Ontario’s attorney general is seeking forfeiture of 288 Bitcoins worth about $1.4 million belonging to an online drug dealer who says he should be allowed to keep the half of the digital cash, arguing it was not all used for nefarious purposes.
The case concerns Canada’s first seizure of Bitcoin, an electronic currency that has fluctuated wildly in value in recent years.
Matthew Phan, left, is fighting an attempt by the government to seize his Bitcoin wallet as proceeds of crime. He pleaded guilty in December to possessing drugs and attempting to import a handgun prosecutors say he bought on the Dark Web.
From The Star:
Matthew Phan, 30, pleaded guilty in December to attempting to import a Glock handgun and silencer and possessing cocaine and ketamine for the purposes of trafficking. According to an agreed statement of facts read at his trial, he illegally purchased the firearm and drugs using Bitcoins on two sites on the “dark web.”
The dark web, which functions as a virtual black market, is hidden from the regular internet and can only be accessed with specific software. “These markets facilitate the selling and buying of illicit goods using an eBay-style platform,” Erin Pancer, lead prosecutor in the Phan case, wrote in an article published in the Ontario Bar Association Criminal Justice Newsletter.
Bitcoin is the most common form of payment on the dark web, she wrote.
In May 2015, U.S. Homeland Security officers tipped the Toronto police that a Canadian was attempting to buy a gun on a dark web site called Agora. The seller was an undercover agent, the buyer Phan, a university dropout who was making an illegal living inside Mississauga’s curvaceous “Marilyn Monroe” condo tower.
Toronto police set up surveillance on a post office box in Woodbridge and nabbed Phan when he retrieved a dummy parcel containing not a Glock but a flare gun, Pancer said, reading the statement of facts in court late last year.
After obtaining a search warrant for Phan’s condo and a storage locker, police located thousands of grams of marijuana, cocaine, ketamine and MDEA (an amphetamine-type stimulant) along with evidence of narcotics trafficking, such as addressed envelopes, baggies and scales.
Officers also searched Phan’s computers and located a digital wallet containing 288 Bitcoins, then worth about $88,000.
At their highest value, in late 2017, the coins were worth more than $7 million.
Dwayne King, a former Toronto financial crimes officer, acted quickly to seize the electronic cash — otherwise, it could be gone in a “heartbeat,” he said in an interview this week.
“I was concerned it was going to be liquidated,” said King, now a senior manager at Grant Thornton, a business advisory firm. He set up a Toronto police online wallet and transferred the 288 coins over — marking law enforcement’s first-ever seizure of Bitcoin in Canada.
Virtual currencies represent the new technology challenges for law enforcement which is always playing catch up to criminals, King said.
“Not many years ago criminals kept their ill-gotten gains in shoeboxes hidden in their closets or under their mattresses. Cryptocurrencies have changed what that shoebox looks like and where it is hidden.”
King, who left the force after 27 years, came to a downtown courthouse Thursday to watch Pancer argue that Phan’s Bitcoins are proceeds of crime and Superior Court Justice Jane Kelly should approve a forfeiture order for the full amount.
At Pancer’s request, the judge qualified David Jevans, the founder and CEO of CipherTrace Inc., a U.S.-based company that assists in criminal investigations involving cryptocurrencies, to testify as an expert.
Jevans testified he was able to trace multiple transactions from dark web markets Agora and Evolution into Phan’s Bitcoin addresses.
“If I knew nothing about the case, other than being presented with the Bitcoin addresses that Mr. Phan controlled, my analysis would indicate that this individual was dealing in drugs online,” Jevans wrote in a report filed in court.
He also testified about dark web markets, how are they used and how Bitcoins are traced.
Phan, who had no criminal record, took the stand briefly Thursday. A man of few words, Phan said he began buying Bitcoins in 2012 when they were valued at $10 each. He testified he also used the coin to buy and sell gold bars.
Pancer asked the judge to reject that claim.
“Mr. Phan will have you believe that he was legitimately selling gold on the dark web, but for his testimony, there isn’t a scintilla of evidence to suggest that,” Pancer told Kelly.
The judge said she accepted that at one time Phan might have been using Bitcoins for legitimate purposes, but she noted he’s admitted to March 2015 transactions related to importing a firearm into Canada, and “it looks like he had quite a business going selling narcotics.”
In online messages on the dark web about buying a gun, Phan wrote to the undercover officer he was “depositing the BTC now,” which Pancer said referred to a Bitcoin payment.
Defence lawyer Jason Bogle asked the judge to consider leaving Phan with half the Bitcoins, so as not to leave him “destitute” and without means to move forward once he is released from custody. He has yet to be sentenced.
While on bail last year, Peel police arrested Phan and charged him with numerous drug-related offences. He has also pleaded guilty to those charges and is waiting to be sentenced in Brampton.
Police seized $14,000 worth of Bitcoins as part of that investigation, Bogle said.
Kelly said she will rule April 4 on the Crown’s request for a forfeiture order.
King wrote in an email sent Friday that the Phan case is significant for Canadian law enforcement.
“It forced agencies to start thinking about cryptocurrency investigations as a reality more than a possibility. A lot of agencies across the country were not ready to properly investigation cryptocurrency related cases,” he wrote.
King added the involvement of CipherTrace in this case demonstrates that strong public-private partnerships are vital in these kinds of prosecutions.