United States v. Sterlingov

1

UNITED STATES OF AMERICA, v. ROMAN STERLINGOV, Defendant.

CRIMINAL ACTION No. 21-399 (RDM)

United States District Court, District of Columbia

March 6, 2023

MEMORANDUM OPINION AND ORDER

RANDOLPH D. MOSS, United States District Judge

This matter is before the Court on Defendant Roman Sterlingov's motion for release of funds, Dkt. 48, and supplemental motion for the same, Dkt. 101. Sterlingov is charged with money laundering conspiracy, money laundering operating an unlicensed money transmitting business, and money transmission without a license, all in relation to his alleged operation of a Bitcoin mixer known as Bitcoin Fog. Dkt. 43 (Superseding Indictment). Pursuant to a warrant issued by a U.S. Magistrate Judge, the government has seized certain of his assets that it alleges were involved in the charged offenses. See Dkt 40; Dkt. 53-2. Sterlingov seeks release of these funds to pay for his legal defense. Dkt. 48; Dkt. 101. For the reasons that follow, the Court will DENY Sterlingov's motions. Dkt. 48; Dkt. 101.

I. BACKGROUND

The following background is taken from the government's charging instruments; the affidavit of Special Agent Devon Beckett; the parties' proffers and testimony at the hearings held on January 13, 2023 and January 31, 2023; and the exhibits tendered to the Court, including the seizure warrant affidavit and the declaration of Staff Operations Specialist Luke Scholl. It bears emphasis, however, that the Court's description of the facts is necessarily preliminary and does not represent a determination on the merits, which is both premature and, in any event, the sole province of the jury.

The government contends that Sterlingov operated “an illicit Bitcoin money transmitting and money laundering service” known as Bitcoin Fog. Dkt. 1-1 at 1; see also Dkt. 43. Bitcoin, also known as BTC, “is a decentralized form of electronic or digital currency that exists only on the internet.” United States v. Harmon, 474 F.Supp.3d 76, 80 (D.D.C. 2020) (quotation marks and alterations omitted). The term “bitcoin” refers both to “a system” that facilitates financial transactions and to “a unit” of currency. Id. Bitcoin the system “is a peer-to-peer network enabling proof and transfer of ownership-of units, or tokens, also called bitcoin-without involving a third-party such as a bank.” id.; bitcoin the unit is a virtual currency “transacted over the Internet using Bitcoin software,” Dkt. 1-1 at 1 n.2. This software permits users to create “‘Bitcoin addresses,' roughly analogous to anonymous accounts,” and to “securely transfer[] bitcoin from one Bitcoin address to another.” Id. “[T]he identity of a Bitcoin address owner is generally anonymous.” Id. at 3. But the government maintains that “law enforcement can often identify the owner of a particular Bitcoin address by analyzing the blockchain,” which “is essentially a distributed public ledger that keeps track of all Bitcoin transactions, incoming and outgoing, and . . . records every address that has ever received a bitcoin and maintains records of every transaction.” Id. at 3 & n.3. Sterlingov and his experts do not accept this premise and, instead, argue that blockchain analysis is unscientific and unreliable. See, e.g., Dkt. 48 at 7-11; Dkt. 48-1 (Vickery Decl.).

Bitcoin Fog is a bitcoin mixer (or tumbler) that offers enhanced anonymity to those engaged in bitcoin transactions. Dkt. 1-1 at 1. The service enables users to “send bitcoins to designated recipients in a manner designed to conceal and obfuscate the source of the bitcoins.”

Dkt. 1-1 at 1-2. Bitcoin Fog does this by “disassociating incoming bitcoin from particular Bitcoin addresses or transactions and then comingling that bitcoin with other incoming bitcoin prior to conducting any further transactions.” Id. at 2. Simplified somewhat, the process works as follows: Users who register with Bitcoin Fog receive a randomly generated account into which they can deposit bitcoins. Dkt. 106-1 at 2 (Gov't's Suppl. Ex. 1). Bitcoin Fog then gradually draws these bitcoins down into a centralized pool comprised of many bitcoins from many users. Id. Users can then schedule withdrawals, at which point funds from the pool are sent to them at a separate account, at random times and in random amounts, until the full withdrawal has been accomplished. Id. This process makes it next to impossible to determine the origin of the bitcoin deposited in that separate account. Dkt. 1-1 at 2. For that reason, Bitcoin Fog is allegedly used by those engaged in criminal activity to launder illicitly obtained funds. Id.

Bitcoin Fog makes money by charging a fee of between 2% and 2.5% of each transaction that it processes. Id. at 11. Based on the service's alleged transaction volume, the government calculates that it has generated approximately $8 million in fees, assuming that its proceeds (taken in bitcoin) were converted into cash at or near the time of the relevant transactions. Id. But bitcoin has appreciated dramatically since Bitcoin Fog's inception-from $2 during the fall of 2011 when Bitcoin Fog launched to around $50,000 at the time Sterlingov was charged-so the government estimates that Bitcoin Fog may have generated nearly $70 million in profits at more recent valuations. Id.

The government has proffered some evidence that parties seeking to launder the proceeds of criminal activities comprise a substantial portion of Bitcoin Fog's customer base. Id. at 3-5. In particular, the government presents evidence that Bitcoin Fog has processed more than $ 78 million in transactions from “darknet markets”-hidden online businesses that “primarily traffic in illegal narcotics and other illegal goods and services.” Id. at 4. There is also evidence that Bitcoin Fog's operators were aware of the nature of its customers. Id. at 2-3. Indeed, one of Bitcoin Fog's selling points was that its operators could not be found by nor would they cooperate with the authorities. Id. at 2-3. In addition, the government has provided evidence that Sterlingov was involved in Bitcoin Fog's founding and operations. Id. at 7-11.

On April 26, 2021, the government charged Sterlingov by criminal complaint with money laundering, in violation of 18 U.S.C. § 1956(a)(3); operating an unlicensed money transmitting business, in violation of 18 U.S.C. § 1960(a); and money transmission without a license, in violation of D.C. Code § 26-1023(c). Dkt. 1. Sterlingov was arrested the following day in Los Angeles and was subsequently transported to the District of Columbia. Dkt. 53 at 3. He was later charged in a three-count indictment with the same offenses charged in the complaint: money laundering (Count One), operating an unlicensed money transmitting business (Count Two), and money transmission without a license (Count Three). Dkt. 8 at 1-3. The indictment also contained a criminal forfeiture allegation, seeking forfeiture, upon Sterlingov's conviction on Counts One and Two, of “any property, real or personal, involved in the offense, and any property traceable thereto,” pursuant to 18 U.S.C. § 982(a)(1). Id. at 3.

Three days after Sterlingov was indicted, a U.S. Magistrate Judge of this Court issued a seizure warrant for the contents of two accounts associated with Sterlingov at the digital currency exchange known as Kraken. Dkt. 53-2 at 5. The warrant was issued based on an affidavit alleging probable cause to believe that the contents of these accounts “constitute the proceeds of, and property involved in” the operation of Bitcoin Fog, in violation of 18 U.S.C. § 1956(a) and 18 U.S.C. § 1960(a). Id. at 31. One of these accounts was held in Sterlingov's name and the other in the name of TO THE MOON LTD. Id. at 5; Rough Hearing Tr. at 109 (Jan. 31, 2023). The government executed the warrant and seized the following:

• $349,625.72 in cash

• 0.10877 in BTC

• 205.9625 Ethereum (ETH) (a cryptocurrency)

• 9,371.52683 Stellar (XLM) (a cryptocurrency)

• 35.9998 Monero (XMR) (a cryptocurrency)

Dkt. 40 at 1-2. The government has also provided notice that, if Sterlingov is convicted, it intends to seek forfeiture of 1,354 BTC currently held in a cryptocurrency wallet that the government attributes to Bitcoin Fog. Id. at 2

A grand jury returned a superseding indictment on July 18, 2022. Dkt. 43. The superseding indictment contains a new Count One for Money Laundering Conspiracy, in violation of 18 U.S.C. § 1956(h). Id. at 1-2. The other counts mirror those in the original indictment: Money Laundering, in violation of 18 U.S.C. § 1956(a)(3)(A), (B) (Count Two); Operating an Unlicensed Money Transmitting Business and Aiding and Abetting in violation of 18 U.S.C. § 1960(a) & 2 (Count Three); and Money Transmission Without a License in violation of D.C. Code § 26-1023(c) (Count Four). Id. at 3-5. As before, the indictment also contains a criminal forfeiture allegation under 18 U.S.C. § 982(a)(1). Id. at 5-6. This allegation provides additional detail on the seized contents of the Kraken accounts and reflects the government's intent to seek forfeiture of the contents of the alleged Bitcoin Fog wallet if Sterlingov is convicted. Id.

Sterlingov now seeks release of his seized funds. Dkt. 48; Dkt. 101. He contends that he needs the money to pay for the counsel of his choice and other litigation expenses, most notably expert witness fees. Dkt. 48 at 25-26; Dkt. 101 at 12-16. The Court held hearings on this matter on January 13, 2023 and January 31, 2023, at which the parties presented evidence and argument regarding Sterlingov's need for his funds and the evidentiary basis of the seizure. Min. Entry (Jan. 13, 2023); Min. Entry (Jan. 31, 2023).

II. ANALYSIS

A. Legal Framework

Individuals convicted of certain federal crimes, including all three federal crimes charged...