Category Archives: Crime

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Rogue Crypto Trader Joseph Kim Gets 15 Months Prison, $1.146 Million Restitution Order

Cryptocurrency trader Joseph Kim has been sentenced by the US Department of Justice to 15 months in prison, and the Commodities Futures Trading Commission (CFTC) has ordered Kim to pay USD 1.146 million of restitution after the rogue trader was found to have committed trading-related fraud from September 2017 through March 2018, which resulted in total losses of USD 1.146 million. Further, Kim has been banned from trading for the rest of his life.

In September 2017, Kim was working at a cryptocurrency trading firm based in Chicago and began sending the firm’s Bitcoins and Litecoins to his own wallet. The firm approached Kim and asked him about the missing money, and he asserted that the cryptocurrency exchange was having problems, and Kim had to transfer to other accounts for security purposes. The ruse only held up for two months and Kim was fired in November 2017 after stealing USD 601,000 from the firm.

Kim then solicited funds from clients, without notifying them that he was fired from the firm. Kim made it seem like he was trying to start his own business. Five clients invested USD 545,000, with Kim promising the money would go towards a low-risk arbitrage scheme. However, Kim made high-risk bets on directional cryptocurrency price movements, during a time when the cryptocurrency markets were crashing. Kim ultimately lost all of the money but issued false statements to customers showing profits.

The arrest and prosecution of Kim was a joint effort by the CFTC, Federal Bureau of Investigations (FBI), Department of Justice, and the Securities and Futures Commission of Hong Kong.

The Director of Enforcement at the CFTC, James McDonald, said, “Today’s Order stands as yet another in the string of cases showing the CFTC’s commitment to actively police the virtual currency markets and protect the public interest.  In addition, the criminal indictment and sentence reaffirms the CFTC’s commitment to working in parallel with our partners at the Department of Justice to root out misconduct in these markets. My thanks to US Attorney Lausch and his staff, as well as the Federal Bureau of Investigation, for their assistance in this case.”

 

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Compromised Traffic Counter Features in New Kind of Exchange Hack

In a new type of hack, malicious code was injected into a website traffic analysis app called StatCounter in order to steal Bitcoins from Gate.io users. Gate.io currently has a daily trading volume in excess of USD 20 million, but was near USD 35 million before the information about this hack was published. That being said, it appears Gate.io and StatCounter have been fixed and are safe to use at this point.

StatCounter is one of the more popular website traffic analysis tools, with 2 million websites and 10 billion pages analyzed per month. Websites that use StatCounter place a snippet of java code on their web pages. Hackers exploited this piece of code and injected their own malicious code, placing all 2 million websites that use StatCounter at risk.

The malicious code checks for ‘myaccount/withdraw/BTC’ in the URL; if it finds this then it downloads another piece of malicious code from statconuter.com, which is spelled very similar to statcounter.com to avoid detection. The only website that has this URL out of all 2 million StatCounter websites is Gate.io, making it clear this hack was aimed at the exchange.

This second piece of code replaces the destination Bitcoin address chosen by Gate.io users with the Bitcoin address of the hacker at the moment they submit an external Bitcoin transfer. Further, the malicious code increases the send to the daily withdrawal limit for the user, depending on how much Bitcoin is in their account.

This made the losses from this hack very hard to track since as far as Gate.io was concerned, they sent the Bitcoin to an external address as usual; only the user would know that they did not receive their Bitcoins. As the hackers changed their Bitcoin address every time a user hit submit, there is no central Bitcoin address that can be viewed to see the total losses.

This is the latest evidence to show that hackers are becoming more sophisticated and creative, developing new ways to hack cryptocurrency exchanges.

 

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Head Teachers in China Caught Red Handed Ether Mining at Work

Two school principals in Hunan province, China, have gotten themselves into hot water for mining Ethereum at work.

Lei Hua, Principal of the Puman Middle School in Chenzhou, Hunan convinced his wife that mining Ethereum might be a good way to earn some extra income, then put 7 machines to work at school.

Lei was put on to the benefits of crypto mining by a cousin, prompting him to spend 10,000 yuan on equipment, one machine followed later by another 6 which he ran round the clock in one of the school’s classrooms. The only problem being between June and November last year he used over $2K of the school’s electricity.

So profitable were the school principal’s extracurricular activities that his vice- principal decided to join him. The activities were only tumbled when teaching staff observed unusual levels of noise emanating from the schools’ physics’ lab which clearly couldn’t have been caused by lessons, although the 24 whirring was originally put down to the school’s air conditioning. This noise was emanating from an extra two machines set up there by vice-principle Wang, also purchased from the principal’s cousin.

Once the nine machines were discovered by authorities and duo’s earnings were seized, the school returned to its main function; educating the children. The principal was removed from office but his junior managed to retain his job with an official warning.

Illegal mining at work does happen, albeit not frequently. Power theft, however, is a far more frequent activity. Russian miners made the news earlier this year when more than 6,000 pieces of mining equipment were found at the site of an abandoned rubber factory in Orenburg, 1,478 kilometers southeast of Moscow near the Russian border with Kazakhstan.

Russian ministry of internal affairs spokesperson, Irina Volk, stated that the miners, two former factory employees, had stolen 8 million kW/h of electricity estimated to cost 60 million Russian rubles (RUB, approximately USD 968,000 at time of writing). Media reports suggest that despite rumors of the mining farm’s existence since March, police declined to comment if they had any knowledge of illegal activities taking place.

Also, earlier this year, Russian security officers arrested scientists at a top-secret warhead facility in Sarov, 240 miles east of Moscow. Several scientists had tried to use one of Russia’s most powerful supercomputers to mine Bitcoin.

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Bitmain Sues Unknown Hacker Who Stole 617 Bitcoins via MANA Market Manipulation

Bitmain is suing ‘John Doe’, an unknown hacker who gained access to Bitmain’s Binance account on 22 April 2018. Ultimately 617 bitcoins worth USD 5.5 million were stolen from Bitmain, the largest cryptocurrency mining firm on the planet.

The scheme the hacker used to steal the bitcoins was unique. Instead of directly withdrawing cryptocurrency from Bitmain’s account, likely impossible due to some sort of 2FA requirement, the hacker manipulated the MANA market to steal Bitmain’s bitcoins. MANA is the native cryptocurrency of decentraland, and its trading volume of only USD 10 million per day on average makes it an easy target for market manipulation.

After the hacker gained access to Bitmain’s bitcoins and ether, they placed large buy orders for MANA. This caused a rally in daily trading volume from USD 10 million to over USD 100 million. Part of this price rise can be explained by other traders thinking this was a legitimate MANA rally and jumping in. Globally, MANA’s average price jumped from USD 0.12 to USD 0.23 during the hack, an impressive 90% rise. On Binance, the price rise was even more drastic, with a peak price of USD 0.34, a 180% increase.

The hacker likely had a large amount of MANA on hand before the hack, and they filled Bitmain’s overpriced MANA buy orders. Then the hacker placed orders to buy Mana at prices far below the market value and used the Bitmain wallet to match these orders. The combination of these mechanisms drained USD 5.5 million of bitcoin from Bitmain’s wallet in a single day, without directly withdrawing cryptocurrency from Bitmain’s wallet.

After the bitcoins were siphoned into the hackers wallet, the hacker proceeded to trade for other cryptocurrencies and withdraw funds. Some of these funds were withdrawn to Bittrex and other unnamed cryptocurrency exchanges. Essentially, the hacker mixed the coins to obfuscate the trail.

Bitmain is suing the hacker for unauthorized access, computer trespass in the 2nd degree, electronic data theft, the USD 5.5 million of stolen cryptocurrency, and attorney fees. A key part of this lawsuit will involve subpoenas to obtain information from Binance and Bittrex, in order to gain enough information to identify the hacker and proceed with the criminal case.

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Sim Swapping Victims Sue T-Mobile and AT&T

The Silver Miller law firm, which has been on the forefront of cryptocurrency lawsuits including the class action lawsuit against YouTube regarding BitConnect, is suing the major cell service providers AT&T and T-Mobile over their roles in facilitating sim swapping.

In August 2018 it came to light that a crime ring led by Joel Ortiz had stolen USD 5 million in cryptocurrency from over 40 victims. BitcoinNews correctly speculated at the time that the mobile carriers may be liable for the damages since ultimately they were the ones who handed over control of victim’s sim cards to the hackers.

Silver Miller asserts that T-Mobile and AT&T had holes in their security protocols and did not properly train employees, resulting in employees giving control of sim cards to thieves. Once the hackers had control over a sim card they could access financial information, allowing them to drain cryptocurrency wallets, as well as credit cards and bank accounts.

One of the clients Silver Miller is representing lost USD 621,000, and that was after AT&T supposedly increased account security after an attempted hack on the client. There are 2 clients using T-Mobile who lost USD 400,000 and USD 250,000 respectively.

Essentially, a hacker can plea for assistance with customer support, tricking the customer support into not following proper identification protocols, resulting in the loss of a client’s life savings. Silver Miller is considering additional sim swapping lawsuits against Verizon, Sprint PCS, Cricket Wireless, Boost Mobile, Virgin Mobile, and Metro PCS. The goal is to restore the client’s life savings and improve the policies of cell phone carriers to prevent further sim swapping.

It could be argued that cryptocurrency thefts via sim swapping would not happen if the victims properly stored their cryptocurrency. Bitcoin private keys, especially for large amounts of money, should only be stored in core wallets and not on mobile wallets.

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Principal Turns Chinese School Into Mining Farm

The principal and vice principal of a middle school in Chenzhou, Hunan Province, China have been busted after turning their middle school into a cryptocurrency mining farm. Lei Hua and his deputy Wang Zhipeng have been fired, thrown out of the Communist Party, and their mining revenue confiscated. The mining operation reportedly used large amounts of the school’s electricity and internet bandwidth.

Apparently, a loud noise had been emanating throughout the school at all hours, including holidays, due to the mining rigs. Additionally, the internet had slowed to a crawl at the school, a serious detriment for computer students and teachers. The teachers asked the principal why this was happening and Lei responded that the air conditioner and grills were being used too much. That was a good excuse for the power bill, which increased by nearly 100% and cost the school a total of USD 2,163, which has been paid back at this point. Eventually, the teachers worked together to investigate since the loud noise and slow internet was too much of a nuisance to ignore and discovered the mining rigs.

Indeed, the reason Lei moved the mining rigs into the school in the first place was that they consumed too much electricity at home. They originally moved a mining rig into a school dormitory but after they expanded to nine rigs, there was not enough room in the dormitory so they moved the mining farm to a computer classroom.

Ethereum has experienced a drastic price decrease during 2018 from nearly USD 1,400 in January 2018 to about USD 200 as of November 2018. This has caused Ethereum mining to become unprofitable for individual miners. Some have sought a source of free electricity like Lei and Wang were doing.

This is not the only incident of employees stealing electricity for cryptocurrency mining. An employee at the Florida Department of Citrus was arrested for mining cryptocurrency on state computers, a group of staffers for the Louisiana Attorney General are being investigated, and an employee of the Federal Reserve of the United States was fined USD 5,000 for mining Bitcoin on government computers.

 

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Research Claims 1 out of 40 Bitcoins Seized by Government at Some Point

According to research by The Block Crypto, 453,000 Bitcoins have been seized by various governments at some point in the past. This is 2.6% of the 17.366 million Bitcoins in circulation, approximately 1 out of 40.

Some 85.6% of these seized coins came from the Silk Road shutdown and a crackdown on a crime group in Bulgaria. It is important to note that the amount of seized Bitcoins at any given time is much less than the total, as since governments usually auction off the seized funds for cash.

Theoretically, Bitcoin cannot be seized if used properly, since Bitcoins are cryptographically secured with a private key. However, if not stored properly or if forceful persuasion tactics are used, private keys can end up being revealed.

The Silk Road is probably the most well-documented seizure. A total of 174,000 Bitcoins were seized from the Silk Road when Ross Ulbricht was arrested in October 2013, worth nearly USD 54 million at the time. All of these have been auctioned off.

In May 2017, the Southeast European Law Enforcement Center (SELEC) announced that it had seized 213,519 Bitcoins worth USD 500 million, and these are believed to be in the coffers of the Bulgarian state. There is some controversy over whether this happened, due to conflicting official statements released by the Bulgarian government.

Other seizures include 24,518 Bitcoins by Australia in May 2016 from a Silk Road merchant, 11,000 Bitcoins by Europol in July 2015, 6,060 Bitcoins by the United States in April 2014, 4,000 Bitcoins by the United States in June 2018, another 3,813 Bitcoins by the United States in January 2018, with many smaller ones.

The United States and Europe are responsible for practically all of the seized Bitcoins in the world, besides the one incident in Australia. Bulgaria officially claims to not have the stash of 200,000 seized Bitcoins and the United States in one estimate has no more than 10,000 seized Bitcoins after auctions.

 

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Bank of America Secures Tamper-Proof Blockchain Patent

America’s second-largest bank after Morgan Chase may have taken a reluctant step closer to cryptocurrency storage with the securing of its “tamper responsive” blockchain patent.

The Bank of America filed for the patent in 2016 for a technology which acts as another barrier against hacking into clients’ private keys. The patent describes how, during attempts to hack remote storage of private cryptocurrency keys, “such devices do not provide for a real-time response to such breaches, such that misappropriation of private cryptography keys is prevented”.

To prevent these “misappropriations” the new tamper-proof invention “points out to a structure having redundant keys in which the system automatically reacts to tamper attempts by removing the key from the potentially compromised device”.

According to the patent:

“In other specific related embodiments of the system, the one or more sensors further comprise at least one of a shock sensor, an acceleration sensor and a temperature sensor, in such embodiments of the system, the first processor is further configured to, in response to receiving the tamper-related signals from at least one of the shock sensor, the acceleration sensor and the temperature sensor, delete the one or more private cryptography keys from the first memory.”

The patent offers the holders a highly marketable product. It seems likely that larger companies more at risk to large-scale hackings may find the Bank of America tamperproof system highly applicable to be used alongside their current cybersecurity measures. However, in terms of the bank’s own stance on cryptocurrency, it seems unlikely that it will be offering its own cryptocurrency storage anytime soon. It cannot, under any circumstance, be cited as one of the more crypto-friendly financial institutions in the US.

Clients of the bank have been barred from using its credit cards to purchase cryptocurrencies. Bank of America’s latest annual report references cryptocurrencies as a threat to its business model; apparently, it sees the way to combat this is as to get ahead of the game and monetize cryptocurrency use cases via patenting innovations such as the “tamper responsive” patent.

 

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Oyster Protocol Smashed Open and Sucked Dry

The Oyster Protocol has allegedly been compromised by its founder Bruno Block, who generated 3 million Oyster Pearls (PRL) without permission, crashing the PRL market cap from USD 20 million to less than USD 3 million in a day. Oyster Protocol is a hybrid between IOTA and Ethereum, and is used for data storage, but its reputation has been severely impacted by this event and trading volume has fallen to less than BTC 5 per day.

Block is actually a pseudonym and his real identity is unknown even to the Oyster Protocol team members. The founder apparently installed a transferDirector function in the Ethereum smart contract which generated the PRL cryptocurrency. Oyster Protocol was audited three times and this function was noticed but Block assured the team it was necessary to adjust PRL’s peg.

The transferDirector function ended up being used as a hack in this incident, with Block creating PRL 3 million and quickly transferring them to KuCoin, before selling them for other cryptocurrencies and withdrawing the proceeds. This incident occurred only days before KuCoin, the primary crypto exchange which PRL is listed on, was due to implement know your customer (KYC) procedures, which would have prevented this from occurring. In any case, KuCoin has frozen PRL trading until the code is fixed.

In total there are PRL 98.5 million in circulation, so the 3 million tokens created and dumped by Block should not have been the main reason for the market crash. It is believed that PRL’s damaged reputation is what caused most of the 80+% decline in price since now traders and investors know it can be created at will by an anonymous bad actor.

The CEO of Oyster Protocol, William Cordes, is planning on revising the smart contract to remove the transferDirector function exploit installed by Block. Cordes says a token swap is likely, asserting that all PRL is safe and will eventually be exchanged 1:1 for a new token called PEARL “or something to that effect”. Beyond this, Cordes is asking for the community’s help to track down Block.

 

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Silk Road Fallout Continues as Libertas Takes Prison Plea Deal for up to 20 Years

The fallout from the Silk Road, perhaps the most infamous darknet market in history, continues. Gary Davis, aka Libertas, who was a site administrator and moderator, has pleaded guilty to distributing massive amounts of narcotics. Sentencing is scheduled for 17 January 2019, and Libertas faces a maximum sentence of 20 years in prison.

US Attorney Geoffrey S Berman said: “Silk Road was a secret online marketplace for illegal drugs, hacking services, and a whole host of other criminal activity. As he admitted today, Gary Davis served as an administrator who helped run the Silk Road marketplace. Davis’s arrest, extradition from Ireland, and conviction should send a clear message: the purported anonymity of the dark web is not a protective shield from prosecution.”

Libertas’ duties included moderating forum posts, arbitrating trade disputes, and enforcing marketplace rules. Apparently, he was paid a weekly salary in excess of USD 1,000.

Silk Road operated from 2011-2013 and transacted BTC 9.52 million. Although darknet activity comprises only a minuscule fraction of Bitcoin volume in 2018, back when Silk Road rose to prominence, it has been speculated that a large amount of Bitcoin’s price rise and adoption was driven by illicit trading there. Indeed, the collapse of Bitcoin’s price in late 2013 coincided with the shutdown of Silk Road.

Roughly BTC 174,000 were seized during a sting operation and these were eventually auctioned off. The owner of Silk Road, Ross Ulbricht aka Dread Pirate Roberts, is serving a life sentence in prison after a lengthy and controversial court battle, with his only hope being a presidential pardon.

Due to the anonymous nature of Silk Road, which used Tor and Bitcoin to shield operator’s and user’s identities, it took years to find Libertas and extradite him to the United States. It is believed by enforcement that there were only three team members working for Ulbricht. The other team members have not been sentenced yet.

 

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