Exclusive: Binance Moves $346M for Seized Crypto Exchange Bitzlato

LONDON, Jan 24 (Reuters) – Crypto giant Binance processed nearly $346 million in bitcoin for digital currency exchange Bitzlato, whose founder was arrested by U.S. authorities last week for allegedly running a “money laundering engine”, blockchain data seen by Reuters shows.

The Justice Department said on Jan. 18 that it charged Bitzlato’s co-founder and majority shareholder Anatoly Legkodymov, a Russian citizen living in China, with running an unlicensed money exchange business that “operated a high-tech axis of cryptocrime” by processing $700 million in illegal funds.

Bitzlato had singled out the laxity of its background checks on clients, the Justice Department said, adding that when the exchange asked users for ID information, it “repeatedly allowed them to provide information belonging to ‘strawman’ registrants.”

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

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

Hong Kong-registered Bitzlato was a “primary money laundering concern” related to Russian illicit finance, FinCEN added. It will prohibit the transfer of funds to Bitzlato by US and other financial institutions from February 1. FinCEN said. It did not name Binance or other individual firms among those subject to the ban.

A spokesperson for Binance said via email that it had “provided significant assistance” to international law enforcement to support their investigation into Bitzlato. The company is committed to “cooperating” with law enforcement, they added, declining to provide details about its dealings with Bitzlato or the nature of its cooperation with such agencies.

Bitzlato, whose website says it has been seized by French authorities, could not be reached by Reuters. Legkodymov has made no public comment since his arrest in Miami last week and did not respond to requests for comment by email.

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

Hydra’s operator, who was indicted in the US last year, did not respond to requests for comment.

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

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

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

“I wouldn’t call it a warning shot, I would call it a guided missile,” said Ross Delston, an independent U.S. attorney and former bank regulator who is also an expert witness on anti-money laundering issues, referring to FinCEN’s citation of Binance and LocalBitcoins.

The Justice Department and FinCEN declined to comment.

Binance moved more than 20,000 bitcoins, worth $345.8 million at the time of execution, over about 205,000 transactions for Bitzlato between May 2018 and its shutdown last week, according to a review of previously unreported data. The figures were compiled by leading US blockchain researcher Chainalysis and seen by Reuters.

About $175 million worth of Bitcoin was transferred to Binance from Bitzlato during that period, making Binance the largest receiving counterparty, the data shows.

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

DARKNET MARKET

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

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

Reuters could not determine whether Binance’s dealings with Bitzlato are under review.

Binance, which does not disclose the location of its core 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 based on blockchain data, court and company records.

The reporting also showed that Binance intentionally kept lax anti-money laundering controls and planned to evade regulators in the US and elsewhere, according to former executives and company documents.

Binance disputed the articles, calling the illegal fund calculations inaccurate and the descriptions of compliance checks “outdated.” The exchange said last year that it was “driving higher industry standards” and that it was seeking to improve its ability to detect illegal crypto activity.

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

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

Reporting by Tom Wilson and Angus Berwick in London; Editing by Elisa Martinuzzi and Louise Heavens

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