Bitzlato founder arrested for laundering $700m in crypto

US authorities arrested Russian national Anatoly Legkodymov, founder of Bitzlato crypto exchange known for assisting money laundering.

According to a statement from the US Department of Justice (DoJ), Legkodymov was detained on January 17 in Miami for his role in founding Bitzlato, a Hong Kong-registered and regarded as a “high-risk” cryptocurrency exchange that predominantly served Russian customers.

Legkodymov is accused of facilitating transfers of $700m in illicit funds through his cryptocurrency exchange. According to prosecutors, Bitzlato processed cryptocurrency transactions worth a total of $4.58 billion since May 3, 2018, although not all the transactions were related to criminal activities. Simultaneously with the arrest, law enforcement agencies in France, in collaboration with Europol and their counterparts in Spain, Portugal, and Cyprus, shut down Bitzlato's digital operations, confiscated Bitzlato's cryptocurrency, and took other steps to enforce the law.

“Today, the Department of Justice dealt a significant blow to the cryptocrime ecosystem. Overnight, the Department worked with key partners here and abroad to disrupt Bitzlato, the China-based money laundering engine that fueled a high-tech axis of cryptocrime, and to arrest its founder, Russian national Anatoly Legkodymov,” commented on the arrest US Deputy Attorney General Lisa Monaco.

Legkodymov faces charges for "conducting an unlicensed money-transmitting business." If convicted, he could face a maximum sentence of five years in prison.

Facilitated money laundering for criminals

The US Treasury's Financial Crimes Enforcement Network (FinCEN) has identified Bitzlato as a significant concern for money laundering, particularly in relation to illegal financing from Russia.

In a 2022 report on cryptocurrency crimes, blockchain security firm Chainalysis identified Bitzlato as a Russia-based service that played a significant role in facilitating money laundering for cybercriminals, including those involved in ransomware attacks, scams, and darknet marketplaces.

The Chainalysis report found that a significant portion of the funds received by Bitzlato between 2019 and 2021 came from suspicious or illegal sources. According to court documents, Bitzlato had a significant transaction volume from ‘Hydra’ – a major anonymous online marketplace on the darknet that was shut down by US and German authorities.

‘Hydra’ was used to sell illegal drugs, stolen credit card information, counterfeit currency, and fake identity documents while using encryption to conceal the identities of those involved. When it was closed in April 2022, German federal police reported that the ‘Hydra’ marketplace had around 17 million customer accounts and over 19,000 vendor accounts.

Users were "known to be crooks"

Bitzlato positioned itself as requiring minimal identification from users, stating that no passport or selfies were needed. Because of these lax know-your-customer (KYC) measures, the exchange allegedly became a popular destination for proceeds from criminal activities and funds intended for illegal activities.

According to DoJ, Legkodymov and other managers of Bitzlato were aware of the illicit activity happening on the exchange and that a significant number of users were registered under false identities.

On May 29, 2019, Legkodymov used Bitzlato's internal messaging system to inform a colleague that the exchange's users were "known to be crooks" and that they were using others' identities to register their accounts. The evidence suggests that Legkodymov was warned multiple times by colleagues that Bitzlato's customer base mainly consisted of "addicts who buy drugs at Hydra" and "drug traffickers."

Reportedly, Bitzlato was also involved in Russia’s war with Ukraine. The infamous crypto exchange was used as a destination for transferring funds for Project Terricon. The organization solicited cryptocurrency donations to support Russian militia groups operating in the Donbas region.

The arrest of Legkodymov occurred shortly after the Department of Justice announced the extradition of another prominent figure in the cryptocurrency industry, Sam Bankman-Fried, who was the former CEO of the now-defunct cryptocurrency company FTX. He is facing fraud and money laundering charges and was residing in the Bahamas at the time of his extradition.