Blockchain Forensics Convict Bitcoin Mixer User

I was present at the trial of Roman Sterlingov, a 35-year-old man accused of running the largest Bitcoin mixer money laundering operation. Throughout the trial, he was referred to as “Mr. Sterlingov,” but I knew him as Roman. The jury recently delivered a verdict of “guilty” on all four counts of the indictment, leaving me feeling stunned. Now, my focus is on planning the appeal strategy to overturn the verdict. This trial lasted for four weeks, during which I testified for a full day, having worked on the case for a year.

The case revolved around Bitcoin Fog, which was the largest Bitcoin mixer in history. Over its lifespan, Bitcoin Fog processed around 1.2 million Bitcoin, allegedly laundering hundreds of millions of dollars in drug money from darknet sites like Silk Road and AlphaBay. The prosecution argued that Roman not only used Bitcoin Fog but also operated it. Our defense counsel, Tor Ekeland and Mike Hassard, fought tenaciously against every motion and objection.

The prosecution’s case primarily relied on a Bitcoin transaction from Sterlingov’s Mt. Gox account, which ended up in a Bitcoin wallet. The ownership of this wallet and its private key remained unknown. Subsequently, a series of transactions were traced back to the purchase of a clearnet site providing information on how to access Bitcoin Fog on the darknet. There were uncertainties about whether Sterlingov sold Bitcoin to the eventual buyer of the Bitcoin Fog website or if someone else carried out the transactions. The government emphasized Sterlingov’s use of Bitcoin Fog, claiming he sent 2,700 Bitcoin through the mixer.

During the trial, I presented evidence that the true operator of Bitcoin Fog would have earned 24,000 to 36,000 Bitcoin as fees, equating to hundreds of millions of dollars. This amount was comparable to what a government witness, Larry Harmon, testified to earning through a related Bitcoin mixer called Helix. The government’s IRS witness revealed that Roman’s spending never exceeded $60,000 annually, and his net worth was never more than $1.8 million in the ten years they monitored him.

A significant turning point in the trial occurred when defense expert Jeff Fishbach caught a mistake made by the government. They had presented a screenshot of a text message chain discussing a money laundering plan, which they attributed to Sterlingov. It turned out to be a picture from an e-book Roman was reading on his computer, leading to an apology from the prosecution during closing arguments.

Interestingly, the prosecutors themselves wrote a publication advising against relying solely on tracing evidence in cases, recommending the use of corroborating evidence like possession of a private key. This advice is backed by academic literature, which suggests that Chainalysis heuristics, commonly used for tracing Bitcoin transactions, can be wrong 90% of the time. Ironically, in this case, the prosecutors made the exact mistake they cautioned others against.

One key issue with Chainalysis’s tracing heuristics was their assumption that Bitcoin spent together originated from the same user. This assumption could be undermined in scenarios such as splitting a dinner bill using Bitcoin. The heuristics assumed that unspent Bitcoins would be linked along a chain, with the larger transaction representing the spender keeping their change. This assumption fails if the larger amount is sent to another person within that same chain. In the early years of Bitcoin, it was common to engage in off-chain transactions where private keys were simply given to another person, making traceability more challenging.

Roman was an early adopter of Bitcoin, valued his privacy, held a Russian passport, and had a strong interest in computers. These factors made him an easy target for connecting him to the operation of Bitcoin Fog. In many ways, he was incredibly unfortunate, as he found himself at the center of a high-profile trial with severe consequences.

As an associate professor at George Mason University’s Antonin Scalia Law School and a practicing crypto forensic accountant, I am committed to fighting for policy changes that protect the freedom and privacy of crypto developers and users. My work extends to securities law, as I am also a member of the Financial Accounting Standards Board’s Advisory Council and a former member of the SEC Investor Advisory Committee.