Crypto shrugs at US crackdown on illicit activity

Welcome to this week’s Cryptofinance newsletter. Today we’re taking a look at the industry’s dismissal of its latest black eye, Bitzlato.

An industry that over the past year has witnessed precipitous price falls, multiple bankruptcies and allegations of fraud would normally pay attention when the US accuses one of its companies of fueling a “high-tech axis of crypto crime”.

Yet a broad collective shrug was the response when the US Department of Justice on Wednesday took aim at the founder of a little-known exchange named Bitzlato.

Anatoly Legkodymov, Russian national and founder of the Hong Kong-registered exchange, was arrested in Miami on Tuesday. The DoJ alleged his exchange was used to process more than $700mn worth of crypto by users of Hydra Market, a now-defunct marketplace once used to trade illicit goods on the dark net, a section of the web that is hidden from conventional search engines.

“Pffft,” said the army of Crypto Twitter™ pundits, many of whom were left deflated after they speculated that the DoJ was about to nail an industry bellwether rather than a small fish exchange many had not even heard of. The collective shrug reveals just how disconnected crypto watchers are when it comes to law enforcement rooting out suspected bad behaviour.

“Nothing will ever be enough. Just because you’ve read it on Twitter doesn’t mean it’s a prosecutable offence that satisfies the burden of proof. Trust me when I say as an ex-law enforcement person, we want to lock up the bad guys,” one former law enforcement official told me over the phone.

For those not paying attention, don’t be so quick to dismiss the Bitzlato case. The Hydra dark net market once accounted for 80 per cent of all dark net market-related crypto transactions, and had received more than $5bn in cryptocurrencies from 2015 until it was shut down by US and German law enforcement last year.

“Let’s acknowledge they were operating with one of the biggest and worst and well-known bad actors in the dark net space, so if you don’t target someone like that . . . who do you target?” Aidan Larkin, founder and chief executive of Asset Reality, a company that tries to recover crypto assets seized by bad actors.

Legkodymov’s arrest also reveals plenty about the US’s view on crypto as a national security threat. Wally Adeyemo, the Treasury’s deputy secretary, pitched the founder’s arrest as a warning, claiming the action against Bitzlato will be used “in the future when it comes to Russia and illicit finance”.

“The government’s announcement of the Bitzlato prosecution is significant because it is perhaps the strongest statement to date of the priority this administration gives to reducing crypto’s all-too-large role in international money laundering, sanctions evasion, and criminal finance,” Peter Fox, partner at Scoolidge, Peters, Russotti & Fox LLP, told me via email.

Last year, the Treasury’s Office of Foreign Assets Control imposed sanctions on two mixing services, Blender.io and Tornado Cash, after it claimed both platforms were used by North Korea-backed hackers to launder funds.

Russia’s invasion of Ukraine has increased scrutiny of the use of crypto to evade US sanctions. But the Biden administration had concerns in 2021, saying digital currencies and other “new” ways of hiding cross-border payments “all potentially reduce the efficacy of American sanctions”.

All of this, in turn, should turn heads among the industry’s C-suite community, especially those whose companies — like Binance — have already been linked to Bitzlato.

Binance told me it is committed to working with law enforcement worldwide and it “provided substantial assistance” to law enforcement investigating Bitzlato.

Many hadn’t heard about Bitzlato before this week, but does that mean the DoJ’s action should be dismissed? Email me your thoughts at [email protected].

Weekly highlights

• Genesis’s lending unit has filed for bankruptcy protection in New York, bringing full circle the broker’s troubles, which began in November when it halted withdrawals after FTX’s collapse. My FT colleagues have the story here. In a related note, FTX refiled its top 50 creditors list, which showed Genesis as the exchange’s biggest creditor.

• Bitcoin has risen by just over a quarter against the dollar this year but how durable is this rally? Check out my story here.

• Here’s a good old-fashioned eye roll story for you: four people were this week sentenced in a £20mn bitcoin fraud case in the UK after an associate discovered a glitch in an Australian crypto exchange. They took so much money they were handing out £5,000 gift cards to strangers and buying cars for people at the pub. The person who found the glitch died before he could be prosecuted.

• The co-founders of bankrupt crypto hedge fund Three Arrows Capital, Su Zhu and Kyle Davies, are back. They announced a new exchange named “GTX” that would trade bankruptcy claims, for those who don’t want to wait years for the legal tussles to be settled. *Cue awkward pause* Well, they have some knowledge of the market. They want to find $25mn to get to market “ASAP by the end of February”. Check out Jemima Kelly’s take here.

Soundbite of the week: Jamie Dimon is at it again

Jamie Dimon is back to bashing bitcoin.

Last year, Dimon said he was a “major sceptic” on cryptocurrencies, describing them as decentralised Ponzi schemes and linking them to criminal industries such as money laundering and sex trafficking.

On a CNBC panel this week, the JPMorgan chief executive struck an exasperated tone, telling his fellow panellists: “Why you guys waste any breath on it is totally beyond me,” adding bitcoin was a “hyped-up fraud” and a “pet rock”.

This week he hit out at the expectation that there will only ever be a finite 21mn coins mined (roughly 19mn have been mined so far).

“How do you know it’s going to stop at 21 million? Everyone says that, well maybe it’s going to get to 21 million and Satoshi’s picture is going to come up and laugh at you all.”

Data mining: Ransomware attacks and defiant victims

A final word on crypto’s ugly criminal underbelly.

Last week, I shared Chainalysis’s 2023 crypto crime report, which found the total amount of crypto sent to wallet addresses associated with illicit behaviour hit an all-time high of $20bn in 2022.

Troubling as that may be, ransomware — one of crypto’s most frequently cited illicit industries — isn’t the biggest factor. Last year, ransomware attackers extorted at least $456mn from victims, an eye-popping 40 per cent less than 2021’s figure of $765mn.

This doesn’t necessarily mean there have been fewer attacks, more that targets are refusing to pay up. According to Chainalysis, victim payment rates have fallen from 76 per cent to 41 per cent since 2019.