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If Your Bitcoins Are Stolen in a Major Hack, Will the FBI Help?

Did the FBI overlook a Bitcoin hack for lack of understanding, or because it views users as criminals?

This story appeared in the February Issue of VICE magazine. Click HERE to subscribe.

Bitcoin is a cryptocurrency that launched in 2009 by someone who used the pseudonym Satoshi Nakamoto. Bitcoin transactions can take place on the internet via an online exchange; you trade real dollars for Bitcoins, which means you can skip banks and outfits such as PayPal. 

And when a hacker stole as much as $1 million in Bitcoins from one of the most popular and largest online depositories handling the currency, its users were livid, but the authorities did little to recover their losses. This 2011 FBI investigative file, which I have obtained exclusively as a response to my Freedom of Information Act (FOIA) request, shines light on the agency's inaction, as well as some indication as to why that was the case. At the time, the FBI didn't consider Bitcoin to be a legitimate currency, and it still casts a suspicious eye on individuals who use it for financial transactions. 

On July 29, 2011, the well-known e-wallet website MyBitcoin went offline for a week. This incident, notorious to the currency's users, resulted in a handful of news reports and was the subject of numerous chat forums in which the Bitcoin community opined about the circumstances. When the site came back online, its owners announced that hackers had compromised the MyBitcoin servers and stolen a huge number of Bitcoins. 

The site announced it would settle the losses by reimbursing users 49 percent of their last-known stored value if they filled out a claim form. The Bitcoin community was outraged and suspicious. Some believed the claim that the site was hacked was an inside job, staged by MyBitcoin's semi-anonymous owners, so they could steal its customers' Bitcoins. 

However, Bruce Wagner, a well-known figure in cryptocurrency circles, encouraged MyBitcoin users to file their complaints directly with the FBI. Wagner was the host of an online show about Bitcoin that boasted multiple sponsors. He was also an avid user of MyBitcoin and often directed new users of the currency to the website because of its ease of use. On an episode of his show, which aired during the week the website went offline, Wagner said he had 25,000 Bitcoins stored with MyBitcoin, which at the time amounted to about $250,000. 

But MyBitcoin users believed such an effort to be pointless, particularly on Reddit, where one person wrote, "The FBI wouldn't care any more about stolen bitcoins than they'd care about stolen WoW [online role-playing game World of Warcraft] gold."

The FBI files I obtained on MyBitcoin seem to back up the Reddit user's point. The bureau's lack of action when compared with how the FBI reacts to other federal crimes calls into question whether the FBI failed to understand that Bitcoin is a real currency. 

Wagner contacted the FBI's Cyber Crimes Unit to report the theft. The Bitcoin community would later suspect Wagner of being part of the MyBitcoin theft based on some alleged past misdeeds involving mortgage fraud. These documents are an investigative file that pertains to Wagner's discussion with the FBI, the bureau's characterization of Bitcoin, and the alleged hack of MyBitcoin.

1. This unclassified document shows that on August 17, 2011, an FBI special agent in New York requested authorization to open a case file and investigation into the "computer intrusion" at MyBitcoin. Two FBI special agents were assigned to the case, and it was handled by the US Attorney's Office in the Southern District of New York. Wagner's name is in the title of the case file, along with "computer intrusion," but it was redacted on privacy grounds. However, via a conversation with one of my FBI sources, I confirmed that his was the redacted name, and he was the interviewee in the report. On the right-hand side of this page, the FBI explains that information was redacted under FOIA exemptions B7e, B6, and B7c, which mean the information would reveal law enforcement techniques and procedures. 

The document characterizes Wagner's meeting with the FBI. It says he filed a complaint with the FBI's New York field office on August 1, 2011, and the FBI special agent who is also author of this particular file interviewed him by phone ten days later. On August 16, 2011, Wagner and his partner met with the two special agents to "explain his complaint in detail."

2. Just one day after the FBI special agent opened the file, the agent asked for $52 to pay the registration fee for two agents to attend the Bitcoin Conference and World Expo 2011 in New York City. "The money will be exchanged to BTC [Bitcoin] to pay for the conference." 

3. This document, the last one in the cache, is what's known as an FBI 302 report. It's a summary of an interview an FBI agent conducts with a subject. In this case, the subject was Wagner. He apparently told the agents that on July 28, 2011, MyBitcoin "stopped allowing withdrawals, however deposit [sic] were allowed."

The FBI 302 is dated February 10, 2012, and summarizes the interview conducted on August 16, 2011. The contents are unclassified. What's notable here is that the 302 says MyBitcoin "may be linked to a Canadian hacker group, Hack Canada," which was previously involved in credit card fraud. 

Wagner told the agents that he received a text message to his Google Voice number from "someone who claimed to be a close associate" of a person affiliated with MyBitcoin. "The text message explained that the disappearance of MyBitcoin.com was not a scam and when the website is fixed, a forum will be established to help return money to the rightful account holders."

In the end, MyBitcoin claimed hackers stole "51% of MyBitcoin.com's Bitcoin holdings in small increments." The FBI agent then requested permission to close the file and the investigation without further probing the claims that the site was hacked or trying to recover the stolen Bitcoins. 

This file implies that the FBI didn't understand that the possible theft of Bitcoins from MyBitcoin was equivalent to a major robbery. While the investigative file shows the bureau didn't completely ignore Wagner, there's nothing in the documents that reaches any kind of conclusion about who stole the Bitcoin: MyBitcoin or hackers. There's nothing to suggest the FBI conducted a proper investigation or that its agents could not obtain enough evidence to recommend prosecution. The FBI just shrugged its shoulders. That would never happen with a brick-and-mortar bank or PayPal. Because Bitcoin is a different kind of currency, the response ended up being disparate treatment.

But there may be something else at play here. Perhaps the reporting of stolen Bitcoins is analogous to going to the FBI and saying, "Someone stole my drugs," because Bitcoin has been used to fund illicit activities. 

4. Another set of FBI documents about Bitcoin, this one, from 2013, provides a little bit of context about how the bureau views Bitcoin. While the bureau doesn't come right out and say Bitcoin is contraband, the discussion about the cryptocurrency shows that it's first and foremost a law enforcement problem, as demonstrated by this redacted email, which is marked "law enforcement sensitive." There's not a neutral discussion about Bitcoin being a legitimate form of currency. 

What users of Bitcoin should know after reading the FBI files is that the FBI views Bitcoins users as criminals. 

5. An FBI background sheet on the currency under the heading "Law Enforcement Impact" and marked LES for "law enforcement sensitive" says authorities are concerned "about the use of Bitcoins to facilitate illegal activities online… like illicit drugs, stolen credit cards, etc." 

See more pages from this FOIA request here.