I found myself seated at the counsel table beside Roman Sterlingov, a 35-year-old man, during the monumental trial for the largest Bitcoin-mixer money laundering case to date. Although referred to as “Mr. Sterlingov” throughout the trial, I personally knew him as Roman. He was the defendant, and we anxiously awaited the jury’s verdict.
On March 12, the verdict was delivered: “guilty.” As each of the four counts of the indictment were read, the words echoed four times, hitting me like a blow to the stomach. To cope with the shock, I focused my thoughts on devising strategies for an appeal.
The trial had spanned four weeks, during which I testified for an entire day. I had dedicated a year of my life to working on this case. The subject at hand was Bitcoin Fog, the most prominent mixing service in the history of Bitcoin (BTC).
Bitcoin Fog had facilitated the processing of approximately 1.2 million Bitcoin over its existence. Allegedly, hundreds of millions of dollars in illicit drug money from darknet platforms like Silk Road and AlphaBay had been laundered through this platform. The prosecution claimed that not only had Roman used Bitcoin Fog, but he had also operated it.
In our defense, Tor Ekeland and Mike Hassard, members of the legal counsel, fought tirelessly against every motion and objection. Their tenacity resembled that of Paul Newman’s character in “The Verdict,” but with a modern twist involving cryptocurrency technology.
The prosecution’s case closely mirrored the initial indictment. It primarily revolved around a Bitcoin transaction from Sterlingov’s Mt. Gox account, which then proceeded to a Bitcoin wallet. The identity of the wallet owner and the holder of its private key remained unknown. Subsequently, a series of transactions were traced back to the purchase of a Bitcoin Fog clearnet site, providing instructions on accessing Bitcoin Fog on the darknet.
It was suggested that Sterlingov may have sold Bitcoin to an individual who later acquired the Bitcoin Fog website. Alternatively, someone else may have sold Bitcoin to another person, and the cycle continued until the domain was eventually purchased.
The prosecution emphasized Sterlingov’s use of Bitcoin Fog. He admitted to regularly using the platform for privacy purposes. The government’s claim was that Sterlingov had sent 2,700 Bitcoin through Bitcoin Fog. However, I testified that if Roman had truly operated Bitcoin Fog, he would have earned between 24,000 and 36,000 Bitcoin in fees, equating to hundreds of millions of dollars.
To reinforce our argument, I presented evidence that mirrored the testimony of a government witness, Larry Harmon, who had operated a related Bitcoin mixer called Helix. Harmon had claimed to have earned a similar amount. However, the government’s IRS witness demonstrated that Sterlingov had never spent more than $60,000 annually, resided in a one-bedroom apartment, and possessed a net worth of no more than $1.8 million over the ten-year surveillance period.
The pivotal moment in the trial came when the defense’s expert, Jeff Fishbach, made a significant catch. The government’s evidence included a screenshot of a text message conversation discussing the defendant’s money laundering plan. However, it turned out to be an image from an e-book that Sterlingov had been reading on his computer. The prosecution apologized for this oversight during their closing statement, assuring the court that it was their only mistake.
Interestingly, the prosecutors, C. Alden Pelker and Chris Brown, had previously advised against building cases solely on tracing. They recommended using corroborating evidence, such as the possession of a private key to Bitcoin addresses containing illicit funds. This was sound advice, considering that academic literature suggests that Chainalysis heuristics, which were used in this case, can be incorrect 90% of the time. Relying on such flawed evidence when someone’s freedom is at stake is unwise. Unfortunately, the prosecutors made the very mistake they had warned others against.
One of the key issues with Chainalysis’s tracing heuristics was their assumption that Bitcoins spent together originated from the same user. However, this assumption was flawed, as it failed to consider scenarios like splitting a dinner bill with a friend using Bitcoin. Additionally, the “peel chain” heuristic, which presumed that unspent Bitcoins were connected in a chain where the larger transaction represented the spender’s “change,” was also flawed. This assumption was debunked when a larger Bitcoin amount was sent to another person within the chain. Moreover, the heuristic was ineffective when a person simply shared the private key in an off-chain transaction, which was more common during the early years of Bitcoin, as observed in this case.
These two flawed tracing heuristics formed the crux of Chainalysis’s tracing in this trial. The Chainalysis expert acknowledged criticisms of her tools but claimed that the issues had been addressed in the proprietary source code, which she could not disclose.
Roman Sterlingov had been an early adopter of Bitcoin, and he had utilized Bitcoin Fog for privacy, thanks to his interest in computers and possession of a Russian passport. Unfortunately, these factors made him an easy target for being implicated in Bitcoin Fog’s operation. In many ways, he was the unluckiest person I had ever encountered.
J.W. Verret is an accomplished associate professor at George Mason University’s Antonin Scalia Law School. Not only is he a practicing crypto forensic accountant, but he also specializes in securities law at Lawrence Law LLC. Verret actively participates in the Financial Accounting Standards Board’s Advisory Council and has previously served as a member of the SEC Investor Advisory Committee. Additionally, he leads the Crypto Freedom Lab, a think tank dedicated to advocating for policy changes that protect the freedom and privacy of cryptocurrency developers and users.
It is essential to note that this article is intended for informational purposes only and should not be considered legal or investment advice. The author’s opinions, thoughts, and viewpoints expressed here are solely his own and do not necessarily reflect or represent those of Cointelegraph.