CRYPTO giant Binance processed almost US$346 million in Bitcoin for digital currency exchange Bitzlato, whose founder was arrested by US authorities last week for allegedly running a “money laundering engine”, blockchain data seen by Reuters shows.

The Justice Department on Jan 18 said it had charged Bitzlato’s co-founder and majority shareholder Anatoly Legkodymov, with operating an unlicensed money-exchange business that “fuelled a high-tech axis of crypto crime” by processing US$700 million in illicit funds.

Bitzlato had touted the laxity of its background checks on clients, the department said, adding that when the exchange did ask users for identification, “it repeatedly allowed them to provide information belonging to ‘straw man’ registrants”.

Bitzlato, whose website says it has been seized by French authorities, could not be reached by Reuters. Legkodymov, a Russian national living in China, has not made any public comment since his arrest, and did not respond to requests for comment.

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

Binance was the only major crypto exchange among Bitzlato’s top counterparties, Fincen noted. It said the other entities that had transacted with Bitzlato were a Russian-language dark-net drugs marketplace called Hydra, a small exchange called LocalBitcoins, and a crypto investment website called Finiko, which Fincen described as an “alleged crypto Ponzi scheme based in Russia”.

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Fincen did not detail the scale of these other entities’ interactions with Bitzlato.

Hong Kong-registered Bitzlato was a “primary money-laundering concern” related to Russian illicit finance, Fincen said, adding that it would ban the transmission of funds to the exchange by the US and other financial institutions from Feb 1. It did not name Binance or any other individual firms among those that would be subject to the ban.

A spokesperson for Binance said that it had “provided substantial assistance” to international law enforcement to support their investigation of Bitzlato. They added that the company was committed to “working collaboratively” with law enforcement, but declined to give details about the nature of its cooperation with such agencies. The spokesperson also declined to give details about Binance’s dealings with Bitzlato.

A lawyer for Finiko’s founder, Kirill Doronin, said Fincen’s statement was “unfortunate for him, as he continues to hope for the return of the cryptocurrency to investors from the people that stole it”. The lawyer added that Doronin did not use investors’ crypto while Finiko was operating.

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

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

Reuters found 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”, broke any rules or laws.

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

“I wouldn’t call it a warning shot over the bow, I would call it a guided missile,” said independent American lawyer and former banking regulator Ross Delston, in reference to Fincen’s citing of Binance and LocalBitcoins. He is also an expert witness on anti-money laundering issues.

The Justice Department and Fincen declined to comment.

A review by leading US blockchain researcher Chainalysis of previously unreported data showed that Binance had moved over 20,000 Bitcoin, worth US$345.8 million at the time they were transacted, across some 205,000 transactions for Bitzlato between May 2018 and its closure last week.

Bitcoin worth about US$175 million was transferred to Binance from Bitzlato in that period, making Binance its largest receiving counterparty, the data showed.

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

Dark-net market

Chainalysis, which is used by US authorities to track illicit crypto flows, had warned in February 2022 that Bitzlato was high risk. The research house said nearly half, or almost US$1 billion worth, of Bitzlato’s transfers between 2019 and 2021 were “illicit and risky”.

The US action against Bitzlato comes amid a Justice Department probe into possible money laundering and sanctions violations by Binance. Reuters reported last month that some federal prosecutors have concluded that the evidence collected justifies filing charges against the major exchange’s executives, including founder and chief executive Changpeng Zhao.

Reuters could not establish whether Binance’s dealings with Bitzlato were under review.

Binance, which does not reveal the location of its core exchange, has processed at least US$10 billion in payments for criminals and companies seeking to evade US sanctions, Reuters found in a series of articles last year. The reporting also showed that Binance intentionally kept weak anti-money laundering controls, and plotted to evade regulators in the US and elsewhere, according to former executives and company documents.

Binance disputed the articles, calling the illicit-fund calculations inaccurate and the descriptions of its compliance controls “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 of Hydra, the world’s largest dark-net drugs marketplace. The site was shut down by US and German authorities last year. The Justice Department said Bitzlato exchanged more than US$700 million in crypto with Hydra, either directly or through intermediaries.

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