Jack Niewold shared: What do: • 4 billion dollars in missing BTC • Female rapper RAZZLEKHAN • Forbes magazine • the US Department of Justice Have in common? A thread on the 2016 Bitfinex hack, its resolution, and the implications. The strangest crypto story of the year (so far, at least):

This story starts with the infamous Bitfinex hack. In August 2016, a (still unknown) hacker gained access to the exchange, allowing them to authorize around 2000 unapproved transactions. They stole 119,754 $BTC, then worth about ~$72 million. It tanked the market by nearly 40%.

What happened next? It’s unclear, but those coins were likely sold in a P2P/OTC deal between the hacker and a third party. It was just another one of several previous (smaller) hacks of Bitfinex, and in the eyes of the public, the exchange never really regained rust.

Although most customers hadn’t been hacked, the exchange slashed account balances across the platform by 36% to stay solvent. Losses were reimbursed in the Bitfinex exchange token, LEO, to even out this account rebalancing. Remember this–it’s important.

Nothing much happened publicly until 2020 when Bitfinex put up a bounty of $400 million for the now $1.3 billion in missing $BTC. The hacked Bitcoin moved around a bit, but no one was able to trace it back to any identity.

On January 31st, on-chain observers began to see strange activity around the wallets holding the funds from the hack. It seemed strange to many observers as the funds were consolidating without any privacy-seeking behavior (mixing, use of Monero, Tornado Cash).

Today, the DOJ announced that the hacked $BTC, now worth $3.6 billion had been recovered. No one had ever really lost track of the $BTC even as those controlling the wallets had tried to hide their trail using now-defunct AlphaBay, Monero, and gift cards.

Although they knew where the funds were, they didn’t yet know who was behind the hack or how to recover them. Tracing exchange accounts to India-based emails, they linked the $BTC to the business and personal accounts of two people: Ilya Lichtenstein and his wife Heather Morgan.

Now that they had identities, they got a warrant to break into the cloud data provider account of Lichtenstein, a dual-citizen of Russia and the US. Lucky for the DOJ, Ilya stored the private keys in plain text on that service, which contained the $3.6 billion in BTC. But here’s where the story gets weirder.

While they were $BTC billionaires on paper, the couple had laundered the money via, among other things, purchasing $500 gift cards from Walmart, Uber, and Playstation. They couldn’t even access most of the money.

On top of that, the couple was relatively well known. Heather Morgan was a serial entrepreneur and angel investor who had written for both Inc and Forbes magazine on entrepreneurship and social persuasion. But her side gig? RAZZLEKHAN, amateur rapper.

And Ilya Lichtenstein was publicly known as well: a cofounder of MixRank, a Y-Combinator backed startup that helps companies analyze marketing data around customers and competitors. Today, they were both taken into DOJ custody.

As to the $BTC? Well, hypothetically it’ll be given back to Bitfinex, who plan to buy back their exchange token in a long-overdue (but maybe ineffective) way to repay customers. Their token, LEO, is mooning on the news and has made its way into the top 25 cryptos.

This has big implications for both LEO and BTC, as it represents a huge block of BTC that will come on the market. With selling methods like TWAP as well as OTC deals, likely, it doesn’t affect the $BTC market too much, but $4 billion is a decent chunk.

Also, now the federal government has nearly $4 billion in crypto on their balance sheet. Yeah, it’s not technically ‘theirs.’ But on the other hand, it kind of is. It also shows us that the DOJ is both closely examining and deploying massive resources to the crypto industry.

It’s a good reminder that exchanges aren’t 100% safe, that $BTC isn’t private, and that you should store your keys offline. An insane saga. Another day in crypto.