In “this just got interesting” news, Binance has been identified as a counterparty in the Bitzlato prosecution. Up to now, the Bitzlato prosecution drew yawns and questions of “who?” from the crypto-verse. On Tuesday, January 17, 2023, the Bitzlato founder, a Russian national named Anatoly Legkodymov was arrested in Miami. The announcement came after the US Treasury pre-announced a big announcement.
Crypto markets were down ahead of the Treasury’s presser expecting the worst. When the US Government announced it was pursuing charges against Bitzlato, the crypto community ridiculed it as an exchange no one has heard of. This announcement was especially seen as minor with the ongoing collapse and bankruptcy of major crypto exchanges like FTX.
However, with Binance now being mentioned it may become a bigger deal.
Binance and Bitzlato
In the documents from the US Government Binance was named as the largest of the 3 major counterparties for the Bitzlato exchange. The other 2 counterparties were a Russia-connected darknet market called Hydra and ‘The Finiko’ which is an alleged Ponzi scheme.
The US Treasury was able to press charges against Bitzlato due to records seized related to Hydra. Bitzlato had ~7% of its transactions coming from Hydra, which was nearly 1.5 million transfers between May 2018 and April 2022. The orders were around 20,000 BTC in total.
Binance is the largest crypto exchange in the world and it may not be surprising that is was a major counterparty to Bitzlato. Additionally, Binance was also a major counterparty to Hydra, totaling $780 million in transactions.
Why Should You Care?
Financial crime prosecution tends to be a game of dominoes. Typically, the government connects dots to catch some smaller firms to build a case against a larger firm.
The US Treasury was able to prosecute Bitzlato due to information it found at Hydra. And now it has information from both Hydra and Bitzlato with ties to Binance.
An investigation by the DOJ into potential money laundering at Binance is currently ongoing and this may be the first signs of a future charge.
Binance is the largest crypto exchange and a major part of the crypto ecosystem.
Who is Bitzlato?
Bitzlato is a cryptocurrency exchange that is registered out of Hong Kong. It was majority owned and operated by Anatoly Legkodymov who went by the online name “Gandalf” who is a Russian national.
The US alleged that Bitzlato had ‘extremely lax procedures” around the know-your-customer (KYC) laws. Legkodymov apparently pursued a strategy of attracting users who wanted to use identities not linked to their real person. He went so far as advertising that on Bitzlato ‘no KYC is required for you to trade’.
Despite no one seemingly knowing about Bitzlato, it has allegedly conducted over $4.5 billion in crypto transactions since May 2018. Additionally, over $15 million in crypto tied to ransomware attacks allegedly flowed through Bitzlato.
Bitzlato was also the preferred exchange for users of the dark web market Hydra. Over $170 million was sent from Hydra to Bitzlato while over $316 million went from Bitzlato to Hydra.
However, Binance has over $780 million in transactions with Hydra. Albeit, that makes up a miniscule amount of Binance’s total transactions.
Legkodymov has been charged with ‘operating an unlicensed money transmission business’. There was also allegedly laundering of money from illicit drug trafficking. The FBI claimed that Bitzlato was a “China-based money laundering engine that fueled a high-tech axis of crypto crime”, but even at its peak, Bitzlato had only $6 million in funds.
Conclusion:
It is yet to be seen if this is the end of story or the beginning of a series of prosecutions. There was a multi-agency investigation that involved the US Department of Justice (DOJ), Federal Bureau of Investigation (FBI), the US Treasury Financial Crimes Enforcement Network (FinCEN), and dozens of European agencies.
If the US is pursuing materials found on Hydra and Bitzlato, it may mean that Binance and its CEO Changpeng Zhao (CZ) are in its sights. However, Binance put out a statement saying it provided ‘substantial assistance’ to international law enforcement supporting the investigation.
In 2021 the US Treasury and the DOJ’s newly made “NCET” team was given more authority to prosecute Russian-related financial crimes. This new authority does appear to be used aggressively now.
