The arrest of a crypto celebrity always makes for a catchy headline. However, it also tends to significantly impact the crypto ecosystem as a whole, both positively and negatively.
Though there have always been criminals trying to use crypto for their own gain, these tend to be external attackers.
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We all know about hackers, but sometimes, the developers and founders on the inside will try to scam their users out of their precious digital assets by using a range of devious methods.
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Why Are Crypto Arrests So Common?
It seems like a year canโt go by without at least one well-known crypto celebrity being cuffed up and jailed.
This begs the question, why havenโt they stopped or at least slowed down in recent years? The simple answer is that crypto is still a developing industry.
There are still many things about crypto that we donโt understand, and while this can seem fascinating to investors, it can also be viewed by others as an opportunity to expose these vulnerabilities.
Of course, this applies to hackers, but it also applies to a handful of developers and founders who have tried to trick people with their influence and enticing promises in recent years.
These sorts of events also leave a notable impact on the industry at large. Arrests make for great news stories, meaning millions of people, even those unaware of the person or crypto in general, will see it for themselves.
This can be disastrous for crypto because public perception and acceptance are highly valued. Crypto-related arrests can, therefore, prompt many enthusiasts to sell off their tokens or leave the industry altogether.
Alternatively, they can sometimes have positive effects, such as reminding us of the best ways to keep our funds safe and protected.
Most Impactful Crypto Arrests
Now that we understand why public arrests are so influential in crypto letโs look at a few examples of the most prominent ones over the years. Though many of these individuals were simply bad actors, others are a little more controversial.
1. Ross Ulbricht: The Silk Road
The Silk Road, created by Ross Ulbricht in 2011, was an online black market for illegal goods and items.
After the FBI managed to become admins on the site, they deduced the location of Ulbricht and intercepted him at the San Francisco library, where he was arrested in October 2013.
While investigating the market site, it was found that Bitcoin (BTC) was the only form of payable currency.
This was when cryptocurrency, which was still in its infancy, was viewed with skepticism due to its potential for anonymous criminal activity.
Impact on Crypto
The arrest of Ulbricht only furthered this view and made it more believable. Jason Bloomberg, writing for Forbes Magazine at the time, argued that the arrest of โKingpinโ Ross Ulbricht was โa nail in the coffin of the radical new cryptocurrency.โ
At the same time, the arrest spawned BitLicense, which was an early desperate attempt to regulate Bitcoin in New York specifically before it would explode in popularity. Those pushing the license saw Bitcoin as little more than money laundering.
Though Bitcoin would eventually shake off this stigma, it certainly took much longer due to Ross Ulbricht’s careless actions.
2.Mark Karpeles: Mt. Gox
Back in 2010, just a year after Bitcoinโs arrival, exchanges barely existed.
Buying crypto, let alone trading it, was almost impossible until the arrival of Mt.Gox. This exchange would grow so popular that, at its peak, it handled over 70% of all Bitcoin transactions.
Mark Karpeles took ownership of Mt Gox in 2011, and his reign was met with numerous controversies.
In January 2014, Mt Gox users realized they couldnโt withdraw their money. Karpeles blamed hackers but admitted that up to 850,000 BTC tokens had seemingly vanished.
Roughly 7% of all Bitcoin at the time was stolen, causing Mt. Gox to file for bankruptcy and Karpeles to be arrested for manipulating the exchangeโs company holdings.
Impact on Crypto
Karpelesโ arrest warned investors about the safety concerns related to centralized exchanges. As one user, Jack, put it: โOne big thing we learnedโฆitโs not a good idea to leave your Bitcoin on the exchangeโฆitโs best to keep a wallet on your own computer.โ
Another user, Kim, shares this view, saying that Mt Goxโs faults and Karpelesโ mishandling of the situation were “because it was the first of its kind.โ
Nowadays, centralized exchanges go to great lengths to ensure the safety of their customers, such as using two-factor authentication and Know Your Customer (KYC) procedures. Karpelesโ arrest undoubtedly motivated CEXs to step up their security measures.
The broader crypto market also took a hit within 24 hours of the arrest taking place, dropping from a global cap of 5 billion dollars to 4.7 billion, and wouldnโt fully recover until November that year.
3. Do Kwon: Luna and TerraUSD
TerraUSD was a stable coin – a token pegged to the US dollar’s value.
However, in May 2022, TerraUSD randomly started breaking away from the US dollar, which turned many peopleโs attention to its founder, Do Kwon.
Soon after, the Securities and Exchange Commission (SEC) began investigating TerraUSD and Kwonโs intentions for the token.
Unlike regular Stablecoins, TerraUSD was not pegged to a stable reserve asset but to its sister crypto, LUNA. When LUNAโs value plummeted due to the crypto market crashing in 2022, so did TerraUSD.
According to federal court regulations, Do Kwon was charged with fraud for not advertising the product as promised. He was imprisoned for four months for โOrchestrating a multi-billion dollar crypto asset securities fraud.โ However, the issue is a little more complex as both Korea and the US have requested Kwonโs extradition. However, due to their earlier request, the Montenegro Appellate Court has allowed Kwon to be sent to South Korea for final proceedings.
Impact on Crypto
Two major impacts came from Kwonโs arrest and TerraUSDโs downfall. The first was that a number of firms that were lenders and investors in TerraUSD were hanging on for life. Astroport and Mars Protocol, for example, saw prices fall by 80%.
This also spilled over into other popular cryptocurrencies too. Bitcoin for example fell to $26,000 after the arrest was made public, down 60% from November 2021.
Secondly, the incident brought heightened governmental attention to Stablecoins. This was the event that promoted the Clarity for Payment Stablecoins Act to be passed, which pushed for further regulations on Stablecoins. It also emphasized that developers need crystal-clear clarification on how they work and what fiat theyโre pegged to.
4. Sam Bankman-Fried: FTX
The aforementioned Bankman-Fried, the FTX founder, was considered a โcrypto poster boyโ when he commented about 3AC. However, it wouldnโt be long before he, too, would be embroiled in a scandal – the biggest in cryptocurrency today.
FTX, short for โFutures Exchangeโ, was a crypto exchange that specialized in spot markets, derivatives, and leveraged assets.
The exchange was heavily advertised, using a mixture of enticing ads and an abundance of celebrity promotions to make it the third most used exchange in the world.
Everything came crashing down, though, in November 2022 when it was revealed that Bankman-Fried had been moving FTX customer funds to his sister company, Alameda.
Additionally, Bankman-Fried never provided balance sheets for FTX, which didnโt help his case. In December 2022, the Royal Bahamas Police Force arrested Bankman-Fried on seven criminal charges. The impact of this event can still be felt today.
Impact on Crypto
The perception of crypto took a massive hit following the arrest. Joe Rogan publicly denounced crypto due to the scandal, and as lawyer Syedur Rahman says, โMany distanced themselves from the industryโ because they did not want to be affiliated with such a โHigh-profile scandal.โ
In fact, this even prompted a bigger push for regulation. This was referenced by Daniel Davis, Financial Markets and Regulation partner, following the incident: โI think any regulator and person in Congress wants to make sure that what happened with FTX doesnโt happen again.โ
A loss of recognition also came with a loss of value. The crypto market saw one of its worst lows after Bankman-Friedโs arrest, dropping to $840 billion from its $3 trillion high just a year before. Only through 2023 and 2024 was the market able to recover steadily from this incident.
5. Changpeng Zhao: Binance
Binance is and has long been the most popular cryptocurrency exchange on the planet, and Changpeng Zhao was at its helm.
After founding the exchange in 2017, Zhao quickly became a billionaire, but something seemed off. Zhao had refused to file proper reports as part of the Financial Crimes Law Enforcement Network, including information on over 100,000 suspicious transactions that were supposedly sent to extremist groups.
Zhao effectively benefitted from the US market without actually abiding by American regulations, which caused Binance to become ridden with criminal transactions, which Zhao permitted.
After further accusations of money laundering, Zhao was arrested in April 2024 for not noticing these actions, and the crypto world certainly took notice.
Impact on Crypto
Binance Coinโs value immediately dropped below the average $230 threshold following Zhaoโs apprehension. Outflows amounted to more than $1 billion in just 24 hours, meanwhile liquidity dropped by 25%.
Zhaoโs arrest also precedes how the courts deal with crypto criminals. There was a clear distinction between Zhao, who only received four months, and Bankman-Fried, who received 25 years. The legal procedures differentiated letting a crime happen from actively participating in it. Despite calls to have Zhao imprisoned for several years, a clear consensus was made on how to deal with both types of crypto-related actors.
6. Pavel Durov: Telegram
Pavel Durovโs situation is unique, not only because heโs not directly related to crypto but also because heโs not exactly seen as the โvillainโ in his instance.
Telegram is a messaging service that provides end-to-end encryption, meaning users can say whatever they want without being censored.
Durov, the owner of Telegram, was arrested on August 4, 2024, at a Paris airport. Durov had failed to provide sufficient moderation of the platform, allowing criminals to communicate and share illegal content with one another.
Impact on Crypto
This overextension of governmental power has sparked a lot of worry within the crypto community. As Wayne Vaughan, the CEO of Tierion, put it, โTelegram CEO is being charged for using cryptography,โ adding, โThis should concern everyone in Bitcoin and crypto – no one should need government permission to do math.โ
Vitalik Buterin, the co-founder of Ethereum, has also argued that Durov’s arrest โLooks very bad and worrying for the future of software freedom in Europeโ alongside Edward Snowden.
Punishing the creator for what happens within their creation has clearly unsettled many crypto developers. It also suggests that harsh governmental crypto regulation may be coming sooner than we initially thought.
Telegramโs Toncoin has witnessed a massive decline, falling to a historic low of $4.6874 on September 4, 2024. Bitcoin also tumbled from a meteoric high of $64,000 in the days following the arrest, continuing to drop as the week went on.
On the Flipside
- The decentralized nature of crypto and blockchain technology, unfortunately, means that there will always be people looking to take advantage.
- Some criminals, such as the infamous Ruja Igantova, have managed to escape arrest despite stealing over $4 billion worth of investorsโ money.
Why This Matters
No matter when you jumped into the world of crypto, it can be hugely beneficial to know how the current landscape was formed through developments such as these arrests.
Recognising the roots of these legal interceptions can also help us better understand the future relationship between authorities and crypto.
FAQs
The office of U.S. Attorney Damian Williams for the Southern District of New York indicted Sam Bankman-Fried. Assistant U.S. attorneys for the prosecution included Nicola Roos and Dainelle Sassoon. Lewis Kaplan served as district judge. Bankman-Fried was found guilty of two wire fraud and five counts of conspiracy.ย
Da Kwon was apprehended in Montenegro and then received extradition requests from both the South Korean and U.S. governments.ย
The Bahamas penthouse is a $35 million, 11,500-square-foot building where Sam Bankman-Fried and nine of his colleagues resided.