DOJ Accuses Bitzlato Crypto Exchange of Money Laundering, Arrests Founder

The Alpha:

• The U.S. Department of Justice (DOJ) just announced an “international cryptocurrency enforcement action,” according to a live broadcast on the DOJ’s website.

• Deputy Attorney General Lisa O. Monaco announced that the DOJ arrested Hong Kong-registered crypto exchange Bitzlato founder and majority stakeholder Anatoly Legkodymov in Miami last night, according to a press release.
• Legkodymov, a Russian national who resides in Shenzhen, People’s Republic of China, has been accused of enabling more than $700 million of crypto transactions with Hydra, the world’s largest darknet market.

• The announcement has the crypto market concerned, with Bitcoin and Ethereum dipping sharply in the last few hours.

Why It Matters

During the live broadcast, Deputy Attorney General Lisa O. Monaco announced the arrest of Anatoly Legkodymov, saying: “Today, the Department of Justice has dealt a significant blow to the crypto crime ecosystem,” and that the “law enforcement action put all of those who seek to exploit the cryptocurrency ecosystem on notice.” The DOJ alleged that Legkodymov helped operate the exchange while failing to implement required anti-money laundering (AML) protocols, and also enabled malicious actors to profit from their criminal behavior, which, according to the DOJ, included ransomware and drug trafficking.

Court documents state Bitzlato advertised its minimal identification policies to its users, saying: “neither selfies nor passports [are] required.” Even when Bitzlato directed users to submit identifying information, the exchange allowed them to provide data belonging to so-called “straw man” registrants.

Although Bitzlato claimed not to accept U.S.-based users, the DOJ said the exchange conducted business with customers in the country, and advised its customer service representatives repeatedly to tell users they could transfer funds from U.S. financial institutions.

The DOJ partners with global authorities on crypto enforcement

Legkodymov, who administered Bitzlato from Miami in 2022 and 2023, is charged with conducting an unlicensed “money-transmitting” business, according to the DOJ press release on the arrest. If found guilty, he faces a potential penalty of five years in prison.

The DOJ also announced that it’s working in conjunction with French authorities as well as Europol and partners in Spain, Portugal, and Cyprus to dismantle Bitzlato’s digital infrastructure and seize its cryptocurrency holdings. Furthermore, the Treasury Department’s FinCEN announced an Order pursuant to section 9714(a) of the Combating Russian Money Laundering Act, identifying Bitzlato as a “primary money laundering concern” in connection to Russian illicit finance.

The move is the first major action of the National Cryptocurrency Enforcement Team (NCET) that the DOJ announced in the fall of last year. The effort is also a sign from the organization to would-be criminals in the crypto space that the nascent and decentralized nature of the blockchain will not keep them safe from arrest or prosecution.

What’s next

With crypto regulation and enforcement set to change in 2023, the DOJ’s actions could set the tone for the year. Following a disastrous end to 2022 with events like the fall of FTX, agencies and regulatory bodies like the SEC are looking to get out in front of such events in the future.

With crypto regulation and enforcement set to change in 2023, the DOJ’s actions could set the tone for the year. Following a disastrous end to 2022 with events like the fall of FTX, agencies and regulatory bodies like the SEC are looking to get out in front of such events in the future. And, while Bitzlato operated on the illegal fringes of the crypto space, exchanges still need to ensure they are ready for the Treasury Department to clarify its as-of-yet vague guidelines on how exchanges and brokers will interact with Sections 6045 and 6045A of the Internal Revenue Code. More definitive guidelines are likely to drop this year, and that will have a huge impact on who the DOJ and the SEC (and potentially even the CFTC) decide to go after. 

The crypto market remains anxious from the news, with Ethereum dipping to a 24-hour low of $1,509.42 and Bitcoin to $20,541.54, according to CoinMarketCap. While both have rebounded slightly, such announcements have taken the edge off of an optimistic start to 2023, which has seen a steady rise in crypto prices over the last month or so.

But wait! There’s more:

This was a breaking news story and was updated as new information is made available.