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Crypto giant Binance processed nearly $346 million in Bitcoin for digital currency exchange Bitzlato, including the founder was arrested by US authorities last week for allegedly operating a “money laundering engine”, Reuters reported citing blockchain data.

On January 18, the US Department of Justice said it had charged Bitzlato co-founder and majority shareholder Anatoly Legkodymov, a Russian national living in China, with operating an unlicensed foreign exchange business that “supplied a high-tech crypto-crime axis” by processing $700 million in illicit funds.

Bitzlato had touted its lax background checks on customers, the Justice Department said, adding that when the exchange asked users for credentials, “it repeatedly allowed them to provide information belonging to to “straw” registrants.

Binance, the largest crypto exchange in the world, was among the The first three counterparties by the amount of Bitcoin received between May 2018 and September 2022, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) said last week.

Binance was the only major crypto exchange among Bitzlato’s top counterparties, FinCEN said. He said others who transacted with Bitzlato were the Russian-language “darknet” drug market Hydra, a small exchange called LocalBitcoins, and a crypto investment website called Finiko, which FinCEN described as ” an alleged Russian-based crypto Ponzi scheme”. FinCEN did not detail the extent of the entities’ interactions with Bitzlato.

Bitzlato, registered in Hong Kong, was a “primary money laundering concern” linked to Russian illicit finance, FinCEN added. It will ban the transmission of funds to Bitzlato by the United States and other financial institutions starting Feb. 1, FinCEN said. He did not name Binance or other individual companies as among those subject to the ban.

A Binance spokesperson said via email that it had “provided substantial assistance” to international law enforcement to support their investigation of Bitzlato. The company pledged to “work cooperatively” with law enforcement, they added, declining to elaborate on its relationship with Bitzlato or the nature of its cooperation with those agencies.

Bitzlato, whose website says it was seized by French authorities, could not be reached by Reuters. Legkodymov has not made any public comments since his arrest in Miami last week and did not respond to email requests for comment.

A lawyer for Finiko founder Kirill Doronin said FinCEN’s statement was “unfortunate for him [Doronin], as he continues to hope for the return of cryptocurrency to investors from the people who stole it.” Doronin did not use the investors’ crypto while Finiko was operating, the attorney, Dmitry Grigoriadi, said.

The Hydra operator, who was indicted in the United States last year, did not respond to requests for comment.

Finland-based LocalBitcoins said it never had “any kind of cooperation or relationship” with Bitzlato. Some LocalBitcoins peer-to-peer (P2P) traders “would have also been trading on BitZlato’s P2P marketplace,” he said, adding that “there have been virtually no transactions between LocalBitcoins and BitZlato since October 2022”.

Reuters has no evidence that Binance, LocalBitcoins or Finiko transactions with Bitzlato, which the Justice Department has described as a “safe haven for proceeds of crime and funds intended for use in criminal activities”, violated rules or laws.

However, a former US banking regulator and former law enforcement official said Binance’s status as one of the top counterparties would focus the US Department of Justice and Treasury’s attention on security checks. Binance compliance with Bitzlato.

“I wouldn’t call it a warning shot over the bow, I would call it a guided missile,” said Ross Delston – an independent US attorney and former banking regulator who is also an expert witness on issues of fight against money laundering – referring to FinCEN quoting Binance and LocalBitcoins.

The Justice Department and FinCEN declined to comment.

Changpeng Zhao, CEO of Binance.
Changpeng Zhao, CEO of Binance, has in the past called for clear and stable regulation for the crypto industry [File: Darrin Zammit Lupi/Reuters]

Binance moved more than 20,000 Bitcoin, worth $345.8 million at the time of trade, out of some 205,000 trades for Bitzlato between May 2018 and its shutdown last week, according to a review of unreported data previously. The figures were compiled by prominent US blockchain researcher Chainalysis and seen by Reuters.

Around $175 million worth of bitcoins were transferred to Binance from Bitzlato during this period, making Binance its largest receiving counterparty, according to the data.

About $90 million of the total transfers took place after August 2021, when Binance said it would require users to submit ID to combat financial crime, according to data from Chainalysis, which declined to comment. comment. These controls, Binance said in a blog post last year, address “funding and money laundering from illicit activities.” Reuters could not determine whether Binance enforced its identification requirements with Bitzlato.

darknet market

Chainalysis, which is used by US authorities to track illicit crypto flows, warned in February last year that Bitzlato was high risk. In a report, Chainalysis said nearly half of Bitzlato transfers between 2019 and 2021 were “illicit and risky,” identifying nearly $1 billion in such transactions.

The US action against Bitzlato comes as the Department of Justice investigates Binance for possible money laundering and sanctions violations. Some federal prosecutors have concluded that the evidence gathered warrants filing charges against executives, including founder and CEO Changpeng Zhao, Reuters reported in December.

Reuters could not establish whether Binance’s relationship with Bitzlato was under review.

Binance, which does not reveal the location of its main exchange, processed at least $10 billion in payments for criminals and companies seeking to evade US sanctions, Reuters found in a series of articles last year. based on blockchain data, court and corporate records.

The report also showed that Binance was intentionally keeping anti-money laundering controls weak and conspiring to evade regulators in the US and elsewhere, according to former executives and company documents.

Binance took issue with the articles, calling the calculations of illicit funds inaccurate and the descriptions of its compliance checks “outdated”. The exchange said last year that it was “implementing higher industry standards” and seeking to improve its ability to detect illegal cryptographic activity.

Binance and Bitzlato were major counterparties to Hydra, the world’s largest darknet drug marketplace. The Russian-language site was shut down by US and German authorities last year. The Justice Department said Bitzlato traded more than $700 million in crypto with Hydra, either directly or through intermediaries.

In an article published last June, Reuters examined blockchain data that showed Hydra buyers and sellers used Binance to make and receive crypto payments worth around $780 million between 2017 and 2022. A Binance spokesperson said at the time that this figure was “inaccurate and exaggerated”.



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