It’s a new day, and the crypto compliance buzz is ‘Bitzlato’; on Crypto Twitter, it’s been referred to as a ‘nothing burger’ – comments and memes mocking the US Government for a lukewarm response to FTX.
But these lobs at the US government miss the strategic context of Bitzlato and the enforcement action so let us take a more comprehensive look at the debacle.
Who is Bitzlato?
Although promoted as a crypto exchange to the wider world, Bitzlato appeared to be a highly efficient location for criminals looking to convert illicit funds in crypto asset to other currencies. It was often promoted In discussions on darknet forums as a place to buy and sell crypto assets for use in illicit activity; even in cases where users reported funds had been frozen, they were easily released.
An example of how lax the controls were was discussed in forum post between Russian users.
Here the poster complains that their funds have been blocked by Bitzlato and proof is needed to release them. The user had sent funds from OMG!OMG!, one of the successor marketplaces to Hydra. They’ve been asked for documentation and photographs:
But the transaction shown below (extracted from Crystal Expert) illustrates very clear flows from OMG! OMG! OMG! to Bitzlato, illustrating that requests for documentation were lip-service or simply ignored.
Another user replies that they have no issues, just send some fake documents and they will be released – they’ve had the same experience.
And in this post below, Bitzlato recommended on a Russian Darknet Forum
The message from the regulators
Looking more carefully at the operation leading up to the enforcement announcement, there are some important observations:.
Firstly, it was an international operation with cooperation from law enforcement in the US and Europe. In particular, the successful cooperation to seize and remove infrastructure associated with Bitzlato is likely to cause some unease among other businesses that are dabbling in similar dubious practices
Then there was the announcement itself. This contained a laundry list of three-letter abbreviations, big departments, and the deliberately imprecise phrase ‘international Crypto Entity’.
And lastly, there was suspense such that any exchange operator with shady ties would be on alert wondering who is next? Is it me they are about to announce?
The level of detail in the announcement about the allegations of money laundering should also give criminals pause for thought. The extract below illustrates that the level of intelligence gained is very thorough:
“For instance, on May 29, 2019, Legkodymov used Bitzlato’s internal chat system to write to a colleague that Bitzlato’s users were “known to be crooks,” using others’ identity documents to register their accounts. Legkodymov was repeatedly warned by colleagues that Bitzlato’s customer base consisted of “addicts who buy drugs at [] Hydra” and “drug traffickers,” with one senior executive even stressing that Bitzlato should combat drug dealers only “nominally,” to avoid hurting the company’s bottom line. An internal spreadsheet saved in Bitzlato’s shared management folder encapsulated the company’s view of itself: “Positives: No KYC. . . . Negatives: Dirty money. . . .”
While it is good to see decisive action from the US government, in many ways, this latest action is not only about the entity that has been targeted. It is also about the disruption to illegal activity. And we speculate that this recent action will have only a short-term disruptive impact on illicit flows of maybe three or four weeks, owing to the abundance of alternatives available.
There is no place to hide
This latest enforcement announcement is a clear message to the owners and founders of crypto exchanges that collaborate and cooperate with criminals or pay lip service to prevent money laundering – there is no place to hide.
“Institutions that trade in cryptocurrency are not above the law and their owners are not beyond our reach,” stated U.S. Attorney Breon Peace. “As alleged, Bitzlato sold itself to criminals as a no-questions-asked cryptocurrency exchange, and reaped hundreds of millions of dollars’ worth of deposits as a result.”
To learn how Crystal can help your organization counter money laundering and identify suspicious flows of crypto funds, contact us at [email protected].
