Crypto Panics, Then Jeers at DOJ Announcement of ‘Major Action’ Against Tiny Chinese Exchange Bitzlato
Crypto markets teetered on the edge of panic Wednesday, prepared for the worst after the Department of Justice (DOJ) announced a mysterious, upcoming press conference concerning a “major international cryptocurrency action.” Crypto Panics, Then Jeers at DOJ Announcement of ‘Major Action’ Against Tiny Chinese Exchange Bitzlato
Few in crypto had ever heard of the company.
Huge opportunity emerging for exchanges to capture all that massive Bitzlato volume now.
Bitzlato, relative to the size of most major crypto exchanges, is minuscule. According to analytics firm Arkham, the Chinese exchange at its peak held no more than $6 million in funds.
Bitcoin fell some 4.6% within minutes, ETH shed 5% in the same period. Crypto Twitter whipped itself into an anxious frenzy, speculating as to whether another FTX-style implosion of a critical market player was imminent.
And then, a few minutes later, the dust settled: Bitzlato? What’s Bitzlato?
Mid-day Wednesday, federal prosecutors proudly announced criminal charges against Bitzlato, a Hong Kong-based cryptocurrency exchange. The exchange’s founder, Russian national Anatoly Legkodymov, apparently known by the nickname “Gandalf,” was arrested last night in Miami.
Authorities say he failed to establish anti-money laundering requirements for Bitzlato, which allegedly processed some $700 million in illicit funds over the course of its history, primarily in the form of transactions related to dark web marketplace Hydra.
Though most of Twitter laughed off the underwhelming reveal, some may have found it less amusing.
Prior to the DOJ’s announcement, many speculated that the agency would announce charges against Binance, the world’s largest cryptocurrency exchange. Federal prosecutors have been investigating the company for four years; Binance was deeply entangled in the collapse of rival firm FTX, and recently admitted to some unorthodox business practices.
In the minutes preceding the DOJ’s press conference, Binance CEO Changpeng Zhao, better known as CZ, went so far as to tweet a cryptic message implying he was preparing for “fake news” or “attacks” on his company.
Perhaps due to these worrying signals, net outflows from Binance hit $60 million in the last hour, according to analytics firm Nansen.
BTC and ETH, meanwhile, have both recovered about half of their losses incurred earlier today at the height of market panic. BTC has climbed back to $20,923 at writing, according to CoinGecko; ETH has recovered to $1,546.
Bitzlato Kept A Low Profile, But Did Not Go Entirely Unnoticed Before DOJ Action
The Hong Kong crypto exchange with strong ties to Russia was a blip on Chainalysis’ radar last year, with its takedown seen as anticlimactic by many in the crypto community.
Noncustodial peer-to-peer crypto exchange Bitzlato was little known to some before the United States Department of Justice (DOJ) enforcement action against it on Jan. 18. It was co-founded in 2016 by recently arrested Russian national Anatoly Legkodymov.
According to a Russian source, Legkodymov is the owner of 73.4% of Bitzlato, which has an office on a high floor in the Federation Tower skyscraper in Moscow, where it accepted trades of $100,000 or more.
Legkodymov and his main partner in Bitzlato are also reportedly involved in Russian crypto mining equipment distribution company A-HVT.
Legkodymov had a long and checkered history in the crypto industry going back more than a decade. His earliest post on the BitcoinTalk forum dates back to 2011, where he described the events that led to a loss of more than 50 BTC:
Legkodymov described the process of opening the Bitzlato exchange in an online forum in 2017:
“My team and I have analyzed numerous failure scenarios, including a simulation of a hacker attack by the exchange owners and operators, and we found a solution that allows us to operate a bitcoin exchange in a highly secure manner.”
While Bitzlato attracted little attention until the DOJ action on Jan. 18, Chainalysis stated in a report last February that the exchange had “received $206 million from darknet markets, $224.5 million from scams, and $9 million from ransomware attackers.”
Illicit and risky transactions made up 48% of the company’s business at that time, according to the report.
The DoJ had announced it would be holding a conference to discuss the charges early in the day, but did not indicate which companies would be involved. This led many, who were speculating about the involvement of much larger names, to react with a certain amount of irony:
Bitzlato And Its Founder Face Enforcement Actions From US Authorities
The Department of Justice, Treasury Department and French law enforcement seized many of Bitzlato’s resources, alleging the firm helped launder $700 million in illicit funds.
The United States Department of Justice announced a “major international cryptocurrency enforcement action” against crypto firm Bitzlato and the arrest of its founder, Anatoly Legkodymov.
In a Jan. 18 announcement, U.S. Deputy Attorney General Lisa Monaco said that authorities had taken enforcement actions against Bitzlato in coordination with France, seizing Bitzlato’s website and labeling the business as a “primary money laundering concern” connected to Russian illicit finance.
According to Monaco, the Department of Justice worked with the Treasury Department and French law enforcement to take action against Bitzlato for “conducting a money transmitting business that transported and transmitted illicit funds and that failed to meet U.S. regulatory safeguards.”
As part of the case against Bitzlato, FBI officials arrested Legkodymov, a Russian national based in China, on Jan. 17 in Miami. He is scheduled to be arraigned in the U.S. District Court for the Southern District of Florida.
U.S. authorities said the criminal complaint against Bitzlato was based on the firm being a “crucial financial resource” for the Hydra darknet marketplace, allowing users to launder funds including those from ransomware attacks:
“Hydra Market users exchanged more than $700 million in cryptocurrency with Bitzlato, either directly or through intermediaries, until Hydra Market was shuttered by U.S. and German law enforcement in April 2022. Bitzlato also received more than $15 million in ransomware proceeds.”
The enforcement action was a coordinated effort across Europe and the U.S. to seize many of Bitzlato’s resources — including the firm’s servers — as well as take the founder into custody. Monaco referred to the case as the “most significant enforcement effort” against an exchange since the National Cryptocurrency Enforcement Team was launched in October 2021.
Assistant Attorney General Kenneth Polite of the Department of Justice’s criminal division said that U.S. authorities were “just getting started” in cracking down on similar firms involved in facilitating money laundering.
Though not commented directly on the ongoing case against crypto exchange FTX and its former CEO, Sam Bankman-Fried, Monaco warned against those committing crimes against the U.S. financial system “from a tropical island”.
FinCEN Lists Binance Among The Top Bitcoin Counterparties Of Bitzlato
FinCEN placed Binance next to the darknet market Hydra as a major counterparty receiving Bitcoin from Bitzlato.
The United States Financial Crimes Enforcement Network (FinCEN) — a bureau of the Treasury Department — has argued that Binance is linked to the illegal cryptocurrency platform Bitzlato.
In an order published on Jan. 18, FinCEN stated that the Binance cryptocurrency exchange was among the “top three receiving counterparties” of Bitzlato in terms of Bitcoin transactions.
According to the authority, Binance was among the biggest counterparties that received Bitcoin from Bitzlato between May 2018 and September 2022. Other counterparties included Russia-connected darknet market Hydra and the alleged Russia-based Ponzi scheme known as “Finiko,” FinCEN noted.
On the other hand, FinCEN did not mention Binance as the top three sending counterparties in the order. According to the document, the biggest Bitcoin senders to Bitzlato between May 2018 and September 2022 were Hydra, Finland-based exchange LocalBitcoins and Finiko.
“Approximately two-thirds of Bitzlato’s top receiving and sending counterparties are associated with darknet markets or scams,” FinCEN wrote in the order. The agency noted that between 2019 and 2021, Bitzlato received crypto worth $206 million from darknet markets, $224 million from scams, and $9 million from ransomware attackers.
The news comes amid multiple U.S. authorities initiating major enforcement action against Bitzlato, accusing the firm of money laundering and allegedly facilitating circumvention of sanctions against Russia.
As part of the case against Bitzlato, the Federal Bureau of Investigation arrested Bitzlato founder Anatoly Legkodymov on Jan. 17 in Miami.
Unlike major crypto exchanges like Binance or Coinbase, Bitzlato was a little-known cryptocurrency service. Founded in 2016, the platform reportedly has an office in the Federation Tower skyscraper in Moscow, where it accepted transactions of $100,000 or more.
The alleged involvement of Binance in Bitzlato’s case raises some concerns about the exchange’s operations and potential ties with Russia. As previously reported, Binance was among exchanges that opted to continue to serve non-sanctioned Russians after the European Union adopted the eighth sanctions package against the country.
Addressing Cointelegraph’s request for comment regarding FinCEN’s reference to Binance in Bitzlato’s case, a spokesperson for Binance said that the firm has been collaborating with regulators, stating:
“Binance is pleased to have provided substantial assistance to international law enforcement partners in support of this investigation. This exemplifies Binance’s commitment to working collaboratively with law enforcement partners worldwide.“
FinCEN did not immediately respond to Cointelegraph’s request for comment.