Roman Sterlingov has been found guilty of money laundering associated with the custodial mixing service Bitcoin Fog: the evidence provided by Chainalysis has been deemed reliable.
Roman Sterlingov, a 35-year-old Russian developer, has been found guilty on four charges by a federal jury in a Washington court for creating the custodial mixing service Bitcoin Fog in 2011 and using it for money laundering.
The sentencing date for Sterlingov has been set for July 15th. The most severe charge could potentially result in a maximum sentence of 20 years in prison for the developer.
Through a tweet, Tor Ekeland, Sterlingov’s defense attorney, stated that an appeal will be made against the court’s decision.
The context
According to the US court, the Bitcoin Fog service was created by Sterlingov and was utilized to facilitate the laundering of approximately $336 million. The court also stated that the service was utilized by darknet sites associated with drug trafficking.
In April 2021, Sterlingov was arrested at Los Angeles International Airport by the IRS (Internal Revenue Service), the US tax collection agency, and charged with money laundering, operating an unlicensed money transmitting business, and transmitting money without a license. Subsequently, he was also indicted for conspiracy to launder money.
The trial and Sterlingov’s innocence
During the two years of imprisonment and the subsequent trial, Sterlingov admitted to using Bitcoin Fog as a user but denied managing or receiving fees from the service. The jury, composed of non-experts in the field, did not believe his statements of innocence, and after a month-long trial, found him guilty on all four charges.
Witnesses against Sterlingov
During the trial, Larry Harmon, former CEO of the bitcoin mixer Helix, and the two hackers from the Bitfinex exchange, Ilya Lichtenstein and Heather Morgan, the latter known as “Razzlekhan,” testified against him. Accused of laundering over $3.6 billion in bitcoin after the hack, Lichtenstein pleaded guilty last August but has not yet been sentenced. Harmon, on the other hand, pleaded guilty in 2021, agreeing to forfeit over 4,400 bitcoin and pay a fine of $60 million.
The role of Chainalysis
All the evidence leading to Sterlingov’s incarceration comes from the use of Reactor, the proprietary software of the on-chain analysis company Chainalysis. The company has been criticized for not providing evidence of the scientific validity of its program, as well as for not being able to provide the courts with error coefficients.
Reactor operates through the use of a series of heuristics: to incriminate Sterlingov, the company used behavioral heuristics, which involve observing the behavior of on-chain transactions, the type of addresses used, how the change behaves in transactions, the timezone payments are made, the amount transferred, etc. In this way, they try to find patterns in blockchain transactions.
The problem with such heuristics is their extreme imprecision: during the preliminary hearing on June 23rd, Sterlingov’s lawyer questioned Chainalysis Government Solutions’ Head of Investigations, Elizabeth Bisbee. Bisbee testified to being “unaware” of scientific evidence regarding the accuracy of Chainalysis’ Reactor software.
Regarding the Bitcoin Fog case, Jonelle Still, Director of Investigations and Intelligence at CipherTrace (another on-chain analysis company), also intervened. Still stated that CipherTrace, like other companies in the industry, does not use behavioral heuristics. By inputting the data from the Sterlingov case into their software, the company found no evidence that Roman Sterlingov was the operator of Bitcoin Fog.
During the trial, Chainalysis managed to avoid any external audit of its Reactor software, which could potentially have revealed the fallacy of the heuristic used in the software.
Nevertheless, the court deemed the evidence provided by Chainalysis reliable and decided to convict Sterlingov.
The verdict against Sterlingov could potentially be used in the future as a precedent in the trials against Tornado Cash developers Alexey Pertsev and Roman Storm.
