Founder of Bitzlato Cryptocurrency Exchange Charged with Processing $700 Million in Illegal Funds | The Volkov Law Group

On Wednesday, January 18, 2013, the US Department of Justice (“DOJ”) filed criminal charges in the Eastern District of New York against Russian national Anatoly Legkodymov, an officer at Bitzlato Ltd. (“Bitzlato”), a cryptocurrency exchange registered in Hong Kong. Legkodymov – also known as “Gandalf” and “Tolik” – is accused of running an unlicensed money-transmission business that failed to provide the necessary controls, such as Legkodymov was arrested in Miami on January 17th. If convicted, Legkodymov faces a maximum of five (5) years in prison.

Institutions dealing in cryptocurrency are not above the law and their owners are not beyond our reach. As claimed, Bitzlato sold itself as a cryptocurrency exchange to criminals without question, reaping hundreds of millions of dollars in deposits as a result. The defendant is now paying the price for the malicious role his company has played in the cryptocurrency ecosystem.

Breon Peace, US Attorney

Bitzlato was a hotbed of illegal cryptocurrency. That was the stock exchange’s business model. It marketed itself based on its relaxed know-your-customer (“KYC”) requirements – “Easy registration with no KYC. No selfies or passports required. Only your email address is required.” Bitzlato even maintained an internal administrative folder that contained a document listing the pros and cons of the exchange. The document says, I quote: “Positive: No KYC. . . . Cons: Dirty money. . . .” Even when it implemented “required” verification for new users (and I use that term loosely), Bitzlato assured existing users that the new controls didn’t apply to them. Even when Bitzlato requested and obtained identifying information about its users, it knowingly accepted false “straw man” information — essentially fake or stolen information. Quite the business model.

The DOJ claimed that Bitzlato had a two-way relationship with the dark web marketplace Hydra, which was sanctioned in April 2022. While Hydra was active, its users traded approximately $700 million in cryptocurrency with Bitzlato, sometimes indirectly through Mixer or other intermediaries, but often directly with the exchange. Bitzlato was aware of this relationship as its users often used the customer support chats to request help with their Hydra transactions. Users often admitted that they were using the exchange for illegal purposes in these chats, and the support just didn’t bat an eye. Legkodymov himself explained in the company’s internal chat transcripts that he understands that most of Bitzlato’s users are “addicts” and “drug dealers,” but he and other senior executives urged the company to look the other way to avoid hurting revenue. A recent Chainalysis report showed that between 2019 and 2021, nearly $1 billion in cryptocurrency received from the exchange was deemed “illegal and risky,” accounting for 48% of the total cryptocurrency value on the exchange .

In addition, Bitzlato entertained a significant number of US customers. While the exchange claimed they didn’t serve US customers, evidence shows otherwise. Legkodymov directly received reports suggesting US users were visiting the site, including 250 million visits from US IP addresses in July 2022 alone. Additionally, Bitzlato customer support repeatedly advised its users that they could transfer funds to and from US financial institutions.

This study is characterized by its international coordination. Cybercrime is notoriously difficult for law enforcement, operating in an area that doesn’t necessarily fit traditional lines of jurisdiction. Many cybercriminals inevitably commit crimes around the world, using various tools to hide and disguise their true location, while still ensconced in jurisdictions that do not have extradition treaties with the United States (usually Russia). Because of this, Bitzlato was able to violate KYC laws so openly for a while that they thought they were untouchable in Russia and China. The law must play within the usual limits of sovereign jurisdiction. This requires real-time coordination, which can be difficult when a certain amount of bureaucracy gets in the way. On the US side, the case was jointly pursued by EDNY’s National Security and Cybercrime Section and the National Cryptocurrency Enforcement Team (“NCET”). International authorities include the Cyber ​​Department of the Paris Prosecutor’s Office, the French Gendarmerie Nationale Cyberspace Command, EUROPOL and Dutch and Belgian authorities.

Strangely, after the announcement, there was a backlash without the cryptocurrency community. On the morning of January 18thththe DOJ released a statement that it would announce “a major international cryptocurrency enforcement action.” This announcement sparked a lot of rumors on the internet as it was believed that the action would be catastrophic for the industry and that it must be a well-known exchange or key infrastructure, such as. B. a large stablecoin. Instead, most first learned the Bitzlato name while listening intently to the live coverage later that afternoon. The announcement initially caused crypto prices to plummet across the board, although most rallied quickly following the revelation.

Despite the community’s initial eye-roll, this charge is apparently fully justified, and the DOJ should be commended for the job they did to bring down the bad actors here. Prosecuting cybercriminals can be brutally difficult work, and this case is particularly impressive given the international coordination required. And by the way, if you run a Russian cryptocurrency exchange that specializes in money laundering, catering to dark web markets, ransomware, and cybercriminals – I’m not your attorney, and this isn’t necessarily legal advice – but it just seems like a bad idea to get into Party in the United States and continue to operate your illegal exchange where you are subject to the jurisdiction of US law enforcement agencies. That said, please keep up the good work, glad to see you behind bars.

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