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Why That Massive 94,000 BTC ($4b) Seizure Might Be Good for Crypto

The US Department of Justice has seized over 94,000 BTC stolen as a result of the 2016 Bitfinex hack. Worth around $4 billion at the time of writing, the seizure counts as the biggest on record, dwarfing the $2.3 million in BTC seized from the Colonial Pipeline hackers last year, and it even beats the 2020 seizure of 70,000+ BTC linked to the infamous Silk Road marketplace.

Interestingly, the news of the DoJ’s exploits appears to have had little effect, if any, on the market. A day after its announcement, bitcoin is down by a very minor 0.7%, while the whole market is up by a similarly negligible 0.1%, according to CoinGecko. Basically, it seems as though the immediate reaction is more of a yawn than yelp.

However, with Bitfinex promising in the white paper of its UNUS SED LEO token to use 80% of any recovered bitcoin to buy back LEO, there’s a chance that the market could be flooded with nearly 100,000 BTC in the not-too distant future. Combined with the 150,000 in bitcoin waiting to be returned to Mt. Gox users, this means that 2022 could be a year of oversold BTC. That said, it’s still not certain that the DoJ will return the full amount of bitcoin to Bitfinex.

The biggest Bitcoin seizure in history

US Seizes $4 Billion in Bitcoin Stolen from 2016 Bitfinex Hack

There was in fact one notable market reaction to the news of the DoJ’s seizure: Bitfinex’s LEO token skyrocketed in price. Sitting at $4.98 prior to the department’s announcement, it jumped to a new record high of $8.14, before stabilizing at $7.32 (as of writing).

Source: CoinGecko

The reason for this is obvious, as writing in the aforementioned white paper:

“An amount equal to at least 80% of recovered net funds from the BitFinex hack will be used to repurchase and burn outstanding LEO tokens within 18 months from the date of recovery.”

For those who aren’t familiar with it, the UNUS SED LEO token was created by Bitfinex in order to help with its finances in the wake of $850 million of its funds being seized by authorities in Poland, Portugal, the US and the UK. After this loss, Bitfinex held a $1 billion ICO for LEO, launching the coin with the proviso that it would be bought back and burned if seized and stolen funds were returned.

Well, it now looks like one half of this equation has been solved, with the DoJ’s announcement on February 8 that it had arrested two individuals on suspicion of money laundering and reclaimed 94,000 BTC. Its release doesn’t explicitly state that either individual was responsible for the 2016 Bitfinex hack itself, although it does state that the individuals named employed “numerous sophisticated laundering techniques” in order to hide the original source of their illicit funds. In other words, the two individuals, who both reside in New York City, are presumably either responsible for the hack or closely associated with those who perpetrated it.

One other thing the statement doesn’t make clear is whether the US government plans to restore the 94,000 BTC to Bitfinex. This may account for the apparently muted reaction of the wider market, seeing as how bitcoin is basically static in the 24 hours following the announcement, having seesawed from $43,600 around the time of release to $44,380 a few hours later, then back down again.

Will Restitution Crash the Price of Bitcoin?

Of course, as stated above, LEO did rally strongly. This indicates that at least some of the market expects Bitfinex to receive its lost funds, and to pay them out to LEO holders.

Assuming that something like this does happen, it could be bad not only for the bitcoin market, but for the wider cryptocurrency market, which tends to follow BTC. The price of bitcoin is known to dip quite markedly following sales of 10,000 BTC or more, so nearly 94,000 in bitcoin could have a substantial impact, if sold.

Source: Twitter

It’s interesting that few outlets have picked up on this threat to the bitcoin market, since a similar threat has been well publicized in relation to the Mt. Gox restitution payments, which are due later this year. And what’s even more interesting is that, when you combine the Mt. Gox bitcoin with the Bitfinex bitcoin, you end up with 244,000 BTC.

This is worth $10.7 billion in today’s prices, implying that we could have an avalanche of selling in a few months. However, it’s not a given that this amount of bitcoin will be sold, even if it is redistributed to Mt. Gox creditors and LEO holders.

For one, if the price of bitcoin happens to be rising at the time of the restitutions, many people will hold onto their newly received BTC. In that case, the latter will be sold in much the same way as BTC is sold now: over time, with different traders cashing out according to different timeframes and circumstances.

Indeed, it’s likely that the full 244,000 BTC would be sold only in the doomsday scenario of a complete market collapse. It’s arguable that such an outcome is highly unlikely, if only because Bitcoin’s limited supply should make it deflationary over time.

Seizure Makes Case Bitcoin is Awful for Crime, Illicit Activities

As we’ve stated above, the DoJ still hasn’t disclosed whether it will return the 94,000 BTC in full to Bitfinex, so the above scenarios remain hypothetical at this moment in time. And if we get rid of the possibility of a massive selloff, the seizure of the BTC is actually bullish for bitcoin and for the cryptocurrency market in general.

Why? Well, because it shows that cryptocurrency isn’t really the ideal medium for crime and illicit activities, contrary to its popular reputation. The hackers who stole bitcoin from Bitfinex may have thought they had a real chance of evading detection, but blockchain technology really is one of the worst tools if you’re trying to pull off the perfect crime.

As the DoJ’s Kenneth A. Polite Jr. explained, blockchain’s openness and traceability makes it extremely hard to steal on-chain assets and get away with it.

“Today, federal law enforcement demonstrates once again that we can follow money through the blockchain, and that we will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system. The arrests today show that we will take a firm stand against those who allegedly try to use virtual currencies for criminal purposes.”

This kind of statement might sound like the US government is taking a dim view of crypto, but for all intents and purposes, it amounts to a declaration that it will do everything it can to protect crypto from illicit activity. And for Galaxy Digital CEO Mike Novogratz, the seizure indicates that US governmental agencies are learning to appreciate cryptocurrencies.

Source: Twitter

So while there is a distant possibility that the recovery of $4 billion in bitcoin could end up having the effect of harming the market, it’s long-term effects will be largely positive.  And ironically, the decentralization-loving, anti-government crypto sector has the central US government to thank.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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