Anti-Money Laundering News and Information

An Israeli took advantage of a failure in a crypto platform to steal coins worth $ 800,000

A 36-year-old Israeli stole digital coins worth more than $ 800,000 from a Canadian platform, by exploiting an internal failure • The defendant opened several wallets in the company’s system • The stolen money was laundered by depositing cash in the defendant’s account

A 36-year-old Israeli took advantage of a failure of a Canadian digital currency storage platform to steal digital coins worth over $ 800,000 while investing long hours, and sometimes 24 hours in a row, to commit the theft. He later laundered the theft money by depositing cash in the amount lower than the reporting threshold (NIS 10,000) in his bank account, and also used the money for his and his family’s current expenses for rent, living, various payments, debts and entertainment – the Jerusalem District Attorney’s Office filed an indictment. To the District Court against Shmuel Dzebinski, for aggravated theft, money laundering and omission of income with intent to evade tax payment.

According to the indictment, filed by attorney Michal Azulai, Dzebinski took advantage of a failure in the software of the Canadian company Coinpayments, which is, among other things, an online platform for storing and trading digital currencies of various kinds to convert the same digital currencies through the platform of The company allegedly stole digital coins worth about $ 833,102.

The indictment further alleges that Dzebinski took various actions with the aim of hiding and disguising the origin of the digital coins he stole, including transferring the digital coins to several digital “wallets” and selling them on several occasions.

Along with some of the charges, a request was submitted for the forfeiture of 24,100 Ripple digital coins, as well as a sum of NIS 197,399.

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$ 5.8 million was withdrawn due to system failure

Coinpayments is a Canadian company that has been around since 2013 and provides blockchain management solutions, including digital wallets. The company is, among other things, an online platform for storing and trading digital currencies of various types as well as converting digital currencies held on the platform to other digital currencies through third-party services that allow platform users to convert between digital currencies at market rates.

In practice, when a user of the platform requests to convert a virtual currency, the Coinpayments system processes the request, checks the balances of the user on the platform and sends a request to the cash database on the platform in order to withdraw the requested amount for currency conversion. The system then sends the virtual currency for conversion by an external vendor who accepts the virtual currency and converts the currency as requested. In the final step, the converted virtual currency is sent to the Coinpayments platform which receives the converted currency into the user account and updates the user balances log to reflect the converted virtual currency deposit.

According to the indictment, in the period between 14.10.17 and 13.11.17 or close to this period, a software failure occurred on the platform, which was reflected in a delay in communication between systems on the platform. This failure allowed platform users to submit multiple digital currency conversion requests before the system “had time” to properly update the balance sheet in their account. In practice, the monetary pool in the platform that includes the balances of all users of the platform is charged for the multiple conversions made.

On November 13, 2017, Coinpayments conducted a routine system audit during which the failure was identified and it was found that 24 accounts on the platform took advantage of the failure and overdrawn digital coins on the platform worth over US $ 5.8 million taken from the platform and belongs to all users.

Immediately after identifying the failure on the site and discovering the 24 accounts that took advantage of the failure and overdrawn digital currencies on the platform, Coinpayments sent a demand to the 24 users of these accounts to return the stolen digital currencies to it. Individual users responded to the demand and returned the stolen digital coins to the company.

As a result of the theft of the digital currencies, the company suffered irreversible damage and heavy financial loss. The company had to return the theft money to the users of the site; An amount of about $ 5.8 million which was taken from the cash database on the platform and belongs to all its users.

In addition, as a result of the theft of digital currencies, the company’s reputation was severely damaged as it lost its credibility as a trusted platform in the blockchain technology industry and as a result lost many users and lost significant sums of money.

Apart from the financial loss caused to the company as a result of the theft of the digital currencies, the company had to bear high financial expenses in an attempt to rehabilitate the platform.

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The defendant returned and converted coins, and the balance sheet was not updated

The indictment states that in October 2017, Dzebinski joined the platform, opened an account registered in his name and deposited in a Bitcoin (BTC) virtual currency account.

Near this time, Dzebinski decided to convert the bitcoin currency into a “Ripple” virtual currency on the platform, the defendant logged into his account and ordered the platform to perform a conversion operation. Later, it was alleged, in order to verify that the conversion operation had been performed, Dzebinsky returned and repeatedly instructed the platform to perform a conversion operation of the Bitcoin currency to the Ripple currency.

“In view of the failure of the platform which was reflected in the delay in communication between systems on the platform, in parallel with the multiplication of conversion requests by the defendant, the balance of the balance in the defendant’s account was not updated properly. The indictment states that “at this point near 14.10.17, knowing that there was a failure in the platform that allows him to steal digital coins from the company by making repeated conversions between digital currencies without the converted currency being deducted from his account, the defendant decided to use the platform trick for several days. “The defendant returned to the platform and performed dozens of conversions between digital currencies, knowing that his account is not charged the conversion amount, so in fact he converts the same currency over and over again and each time receives a return for it.”

Thus, it was alleged in the indictment, taking advantage of the company’s mistake and without her knowledge, Dzebinski stole digital coins from the company through conversion operations.

According to the indictment, “the defendant spent many hours carrying out the theft operations, sometimes these operations lasted about an hour, sometimes several hours and sometimes lasted more than 24 hours. The defendant continued to carry out the conversion theft operations until the site failure was corrected.”

According to the indictment, at one point Dzinsky wanted to make sure that the failure of the platform was certain and that the digital coins that he stole from the company and held on the platform were worth money, so tomorrow digital coins from the platform.

After correcting the failure of the platform, it was alleged, Dzhinsky rushed to remove the first theft money from the platform before being caught by the company.

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Open another account in his wife’s name to continue the theft

According to the indictment, at the same time, in order to continue stealing digital coins from the company, on October 18, 2017, Dzhinsky opened another account on the platform registered in his wife’s name. The defendant deposited Bitcoin currency in this account and performed conversion operations between Bitcoin currency and Ripple currency, knowing that there was a failure in the platform that allowed him to steal digital coins from the company by making repeated conversions between digital currencies without the converted currency being deducted from the account.

According to the indictment, in order to disguise the incarnation of the first and second theft funds, Dzhinsky first transferred the stolen digital coins to one virtual wallet, and then the defendant transferred them to another 5-6 digital wallets. Between October 2017 and December 2018, the defendant sold on a number of occasions, digital coins, the fruits of the first and second thefts that were in his possession and in return a total of NIS 100,000 was transferred to his credit.

It is also alleged that Dzinski used the fruits of the first and second thefts for his and his family’s current expenses, among other things for rent, living, various payments, debts and entertainment as well as the clerk in the bank account he and his wife received various sums of money. , In an amount lower than NIS 10,000, in order to avoid reporting these amounts at the bank or to cause incorrect reporting and thus, failed the reporting system.

According to the indictment, when Coinpayments demanded that Medzinski return the stolen digital coins to her, he ignored the request.

The indictment further alleges that during the relevant period, Dzhinsky reported to the IRS his income as a self-employed person in 2017, in the amount of only 10,047, and omitted a report of income in the amount of approximately $ 833,100 that he allegedly stole. In 2018, did not file an income tax return at all.

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*** Presumption of innocence: It should be emphasized that even after the indictment was filed against him, Shmuel Dzebinski was not convicted of any offense, and he has the presumption of innocence.

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By Ela Levi-Winrib (Hebrew), December 17, 2020, published on Globes

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