Binance, a leading cryptocurrency platform, processed a significant amount of bitcoin transactions, amounting to almost $346 million, for the digital currency exchange Bitzlato. This action took place after the founder of Bitzlato was arrested by U.S. authorities for alleged involvement in running a “money laundering engine,” as reported by Reuters, who reviewed the blockchain data.
The Justice Department Allegations
The United States Department of Justice announced on January 18th that they had charged Anatoly Legkodymov, co-founder and majority shareholder of Bitzlato, a Russian national residing in China, with operating an illegal money exchange business. The Justice Department alleged that this business “fueled a high-tech axis of cryptocrime” by processing $700 million in illegal funds.
According to the Justice Department, Bitzlato had advertised its leniency in performing background checks on clients. The department also stated that when the exchange did request identification information from users, it regularly accepted information that belonged to “straw man” registrants.
Binance, one of the world’s largest cryptocurrency exchanges, was identified by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) as one of Bitzlato’s top three counterparties by the amount of bitcoin received between May 2018 and September 2022.
FinCEN Report Reveals Binance as Only Major Crypto Exchange Among Bitzlato’s Top Counterparties
According to FinCEN, Binance was the only major cryptocurrency exchange among Bitzlato’s top counterparties. FinCEN added that the other entities that transacted with Bitzlato were the Russian-language darknet drugs marketplace, Hydra, a small exchange called LocalBitcoins, and a crypto investment website called Finiko, which FinCEN described as “an alleged crypto Ponzi scheme based in Russia.” FinCEN did not disclose the extent of the interactions between these entities and Bitzlato.
Hong Kong-registered Bitzlato was considered as a “primary money laundering concern” in relation to Russian illegal finance, according to FinCEN. It announced that it will prohibit U.S and other financial institutions from transmitting funds to Bitzlato starting February 1st. FinCEN did not name Binance or other specific companies as being subject to the ban.
A representative from Binance stated in an email that the company has “provided substantial assistance” to international law enforcement in their investigation of Bitzlato. The company also said they are committed to “working collaboratively” with law enforcement, but declined to provide any specifics about its interactions with Bitzlato or the nature of its cooperation with these agencies.
Finland-based LocalBitcoins has denied having “any kind of cooperation or relationship” with Bitzlato. They did however mentioned that some peer-to-peer (P2P) traders at LocalBitcoins “would also have been trading in BitZlato’s P2P market”, and added that “there have practically been no transactions between LocalBitcoins and BitZlato since October 2022.”
The lawyer for the founder of Finiko, Kirill Doronin, said that FinCEN’s statement is “unfortunate for him” as he is still hoping for the return of the cryptocurrency to investors from the people that stole it. The lawyer, Dmitry Grigoriadi, also stated that Doronin did not use investors’ crypto while Finiko was in operation.
According to a review of previously unreported data by leading U.S blockchain researcher Chainalysis and seen by Reuters, Binance transferred over 20,000 bitcoin, worth $345.8 million at the time of the transactions, across 205,000 transactions for Bitzlato between May 2018 and its closure last week.
According to data from Chainalysis, bitcoin worth around $175 million was transferred from Bitzlato to Binance during that period, making Binance the largest receiving counterparty. The data also showed that about $90 million of the total transfers took place after August 2021, when Binance stated that it would require users to submit identification in order to combat financial crimes. Binance added in a blog post last year that such checks are necessary to tackle “the funding and laundering of money from illicit activities.”
Bitzlato Under Investigation by US Justice Department for Money Laundering and Illegal Cryptocurrency Transactions
Chainalysis, a blockchain analysis firm that is used by U.S. authorities to track illegal cryptocurrency activities, had warned in February 2020 that Bitzlato was high risk. In a report, Chainalysis said that nearly half of Bitzlato’s transfers between 2019 and 2021 were considered “illicit and risky,” and identified almost $1 billion in such transactions.
The U.S. action against Bitzlato comes amid an ongoing investigation by the Justice Department into Binance for potential money laundering and violations of sanctions. Some federal prosecutors have found that the evidence collected is sufficient to file charges against executives, including the founder and CEO, Changpeng Zhao.
According to a series of articles by Reuters last year, which were based on blockchain data, court and company records, Binance, which does not disclose the location of its main exchange, has processed at least $10 billion in payments for criminals and companies attempting to evade U.S. sanctions.
Both Binance and Bitzlato were significant counterparties of the world’s largest darknet drugs marketplace, Hydra. The Russian-language site was shut down by U.S. and German authorities last year. The U.S Department of Justice stated that Bitzlato exchanged more than $700 million in cryptocurrency with Hydra, either directly or through intermediaries.