A Hong Kong-registered cryptocurrency exchange, Bitzlato has remained mostly under the radar since its inception in 2016. The exchange managed to avoid any significant media exposure and kept a low profile, aside from a brief mention in a 2022 Chainalysis report. .
That was until January 18, 2023, when the US Department of Justice (DOJ) announced a high-profile enforcement action against the exchange. On the same day, its founder, Anatoly Legkodymov, was arrested in Miami and charged with operating an unregistered money transfer service.
The mainstream media was quickly inundated with news about the size and scope of Bitzlato’s illicit activity. Reports of the exchange’s deep connections to Russian hacking groups and dark web markets surfaced, leading many to wonder about the consequences this enforcement action could have on the industry.
If the allegations against Bitzlato are correct, the exchange and its owners could face charges of laundering cryptocurrency worth more than $1 billion. And while the scope of Bitzlato’s crimes may be significant, the effect of the exchange on the broader crypto market will likely be minimal.
A brief history of Bitzlato
The Russian invasion of Ukraine triggered an unprecedented enforcement effort against the country. Russia became the target of some of the most aggressive economic sanctions ever seen, with its banks, businesses and citizens seeing their funds seized or frozen. Russia’s central bank saw all its $630 billion reserves in the US tied up, driving its inflation to all-time highs.
As restrictions tightened, law enforcement agencies around the world began to worry about Russia’s ability to use cryptocurrency to evade sanctions. According to a 2022 Chainalysis report, Russia accounted for a disproportionately large share of cryptocurrency-based crime and was believed to be home to many cryptocurrency services suspected of money laundering.
However, an analysis of cryptocurrency transfers to and from Russia found no evidence of large-scale money laundering. While a notable amount of cryptocurrency was transferred from Russia to various crypto platforms abroad, the investigation showed that the transfers were small and ultimately negligible.
Bitzlato received a brief mention in the Chainalysis report as one of the few “high-risk exchanges” that received significant transfers from Russia-based users in 2022. The report showed that Bitzlato was ranked second with around $600 million received, behind Garantex.io, which reportedly received more than $1.5 billion in transfers from users in Russia.
The report, published on March 28, 2022, was one of the last times the exchange got major press until news emerged of its founder’s arrest on January 17, 2023.
The United States Department of Justice (DOJ) announced that it had arrested Anatoly Legkodymov, co-founder and senior executive of Bitzlato. The 40-year-old Russian national is the company’s majority shareholder and is accused of operating an unlicensed money transfer business.
At the same time, the Department of Justice announced a major enforcement action against Bitzlato. The DOJ enforcement letter notes that the exchange has been one of the largest market counterparties to the Hydra darknet. Bitzlato was also accused of acting as a primary money laundering route for Russian ransomware groups.
“Bitzlato plays a critical role in facilitating transactions for the Conti ransomware group and other global ransomware players, including actors operating out of Russia,” the Justice Department noted in the compliance letter.
Aside from the notorious Conti group, Bitzlato has been involved with Chatex, DarkSlide, and Phobos, all high-profile ransomware groups believed to be based in Russia.
“In addition to receiving ransomware revenue, Bitzlato’s receiving and sending transactional activity shows a significant connection to counterparties associated with other suspected illicit activities, such as dark web markets and Russian link-and-operate scams.”
The Justice Department’s investigation showed that approximately two-thirds of Bitzlato’s top receiving and issuing counterparties were associated with dark web marketplaces or scams. The top three receiving counterparties to the exchange between May 2018 and September 2022 were Binance, Hydra, a darknet exchange that caters to Russian users, and TheFiniko, a Russian Ponzi scheme. Its top three shipping counterparties were Hydra, LocalBitcoins, and TheFiniko.
An FBI investigation into Legkodymov found that Hydra users sent around $170 million worth of cryptocurrency to Bitzlato between May 2018 and April 2022, when the darknet marketplace was shut down. Hydra users withdrew $124.4 million from Bitzlato accounts and an additional $191.9 million from Bitzlato-funded sources. The exchange also received more than $15 million worth of crypto from ransomware groups.
The FBI investigation showed that Bitzlato employees were aware of and encouraged transfers to and from Hydra, with recovered customer service chats showing employees giving users clear instructions on how to wash “dirty tokens” and reload their wallets in the dark web market. Employees also knew that users were opening accounts with someone else’s credentials.
Legkodymov and other top managers at the exchange knew that most of Bitzlato’s trading volume came from criminal funds. Messages recovered from an internal chat with Bitzlato executives showed that they decided that blocking users related to drug trafficking would not be good for the exchange “from a business point of view.”
A blow to Bitzlato is not a blow to cryptocurrencies
The FBI has been investigating Legkodymov and Bitzlato for more than a year. The initiation of sanctions against Russia accelerated the investigation and quickly discovered that the scope of Bitzlato’s crimes exceeded Russia’s borders.
According to a statement from an agent involved in the investigation, Bitzlato has been conducting business in a “substantial portion” of the US. Evidence collected in the investigation showed that Bitzlato and its executives were aware of serving the customers of the USA and that Legkodymov managed the exchange while in the USA
Following Legkodymov’s arrest in Miami on January 17, the Justice Department issued a statement saying that crypto companies and their owners were not above the law or beyond its reach.
“Today, the Department of Justice dealt a significant blow to the crypto crime ecosystem,” said Assistant Attorney General Lisa Monaco.
“Today’s actions send a clear message: Whether you break our laws in China or Europe, or abuse our financial system from a tropical island, you can expect to answer for your crimes in a United States court.”
Overnight, the once obscure exchange became one of the biggest talking points in the cryptocurrency industry. The scope of Bitzlato’s alleged crimes made him an easy target for US lawmakers fighting for stricter regulation of the market.
A Chainalysis report found that around 26% of all cryptocurrency Bitzlato received between 2019 and 2023 came from illicit sources, while another 27% came from “risky sources.” With the exchange processing around $2.5 billion worth of cryptocurrency, it faces charges for laundering at least $650 million.
Many argue that a high-profile enforcement action could hinder the development of the crypto industry in the US. Big industry players in the country have been asking for regulatory clarity for a while. Still, they fear that regulatory pressure could result in a severe blow to the market.
Others, however, believe that the impact Bitzlato will have on the broader crypto market will be limited. While the volumes the exchange processed are significant, they represent a fraction of the total market volume and are dwarfed by the volumes seen on other, more regulated exchanges.
Posted In: USA, Exchanges
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