The United States and its allies go after Crypto Exchange and Russia

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Last week, the US Department of Justice (DOJ) and the US Treasury Department announced coordinated action against Hong Kong-registered non-compliant cryptocurrency exchange Bitzlato and the arrest of its owner in Miami. for facilitating Russian illicit financing. A few minutes after the announcement What is Bitzlato? was trending on crypto-Twitter with a litany of snooze emojis filling the feeds. A few even asked (ironically) if Bitzlato was a new beverage offering at StarbucksSBUX. The backlash, stemming from the perception that Bitzlato was a relatively small operation, does not tell the whole story, however. In fact, Bitzlato’s action was significant for a number of reasons.

It’s all about Russia as the Treasury uses powerful new authority for the first time

First, while Bitzlato’s action was mostly seen through a crypto lens, it was actually much more about Russia. Since Russia’s invasion of Ukraine, the United States, Europe and democratic allies have mounted a relentless sanctions campaign in an effort to cut Russia off from the global financial system. The actions directly link Bitzlato to Russian illicit finance, particularly the ransomware and darknet markets, allowing the Treasury’s Financial Crimes Enforcement Network (FinCEN) to issue, for the first time, an order under the Article 9714 (a) of the Russian Anti-Money Laundering Law. This order designates Bitzlato as a primary money laundering concern in connection with Russian illicit financing and prohibits certain money transfers involving Bitzlato by any covered financial institution.

If for no other reason, the first use of 9714(a) alone makes Bitzlato action a big deal. As Carole House, a former senior FinCEN and White House National Security Council official who led many U.S. government efforts on digital assets, explained to Forbes, Bitzlato’s 9714 designation marks the first-ever designation landmark under critical authority Congress gave FinCEN in 2021 to combat Russian illicit funding targeting Russia’s ongoing war of aggression against Ukraine, as well as ransomware groups operating in Russia that launder their proceeds through institutions around the world.

The use of the 9714(a) authority under the Russian Anti-Money Laundering Law passed as part of the National Defense Authorization Act (NDAA) of 2020, which included the Anti-Money Laundering Act of 2020, signals that the Treasury is focusing on Bitzlato as Russian illicit trafficking. broader financial issue. The intent of the Authority to view it as what Section 311 of the Patriot Act does for terrorist financing is to isolate and cut off foreign financial institutions used for money laundering from the US financial system. As Ms. House explained, these measures could range from record-keeping or reporting requirements to even prohibiting U.S. financial institutions and agencies from engaging in certain money transfers. A 9714 action can mean a death sentence for foreign financial institutions.

Over the past 18 months, we have seen the United States and partner nations execute a scalpel strategy to tackle what Treasury official Todd Conklin has called the illicit underbelly of the crypto ecosystem. We have seen action against non-compliant Russian exchanges Suex, Chatex and Garantex, like Bitzlato, for having weak or no AML controls and for facilitating ransomware and darknet activity. In her prepared remarks, Deputy Attorney General Lisa Monaco directly linked Bitzlato’s action to Hydra’s earlier breakup, explaining that Hydra and Bitzlato formed a high-tech crypto-crime hub: Hydra buyers funded illicit purchases of illegal drugs, stolen financial information and hacking services from crypto accounts hosted at Bitzlato, and the sellers of these illegal goods and services at Hydra sent criminal proceeds to accounts at Bitzlato, all to the tune of over $700 million in direct and indirect transfers between 2018 and 2022. Bitzlato action is another example like actions against Suex, Chatex, Garantex, Hydra and US darknet mixers Helix and BitcoinBTC Fog targeting illicit parts of the crypto economy without hitting the growing and extremely legal ecosystem.

Sending a message

Besides making a statement in the Russian context, the Bitzlato action was also meant to send a message to the wider crypto space that non-compliance is a non-starter. The DOJ’s criminal complaint is an unprecedented discussion of an entity’s lack of anti-money laundering (AML) controls and is replete with references to Bitzlato’s intentional disregard for compliance. According to the DOJ, Bitzlato presented itself as requiring minimal identification from its users, stating that neither selfies nor passports [are] obligatory. . . Due to these flawed know-your-customer (KYC) procedures, Bitzlato has reportedly become a safe haven for proceeds of crime and funds intended to be used in criminal activities, including $700 million worth of trades with the sanctioned darknet market Hydra. and $15 million worth of ransomware products. . The DOJ and Treasury focus on Bitzlato’s lack of AML controls is an attempt to remove a bad actor – particularly one that facilitates illicit Russian financing – from the financial system, but it also sends a clear message to other exchanges that the authorities expect robust AML controls. While strong AML checks are already standard for US-based exchanges like Coinbase and Kraken, actions such as Bitzlato against non-compliant Virtual Asset Service Providers (VASPs) aim to send a message that which every exchange, regardless of location, must prioritize protection from illicit actors.

Global cooperation

Finally, Bitzlato’s actions implicated not only US authorities, but also law enforcement around the world. In the Bitzlato case, law enforcement from the United States, the Netherlands, France and EUROPOL were all involved in the dismantling and arrest. For example, we saw US law enforcement arrest the owner of Bitzlatos, a Russian national living in China, in Miami. Meanwhile, French authorities took down Bitzlato’s website and FinCEN used its powers to cut Bitzlato out of the US financial system. This comprehensive approach to crypto-related investigations was a key part of the White House Digital Assets Framework, as the DOJ and Treasury provided reports on the importance of international engagement and cooperation in response to the last year’s executive order on cryptography.

The DOJ report, for example, highlights the importance of cross-border collaboration, information sharing, and global capacity-building efforts to ensure global standards for anti-money laundering and other controls. .

Despite the visceral backlash from many on crypto Twitter, Bitzlato’s action was indeed significant as the first use of a powerful new Treasury authority and as part of a much larger puzzle over the US response. and world to illicit finance and Russian aggression in particular. So if you decide to order Bitzlato two shots of sugar-free vanilla, take a sip knowing that a bad actor has been removed from the growth of the crypto economy.

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