at another virtual currency exchange. The funds from both of the hacks were allegedly laundered by the same group of Chinese OTC actors.
DOJ’s announcement last month reveals two noteworthy developments in this type of investigations: U.S. Cyber Command will now be a player in similar investigations and the Cryptocurrency Strike Force’s expertise and skill in tracing and seizing virtual currency are beyond what criminals previously thought possible. This case is the most recent example of the U.S. government’s use of sophisticated tracking tools to identify and take action against parties that are using blockchain technology for nefarious purposes.
 In cryptocurrency markets, over-the-counter trades are also facilitated by OTC brokers who negotiate directly with the buyer and seller. The OTC broker finds buyers and sellers for a trade. OTC trades are thought to offer greater liquidity and increased anonymity.