US prosecutors charge Russian founder of crypto exchange Bitzlato

US authorities have charged a Russian national with transmitting more than $700mn in illicit cryptocurrency funds that fell foul of US money laundering regulations, the latest move by legal authorities to crack down on crypto being used as a vehicle for alleged bad actors.

The US Department of Justice on Wednesday said it arrested Anatoly Legkodymov, a Russian national based in Shenzhen, China on Tuesday night in Miami. He is the founder of Bitzlato, a cryptocurrency exchange that US authorities described as a “crucial financial resource” to the dark net.

“Today’s law enforcement actions put all of those who seek to exploit the cryptocurrency ecosystem on notice that the Department of Justice will use every tool . . . that we have to attack the criminal use of the dark net and cryptocurrency,” said Lisa Monaco, deputy US attorney-general. “And we are taking steps to address the crisis of confidence in the cryptocurrency markets, where criminals and fraudsters seek to operate beyond the reach of law enforcement.”

US prosecutors have increasingly focused on the crypto industry as a potential vehicle for cross-border money laundering on a global scale. Last year, the US Treasury imposed sanctions on two crypto mixing services for allegedly facilitating money laundering on behalf of North Korea-backed actors. Mixers can be used to obscure the trail of transfers that would typically be publicly accessible on digital ledgers.

International transactions in the digital assets space have become a priority for the Biden administration. In 2021, the Treasury said “digital currencies, alternative payment platforms and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions.”

Wally Adeyemo, the US Treasury’s deputy secretary, on Wednesday said the cyber industry and actors attempting to evade sanctions or impact US national security should consider the enforcement action against Bitzlato as one of the tools “we will use in the future when it comes to Russia and illicit finance”.

Prosecutors have alleged Bitzlato’s largest counterparty for crypto transactions was Hydra Market, a dark web marketplace shut down by US and German authorities last year. The DoJ claimed Hydra accounted for about 80 per cent of all dark web market-related cryptocurrency transactions in 2021, and since 2015 received more than $5bn in cryptocurrencies.

Users of the Hydra marketplace allegedly exchanged more than $700mn worth of cryptocurrencies with Bitzlato prior to its shutdown in April 2022. The Hong Kong-registered exchange also allegedly received more than $15mn in ransomware proceeds.

Legkodymov was charged with conducting an unlicensed money transmitting business, which carries a maximum penalty of five years in prison. He was set to be arraigned in a Florida court on Wednesday afternoon and could not be reached for comment. The exchange did not immediately respond to a request for comment.

According to the DoJ, Bitzlato touted “minimal” identification requirements from its users and allegedly “became a haven for criminal proceeds and funds intended for use in criminal activity”. The investigation is ongoing, US authorities said.

French authorities, who are working with Europol, Spain, Portugal and Cyprus, have also taken related enforcement actions including seizing Bitzlato’s cryptocurrency and taking apart its digital infrastructure.

The charges against Legkodymov come just days after blockchain analytics platform Chainalysis said the amount of crypto sent to wallet addresses associated with illicit behaviour hit an all-time high in 2022. Just over $20bn worth of cryptocurrency was sent to addresses linked to criminal activity including ransomware, human trafficking, and terrorism financing, Chainalysis said.