Crypto platform Bitzlato accused of laundering over $700 million in illicit money

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US authorities have designated the cryptocurrency exchange Bitzlato Ltd. as a major money laundering problem and accused its founder of allegedly facilitating money laundering for criminals.

The Treasury Department named Bitzlato under a section of the USA Patriot Act, a law used to combat money laundering and terrorist financing, for allegedly laundering illicit funds for Russian-based ransomware actors . This type of action, a rarely used so-called lethal sanction that cuts the entity off from the U.S. financial system, has been used primarily in the past against banks and other financial institutions and has in most cases forced the institution to to close.

Bitzlato, which is based in Hong Kong but operates globally, reportedly traded more than $700 million in cryptocurrency with Hydra Market, a darknet market that was the largest in the world before it shut down in April 2022, said the US Department of Justice. Bitzlato also received more than $15 million in ransomware proceeds, the Justice Department said.

Anatoly Legkodymov, the founder and majority owner of Bitzlato, was arrested Tuesday night in Miami. Mr. Legkodymov, a 40-year-old Russian national who lives in Shenzhen, China, is due for his first appearance Wednesday afternoon in federal court in Florida.

Alongside the US action, French authorities took their own enforcement actions, including shutting down Bitzlatos’ digital infrastructure and seizing its cryptocurrency.

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U.S. prosecutors said Bitzlato lacked effective know-your-customer procedures to verify user identities as required by U.S. anti-money laundering laws, and did substantial business with customers based in the United States, although it claims not to accept users from the United States.

Representatives for Bitzlato and Mr. Legkodymov could not immediately be reached for comment.

Today, the Department of Justice dealt a major blow to the cryptocurrency ecosystem, Assistant Attorney General Lisa Monaco said on Wednesday. Today’s actions send a clear message: whether you’re breaking our laws from China or Europe or abusing our financial system from a tropical island, you can expect to be held accountable for your crimes in US court. .

Deputy Treasury Secretary Wally Adeyemo said the investigation into whether Bitzlato was used to help circumvent sanctions against Russia was continuing. The enforcement action, however, should serve as a warning against the use of crypto to launder illicit funds and a reminder that US authorities are ready to act if they see this happening. The regulator added that there may be other charges against Bitzlato or its founder.

The message [to those using crypto tools to circumvent Russia sanctions]”We will, in collaboration and coordination with our allies and with the DOJ, find and prosecute you and take action against you with the tools at our disposal,” Adeyemo said at Wednesday’s press conference announcing the enforcement action.

The Department of Justice said that the enforcement measures imposed in recent weeks against the crypto industry have shown that investments in improving its expertise in the sector are paying off. Ms. Monaco told the Wall Street Journal last month that an increase in Justice Department resources in cryptocurrency investigations more than a year ago helped prosecutors quickly indict the founder of FTX, Sam Bankman-Fried, and this decision bodes well for a series of aggressive enforcement actions to come. The Justice Department coordinates cryptocurrency enforcement efforts through a 25-member national team, she added.

Crypto imploded in 2022 as investors lost faith in digital assets and the industry was in the grip of crisis. But unlike other collapses, it largely avoided spillovers to other markets. WSJ explains how crypto has become so interconnected. Illustration: Mallory Brangan

The enforcement action against Bitzlato comes as the crypto industry continues to come under scrutiny following the upheavals in the sector last year. US prosecutors charged Mr Bankman-Fried last month with eight counts of fraud after FTX filed for bankruptcy in November. Mr Bankman-Fried is under house arrest at his parents’ California home as he faces federal fraud charges, to which he has pleaded not guilty.

Bitzlato was a little-known exchange ahead of Wednesday’s action. The Financial Crimes Enforcement Network, the Treasury’s anti-money laundering unit, said in its order against Bitzlato that the exchange accounts for a limited percentage of daily crypto transfers by US and international standards.

FinCEN said that in April 2022, Bitzlato had a daily bitcoin balance that was 0.0185% of the largest US-based crypto exchange. Although FinCEN did not name the largest exchange, Coinbase Global Inc. is ranked as the largest in the United States, according to research site CoinMarketCap.com.

A blog post from last year by blockchain analytics firm Chainalysis Inc. said that Bitzlato received around $2 billion worth of cryptocurrency between 2019 and 2021, and almost half of that value was believed to be illicit or risky.

The enforcement action against Bitzlato seems to have come as a shock to its users. Minutes after the Justice Department’s announcement, a Russian-language Telegram group for Bitzlato users filled with complaints about the exchange shutdown and the actions of US authorities.

They took Hydra, it looks like Bitzlato too, the USA squeezes Russia from all sides, wrote a user posted under the pseudonym Daniel Yanson in the group which has more than 5,500 members.

Another user, with the handle No, wrote: Is this even legal? Let’s say the owner laundered something there. What about ordinary people? Is the United States just taking their money or what?

—Ian Talley contributed to this article.

Write to Mengqi Sun at [email protected] and Alexander Osipovich at [email protected]

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