The United States Department of Justice(DOJ) in cooperation with international law enforcement agencies shutdown Bitzlato Limited, a Hong Kong-based cryptocurrency exchange, and arrested its founder and major shareholder for facilitating the transfer of illicit funds.
Seizure banner uploaded on Bitzlato's website.
According to an announcement by the DOJ, Bitzlato was founded in 2016, by 40-year-old Anatoly Legkodymov, a Russian citizen who resides in China. Legkodymov and his co-founder run Bitzlato with minimal Know Your Customer (KYC) requirements.
Bitzlato's lack of effective anti-money laundering requirements made it a favorite among crypto users who engaged in illicit activities. The exchange allegedly received hundreds of millions of dollars from suspected criminals such as ransomware attackers and users of dark web marketplaces such as the now-defunct Hydra Market.
The Connection Between Bitzlato and Hydra
According to the Criminal complaint, investigations into Bitzlato's operations reportedly revealed that a majority of the exchange's users were also Hydra users. Bitzlato was Hydra's second largest counterparty. Hydra buyers funded their purchases from accounts at Bitzlato, while the vendors on Hydra cashed out via accounts at Bitzlato. A total of approximately $700 million in cryptocurrency was exchanged between the two platforms.
Blockchain analysis revealed that between May 2018 and Hydra's shutdown in April 2022, Hydra users sent approximately $170 million in cryptocurrency to Bitzlato wallets. In the same period, Bitzlato received an additional $218 from non-Bitzlato addresses that had received funds from Hydra users.
During the same period, Bitzlato users sent over $124.4 million to Hydra. An additional $191 million was sent to Hydra from addresses that had received funds from Bitzlato wallets.
In addition to facilitating Hydra transactions, Bitzlato was reportedly used to cash out more than $15 million in crypto received from addresses that had received proceeds of ransomware attacks.
Bitzlato's Personnel Role in Illicit Transactions
Bitzlato's employees sometimes blocked accounts of users suspected of engaging in illicit activities but in most cases let the customers be. Communications between Bitzlato's customers and support representatives reportedly showed that the employees knowingly helped the customers transfer funds to Hydra.
In one such case, a customer who contacted Bitzlato's support on October 18, 2020, and asked if he could transfer funds from his Bitzlato wallet to Hydra was told, you can transfer BTC to any actual address. There are no restrictions for any individual services.
Bitzlato's support also knew that most of their customers used accounts created under the identities of other individuals. The support representatives allowed such customers to continue using the exchange without restrictions.
Legkodymov and his co-founder were aware of the high volume of illicit funds transferred through the exchange but decided that blocking users who engaged in illicit activities would hurt the exchange's bottom line.
Bitzlatos role in illicit activities was highlighted in a document titled Competitor Analysis, made by Bitzlatos marketing director, and shared with the platforms management. The document included "no KYC" as one of Bitzlatos pros while "dirty money" and "lots of scams" were listed as some of the exchange's cons.
US-based Customers on Bitzlato
Bitzlato is also accused of offering its services to US customers even though it was not based in the US. In cases where Bitzlato provided data regarding customers placed under investigation by US authorities, the data showed that the customers had been accessing the exchange from IP addresses in the US.
Information received from an undisclosed US-based cryptocurrency exchange reportedly showed that 1,600 of the exchanges US-based customers had transferred a total of approximately $2.4 million to Bitzlato.
Legkodymov also managed the exchange while he was in the US. Legkodymov entered the US in October 2022 and had been residing in Miami, Florida. Information acquired from his ISP in Florida showed that he had been accessing Bitzlatos management server.
Legkodymov was arrested on January 17, 2023, by US authorities in Miami. During Legkodymov's arrest, an international operation led by French authorities in partnership with law enforcement agencies in Spain, Portugal, the Netherlands, and Cyprus under Europol's coordination took down Bitzlato and seized its crypto assets.