Exclusive: Binance transferred $346 million on behalf of seized cryptocurrency exchange, Bitzlato

On January 24th, Binance, a leading cryptocurrency platform, processed approximately $346 million in bitcoin for the digital currency exchange, Bitzlato. This comes after the arrest of Bitzlato's founder by U.S. authorities on charges of operating a "money laundering engine." According to data obtained from the blockchain, the U.S. Department of Justice has alleged that Bitzlato's co-founder and majority shareholder, Anatoly Legkodymov, a Russian national residing in China, had operated an unlicensed money exchange business. The alleged activities are said to have processed $700 million in illicit funds, thereby fueling a "high-tech axis of cryptocrime.

The Justice Department stated that Bitzlato had advertised the leniency of its client background checks. Additionally, when the exchange did request identification information from users, it allegedly consistently permitted the submission of information related to "straw man" registrants."

According to the Financial Crimes Enforcement Network (FinCEN) of the United States Treasury, Binance, the world's largest cryptocurrency exchange, was among the top three counterparties for Bitzlato in terms of the amount of bitcoin received between May 2018 and September 2022.

According to FinCEN, Binance was the only major cryptocurrency exchange among Bitzlato's top counterparties. The agency stated that the other entities that engaged in transactions with Bitzlato included the Russian-language darknet marketplace Hydra, a relatively small exchange known as LocalBitcoins, and a crypto investment website called Finiko, which FinCEN characterized as "an alleged crypto Ponzi scheme based in Russia." FinCEN did not provide any information regarding the extent of the interactions between these entities and Bitzlato.

The Financial Crimes Enforcement Network (FinCEN) has designated Hong Kong-registered Bitzlato as a "primary money laundering concern" related to Russian illicit finance. As a result, the agency will be banning the transmission of funds to Bitzlato by U.S. financial institutions and other entities from February 1. FinCEN did not name any specific firms, such as Binance, that are subject to the ban.

In response, a Binance spokesperson stated that the company has provided "substantial assistance" to international law enforcement in their investigation of Bitzlato and is committed to working collaboratively with such agencies. However, they did not provide further details on the nature of their cooperation or dealings with Bitzlato.

Bitzlato, whose website indicates that it has been seized by French authorities, could not be reached for comment. Similarly, the founder of Finiko, Kirill Doronin, and the operator of Hydra, who was indicted in the United States last year, did not respond to requests for comment. A lawyer for Doronin stated that FinCEN's statement was unfortunate and that Doronin continues to hope for the return of the cryptocurrency to investors who had it stolen from them.

LocalBitcoins, based in Finland, has stated that it has never had any form of partnership or association with Bitzlato. While some individuals utilizing LocalBitcoins' peer-to-peer platform may have also traded on Bitzlato's P2P market, LocalBitcoins reports that there have been minimal transactions between the two platforms since October 2022. At this time, there is no evidence to suggest that transactions between Binance, LocalBitcoins, Finiko and Bitzlato, which the Justice Department has referred to as a "haven for criminal proceeds and funds intended for use in criminal activity," have violated any laws or regulations. However, it has been noted that Binance's status as a prominent trading partner may attract attention from the Justice Department and U.S. Treasury regarding compliance checks with regards to Bitzlato. Ross Delston, an independent American lawyer and former banking regulator who is also an expert witness on anti-money laundering issues, has stated, "I wouldn't call it a warning shot over the bow, I would call it a guided missile," in reference to FinCEN's mention of Binance and LocalBitcoins.

The Justice Department and FinCEN have both declined to comment on the matter.

An analysis of previously unreported data reveals that Binance transferred over 20,000 bitcoins, valued at $345.8 million at the time of transaction, across 205,000 transactions for Bitzlato between May 2018 and its closure last week. These figures were compiled by leading U.S. blockchain researcher Chainalysis and have been made available to Reuters.

The data shows that Binance received approximately $175 million worth of bitcoins from Bitzlato during this period, making it the largest receiving counterparty.

Approximately $90 million of the total transfers took place after August 2021, when Binance announced that it would be requiring users to submit identification in order to combat financial crime. Chainalysis, which compiled the data, has declined to comment on this matter. Binance stated in a blog post last year that such measures are implemented to address "the funding and laundering of money from illicit activities." It is unclear whether Binance enforced these ID requirements with Bitzlato.

DARKNET MARKET

Chainalysis, a tool utilized by U.S. government agencies to trace illegal cryptocurrency transactions, had issued a warning in February of last year regarding the high risk associated with Bitzlato. In a report, Chainalysis stated that nearly half of Bitzlato's transactions between 2019 and 2021 were deemed "illicit and risky," accounting for almost $1 billion in such transactions.

The U.S. government's action against Bitzlato comes amid an ongoing investigation by the Department of Justice into Binance for potential money laundering and violations of sanctions. According to Reuters, some federal prosecutors have determined that the evidence collected supports filing charges against executives, including the founder and CEO Changpeng Zhao.

It is unclear whether Binance's dealings with Bitzlato are being reviewed as part of this investigation.

Binance, which does not disclose the location of its primary exchange, has processed a minimum of $10 billion in payments for criminal entities and organizations seeking to circumvent U.S. sanctions, as reported by Reuters in a series of articles last year, using blockchain data, court records and company documents.

The reporting also revealed that Binance deliberately maintained weak anti-money laundering controls and sought to evade regulators in the United States and other countries, according to former executives and company documents.

Binance disputed the articles, asserting that the calculations of illicit funds were inaccurate and describing the characterization of its compliance controls as "outdated." The exchange stated last year that it is "driving higher industry standards" and working to improve its ability to detect illegal cryptocurrency activity.

Both Binance and Bitzlato were major counterparties of the world's largest darknet marketplace for drugs, Hydra. The Russian-language site was shut down by U.S. and German authorities last year. The Department of Justice stated that Bitzlato exchanged more than $700 million in cryptocurrency with Hydra, either directly or through intermediaries.

In an article published last June, Reuters reviewed blockchain data that showed that buyers and sellers on Hydra used Binance to make and receive cryptocurrency payments totaling approximately $780 million between 2017 and 2022. A Binance spokesperson stated at the time that the figure related to Hydra was "inaccurate and overblown."

Share :