Bad blockchain forensics blame the user of the Bitcoin mixer – as the operator
I was sitting at the counseling table next to 35-year-old Roman Sterlilov. We called him “Mr. Sterlilov” throughout the experiment, but I knew him as Roman. He was the accused. We were waiting for the jury to read the verdict.
In the year The March 12 verdict was “guilty.” When the four charges are read, say it four times. I felt like I had been punched in the stomach. The only way my mind works is to focus on strategies that appeal.
The trial lasted for four weeks. I testified one full day and worked on the case for a year. The subject of the case was Bitcoin Fog, the biggest mixer in Bitcoin (BTC) history.
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Bitcoin Fog has generated 1.2 million bitcoins in its lifetime. Hundreds of millions of dollars were illegally seized from drug sites like Silk Road and AlphaBay. Prosecutors say she not only used Roman, but ran.
Defense counsel Thor Ekland and Mike Hassard fought like lions – like Paul Newman in “The Verdict” but with crypto-technology.
The prosecution's case mirrors that of the original prosecution. With a trip to Bitcoin wallet, Sterlingov's Mt. Gox account focused on Bitcoin trading. We don't know who has the wallet or the private key. From there, a series of transactions eventually connected to the purchase of the Bitcoin Fog clearnet site, which explains how to get Bitcoin Fog on the darknet.
Sterlilov may have sold Bitcoin to someone who bought the Bitcoin Fog website, or someone later sold Bitcoin to someone else – and so on – who eventually bought the domain.
Roman Sterlilov was convicted on all four charges. I have been working on this pro bono case for a year. I have so much to say but right now I feel dead inside.
— BlockProf (@JWVerret) March 12, 2024
The government harped on how Sterlilov exploited the Bitcoin fog. Yes, he testified that he regularly uses Fog for privacy. Gov. Sterlilov sent 2,700 bitcoins through Bitcoin Mist. However, I have witnessed that a real fog operator earns between 24,000 and 36,000 bitcoins with Fog Pay.
I have shown that this would be in the hundreds of millions of dollars, from subpoenaed state witness Larry Harmon, who testified that he got to run the related Bitcoin mixer Helix. However, the government's IRS testimony showed Roman never spent more than $60,000 a year, lived in a one-bedroom apartment, and was worth no more than $1.8 million in the ten years they watched him.
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The “Perry Mason” moment was captured by defense expert Jeff Fischbach. The government's evidence included a statement that the defendant had screenshots of a text message chain discussing the money laundering scheme. Turns out, it was just an image from an e-book the defendant was reading on her computer! Oh, the prosecutor apologized for their mistakes in closing, but promised that they were the only ones.
Prosecutors C. Alden Pelker and Chris Brown wrote a Justice Department publication advising prosecutors not to file charges based solely on surveillance. They suggest using proof of identity, such as holding a private key for Bitcoin addresses that hold illegal funds.
Good advice Academic literature shows that Chainalysis heuristics can be wrong 90% of the time. This is not a case that can be built when someone is facing decades in prison. Yet in this case, prosecutors made exactly the same mistake they urged other prosecutors to make.
Key problem: Chinalysis's “shared spending” heuristic assumes that the bitcoins are from the same user who spent them together, but is frustrated by splitting a dinner check with a friend using bitcoins.
Likewise, the “peel chain” heuristic assumes that unspent bitcoins are chained together, with the largest transaction cost being that the provider maintains their “change”. However, if you send the largest amount of bitcoins to someone else in that chain, this will be defeated. Also, if you give someone else's private key in an off-chain transaction, which was very common in the early years of Bitcoin, it is easily defeated.
These two tracking heuristics were central to Chinalysis' search in this case. The Chainalysis expert testifies to the criticisms of her tools and fixes them with the secret sauce in the Chainalysis source code. The code is proprietary so she can't share it and we only have to trust her.
Roman was early to Bitcoin, in this way he was lucky. He was also an early user of Bitcoin Fog for privacy, had a Russian passport, and was into computers. This made the fog system an easy mark to install on the pin. In that way, he might be the unluckiest person I've ever met.
JW Verret is an Associate Professor at George Mason University's Antonin Scalia School of Law. He is a practicing crypto-forensic accountant who also practices securities law at Lawrence Law LLC. He is a member of the Financial Accounting Standards Board's Advisory Council and a former member of the SEC's Investor Advisory Committee. He also leads the Crypto Freedom Lab, which advocates for policy change to protect freedom and privacy for crypto developers and users.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
