As the trial of former leaders of the FTX cryptocurrency exchange continues, a new scandal has hit the digital asset market. Blockchain data reveals that Binance processed nearly $346 million in bitcoins for the Bitzlato exchange, whose founder was arrested by US authorities last week for “allegedly operating a money laundering machine”. This destroys confidence in this highly volatile market, which has just had a disastrous 2022, with tens of billions of dollars stolen from investors.
US authorities on January 18 unveiled an indictment against the little-known cryptocurrency exchange Bitzlato alleging that it facilitated the laundering of $700 million in corrupted cryptocurrencies linked to the dark web market Hydra, now shut down, and millions more on ransomware products. Strangely enough, blockchain data shows that tens of millions of dollars that passed through Bitzlato ended up in Binance’s custodial wallets, despite Binance’s strict anti-money laundering standards.
According to the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN), Binance, the world’s largest cryptocurrency exchange, was among the top three Bitzlato counterparties by the number of bitcoins received between May 2018 and September 2022. from Binance , the report published by FinCEN indicates that Bitzlato’s other counterparties were the Russian-language drug exchange Hydra, a small exchange called LocalBitcoins, and a cryptocurrency investment website called Finiko. The latter has been described as “an alleged cryptocurrency Ponzi scheme based in Russia”.
FinCEN did not provide details on the extent of the entities’ interactions with Bitzlato. Based in Hong Kong, Bitzlato was a major money laundering concern linked to Russian illicit financing, notes FinCEN. It will ban the transfer of Bitzlato funds by the US and other financial institutions from February 1. The agency did not name Binance or other individual companies as targets of the ban. In addition, Anatoly Legkodymov, co-founder and majority shareholder of Bitzlato, has a Russian citizen residing in China. But last week he was arrested in Miami by US prosecutors.
The Hydra operator, who has been sued in the United States, and a lawyer representing Finiko’s founder have not commented on the case. Finland-based LocalBitcoins said it has never had any kind of partnership or relationship with Bitzlato. The data shows that between May 2018 and last week’s shutdown, Binance moved more than 20,000 bitcoins worth $345.8 million through some 205,000 transactions for Bitzlato. The numbers were compiled by Chainalysis, an American blockchain analytics company headquartered in New York, and have been viewed by Reuters.
About $90 million of the total transfers took place after August 2021, when Binance announced it would require users to provide ID to combat financial crime. Binance said in a blog post last year that these controls address funding and money laundering from illegal activities. However, Binance has been under strict scrutiny from regulators since the collapse of FTX. It is under criminal investigation by the United States Department of Justice (DOJ) for compliance with anti-money laundering laws.
In his case, Sam Bankman-Fried, founder and former CEO of FTX, pleaded not guilty to criminal charges that he misled hundreds of investors and looted billions of dollars through FTX. Following the disastrous management of FTX, which led to the mysterious disappearance of client funds, Bankman-Fried is currently on trial in the United States, where he faces up to 115 years in prison. He was charged with two counts of wire fraud and six counts of conspiracy, including money laundering and campaign finance violations.
The movement of Bitzlato funds raises questions about the effectiveness of Binance’s anti-money laundering efforts, especially as Binance’s own third-party anti-money laundering provider, Chainalysis, released a report in February 2022 that estimated that 48% of Bitzlato’s 2019-2021 cryptocurrency revenues ” illegal or risky”. According to Arkham Intelligence, Bitzlato’s highest cryptocurrency balance was estimated at just $6.6 million. By comparison, Binance’s highest balance was worth more than $60 billion.
But Bitzlato’s total inflows and outflows ran into the hundreds of millions of dollars, suggesting that Bitzlato was a gateway for users who wanted to hold their cryptocurrencies on more established exchanges such as Binance or Coinbase. . On these exchanges, customers choose to let the platform hold their tokens. But smaller exchanges can often act as a bridge between the entity wanting to transfer its coins and the destination where the tokens are held. Assets can only remain on one of these intermediate exchanges for a few minutes.
A cursory investigation of some of Bitzlato’s largest exchange partners indicates that tens of millions of additional dollars have flowed from Bitzlato to Binance through other cryptocurrency wallets, in an apparent attempt to disguise the funds’ origins. In total, the top 5 Bitzlato connected wallets have sent over $30 million directly to Binance. Smaller transactions eventually ended up in Binance wallets. On-chain data cannot account for additional funds moved through Bitzlato Binance mixers.
Mixers allow users to hide the origin and end point of their cryptocurrency. The data also provides no insight into what sort of actions Binance might take to defend against malicious deposits, including seizing those funds once placed in Binance wallets. But Binance CEO Changpeng Zhao has often touted his exchange’s aggressive efforts to crack down on illicit funds flowing through the platform. This month, Binance announced it had seized millions of dollars in cryptocurrency linked to a North Korean hacker group called Harmony.
Reuters determined last year that Binance, which does not disclose the location of its main exchange, has 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. According to former executives and company documents, Binance deliberately kept anti-money laundering controls weak and colluded to evade regulators in the US and elsewhere. Binance disputed the reports, calling the calculations of the illicit money inaccurate. She also said the allegations are baseless.
Last month, Binance was caught mixing funds between the US and the exchange’s international entity. It was suspected of insolvency after blockchain data showed it financially bailed out its subsidiary Binance.US, which is said to be “independent” of the main exchange. Binance.US was allegedly designed to mislead US regulators and customers. Indeed, reports claim that Binance.US is a ploy to trick US regulators into focusing on the compliant local exchange while the parent company was free to run its own business.
The cryptocurrency market as a whole is plagued by rampant fraud. In 2022 in particular, investors have lost tens of billions of dollars to all kinds of scams and brutal stock market failures. The spectacular bankruptcy of FTX, and the 130 companies that make it up, has led to the bankruptcy of dozens of other industry players, including BlockFi and Genesis. We see the same in the non-fungible token (NFT) market in 2022. The NFT market has literally collapsed, with NFTs like the one in the first tweet in history now almost worthless.
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FTX founder Sam Bankman-Fried faces up to 115 years in prison in the United States if convicted of the charges against him, he faces a total of 8 charges