Crypto shrugs off US crackdown on illicit activity

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Welcome to this week’s Cryptofinance newsletter. Today, we look at the industry’s firing of its latest black eye, Bitzlato.

An industry that over the past year has seen dizzying price drops, multiple bankruptcies and allegations of fraud would normally pay attention when the United States accuses one of its companies of fueling a high- cryptocurrency tech.

Yet a broad, collective shrug was the response when the US Department of Justice targeted the founder of a little-known exchange named Bitzlato on Wednesday.

Anatoly Legkodymov, a Russian national and founder of the Hong Kong-registered stock exchange, was arrested in Miami on Tuesday. The DoJ alleged that its exchange was used to transact more than $700 million worth of crypto by users of Hydra Market, a now-defunct marketplace once used to trade illicit goods on the dark net, a section of the web. which is hidden from conventional search engines. .

Pffft, said the army of Crypto Twitter pundits, many of whom were deflated after speculating that the DoJ was about to nail an industry indicator rather than a small fish exchange that many didn’t have. not even heard of. The collective shrug reveals how out of touch crypto watchers are when it comes to enforcing the law to root out alleged bad behavior.

Nothing will ever be enough. Just because you read it on Twitter doesn’t mean it’s a prosecutable offense that satisfies the burden of proof. Believe me when I say that as ex-law enforcement, we want to lock up the bad guys, a former law enforcement official told me over the phone.

For those who aren’t paying attention, don’t be so quick to dismiss the Bitzlato case. The Hydra darknet market once accounted for 80% of all darknet-related crypto transactions and received over $5 billion in cryptocurrencies from 2015 until it was shut down by US law enforcement and Germans last year.

Let’s face it, they were operating with one of the dark net’s biggest and worst malicious actors, so if you’re not targeting someone like that… who are you targeting? Aidan Larkin, founder and CEO of Asset Reality, a company that attempts to recover crypto assets seized by bad actors.

Legkodymov’s arrest also reveals a lot about the US view of crypto as a national security threat. Wally Adeyemo, the deputy treasury secretary, presented the arrest of the founders as a warning, saying the action against Bitzlato will be used in the future regarding Russia and illicit finance.

The government’s announcement of Bitzlato’s prosecution is significant because it is perhaps the strongest statement yet of the priority this administration places on reducing the overly prominent role of cryptos in money laundering. international, sanctions evasion and criminal finance, Peter Fox, partner at Scoolidge, Peters, Russotti & Fox LLP, told me via email.

Last year, the Treasury’s Office of Foreign Assets Control imposed sanctions on two blending services, Blender.io and Tornado Cash, after claims that the two platforms were used by Korean-backed hackers of the North to launder funds.

Russia’s invasion of Ukraine has heightened scrutiny of the use of crypto to evade US sanctions. But the Biden administration had concerns in 2021, saying digital currencies and other new ways to conceal cross-border payments were potentially reducing the effectiveness of US sanctions.

All of this, in turn, should turn heads among the industry’s C-suite community, especially those whose companies like Binance have previously been tied to Bitzlato.

Binance told me that it is committed to working with law enforcement around the world and has provided substantial assistance to law enforcement investigating Bitzlato.

Many hadn’t heard of Bitzlato until this week, but does that mean the DoJ’s action should be dismissed? Send me your thoughts at [email protected].

Weekly Highlights

Genesis’s lending unit filed for bankruptcy protection in New York, bringing the brokers’ troubles full circle, which began in November when it halted withdrawals after the FTX crash. My FT colleagues have the story here. In a related note, FTX refiled its Top 50 Creditors list, which showed Genesis as the exchange’s largest creditor.

Bitcoin is up just over a quarter against the dollar this year, but how sustainable is this rally? Check out my story here.

Here’s a good old-fashioned story for you: four people were convicted this week in a 20-minute bitcoin fraud case in the UK after an associate discovered a problem at an Australian crypto exchange. They took so much money they gave out 5,000 gift cards to strangers and bought cars for the pub people. The person who found the bug died before they could be prosecuted.

The co-founders of bankrupt crypto hedge fund Three Arrows Capital, Su Zhu and Kyle Davies, are back. They announced a new exchange named GTX that would swap bankruptcy filings, for those who don’t want to wait years for legal wrangles to be settled. *cue awkward pause* Well, they have some knowledge of the market. They want to find $25 million to hit the market ASAP by the end of February. Check out Jemima Kellys take here.

Soundbite of the week: Jamie Dimon is back

Jamie Dimon is back to bashing bitcoin.

Last year, Dimon said he was a huge skeptic of cryptocurrencies, describing them as decentralized Ponzi schemes and linking them to criminal industries such as money laundering and sex trafficking. .

During a CNBC panel this week, JPMorgan’s chief executive struck an exasperated tone, telling his fellow panelists: Why you’re wasting your breath on this is totally beyond me, adding that bitcoin was a fad fraud and a fart rock.

This week, he floated the hope that there will only ever be 21 million coins mined (around 19 million have been mined so far).

How do you know it’s going to stop at 21 million? Everyone says, well, maybe it’ll hit 21 million and Satoshi’s picture will laugh at y’all.

Data Mining: Ransomware Attacks and Defiant Victims

A final word on the ugly criminal underbelly of cryptos.

Last week, I shared the Chainalysiss 2023 Crypto Crime Report, which revealed that the total amount of crypto sent to wallet addresses associated with illicit behavior reached an all-time high of $20 billion in 2022.

Disturbing as it may seem, ransomware, one of the illicit industries most frequently cited by cryptos, is not the most important factor. Last year, ransomware attackers extorted at least $456 million from victims, 40% less than the 2021 figure of $765 million.

This does not necessarily mean that there have been fewer attacks, more that the targets refuse to pay. According to Chainalysis, victim compensation rates have fallen from 76% to 41% since 2019.

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