Yesterday, in a much-hyped press conference, federal authorities said it has seized a little-known, Hong Kong-based crypto exchange Bitzlato and it's founderthe Russian national Anatoly Legkodymov (who also goes by "Gandalf"). The indictment claimed the exchange processed about $4.5 billion worth of crypto currency transactions since its founding in 2018, of which $700 million is known to have flowed to or from the prominent "darknet marketplace" Hydra. Further, a "meaningful" volume allegedly came from U.S. customers – meaning it would be subject to "U.S. regulatory safeguards."
Legkodymov allegedly was aware that his exchange was used by what he called "crooks" and even advertised it as such. If convicted of operating an illegal money transmitting business, Legkodymov faces a maximum sentence of five years. But at its height, the exchange only held $6 million in funds – a remarkably minuscule amount. Likewise, Similar Web searches show how little traffic the so-called crime hub had.
All of this grandstanding over essentially nothing, might be intended to send a message to a different subject of a criminal investigation. In fact, it might send shivers down Binance CEO Changpeng Zhao's spine. In the words of Deputy Attorney General Monaco, "Today's actions send the clear message: Whether you break our laws from China or Europe – or abuse our financial system from a tropical island – you can expect to answer for your crimes inside a United States courtroom."
Industry news site Protos suggested that the Bitzlato investigation was likely kick-started, or accelerated, by the seizure of documents from the Hydra marketplace last year. If that were true, it means the DOJ, which is reportedly already investigating Binance, would have similar data on flows between Binance and Hydra. According to research done by NBER's Igor Makarov and Antoinette Schoar in 2021, Bitzlato was the second-largest source of Hydra's volumes after Binance (and above the peer-to-peer network LocalBitcoins). What's more Bitzlato's top counterparty was Binance.
This isn't to paint a target on Binance – critically, the exchange has boosted its KYC procedures and relationships with regulators over the years. But it's clear from CoinDesk reporting that the Securities and Exchange Commission is interested taking a look under the hood at the industry's biggest exchanges, and Binance is still reportedly staring down a money laundering complaint. If and when that comes no one should be surprised if Hydra is named.
If anything, yesterday's indictment only proved that regulators and police have the tools necessary at their disposal to investigate and indict alleged crypto criminals. That's worth mentioning in the wake of FTX, and other high-profile blockchain embarrassments last year, now that lawmakers are calling for stricter rules and oversight of the industry.
According to the Washington Post, the Bitzlato enforcement was the first action led by the Justice Department's crypto-focused "NCET" team started in 2021. It was also an opportunity for the U.S. Treasury Dept.'s Financial Crimes Enforcement Network to debut more powers granted by a 2021 defense authorization law to combat Russian-related financial crimes, including bypassing slower procedures to administer punishments by fiat.
There's an argument to be made that oversight of monetary transfers is already overly broad – it penalizes everyone by starting from the premise that surveillance for the sake of safety is normal. But ever since the seizure of the Silk Road, it has been evident that fully public, transparent and immutable blockchains are horrible systems to do illicit business on – and yet people choose to do so. The crimes are there, the laws are on the books.
That's part of what made yesterday's presser so cringey. In particular, Monaco's allusion to the "tropical" Bahamas-based FTX exchange – when discussing the broad authority for U.S. agencies to pursue crimes – only goes to show how often regulators fail to preempt anything. Bitzlato may have been an exception, but it pales by comparison.
– D.K.
daniel@coindesk.com
@danielgkuhn
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