Author: Syedur Rahman
7 February 2023
2 min read
Syed Rahman explains why the shutting down of crypto exchange Bitzlato has relevance for the whole sector.
A week, it seems, is a long time in cryptocurrency. Just a short while ago, Bitzlato was a little-known cryptocurrency exchange. Its profile rose dramatically, however, when it became known that it had exchanged around $1 billion in assets that had links to criminal activity.
As a result, French and US authorities shut down Hong Kong-registered Bitzlato’s platform infrastructure, which was based in France. US authorities also arrested Bitzlato’s founder, Anatoly Legkodymov. The exchange’s CEO, financial director and market director were all arrested in Spain, as well as one additional individual in Cyprus and one in the US. Another individual was also questioned in Portugal.
For an exchange that had previously had a fairly understated public image it was suddenly being known for all the wrong reasons.
Europol said analysis showed that about 46% of the €2.1 billion in assets received by Bitzlato was linked to criminal activities. The analysis revealed that most of the suspicious transactions involved entities sanctioned by the US Office Of Foreign Asset Control or others with links to online scams or money laundering, ransomware or child abuse material.
The investigation showed that 1.5 million bitcoin transactions had taken place between Bitzlato and Hydra Market, an online black market for users who are mainly based in former Soviet Union states. Hydra Market, which was considered to be the world’s largest and oldest darknet marketplace, was seized and shut down by German authorities - working with US law enforcement agencies - in April 2022. Bitzlato is alleged to have exchanged more than $700 million in cryptocurrency with Hydra Market,
The statement from Europol details house searches in Spain, Cyprus and Portugal, the takedown in digital infrastructure in France and the seizure of €18 million in cryptocurrency, vehicles and electronics, plus the freezing of €50 million of cryptocurrency at other exchanges.
It can be argued that the circumstances that have led to Bitzlato’s demise highlight the importance of - and the real need for - regulation in the cryptocurrency sector. It is a case that shows that the UK’s Financial Conduct Authority (FCA) was justified in requiring cryptoasset providers to register with it.
It could also be said that a failure to regulate crypto is a declaration of prosecutorial non-enforcement of existing laws. There are entities, institutions and commodities which exist within the crypto eco-system which certainly improve traditional finance and economies. But an understanding of the crypto markets and the instruments involved is essential for all concerned, and allowing crypto exchanges to skirt around the law in the name of inventing the future cannot be allowed.
Virtual asset service providers (VASPs), in general, are now more connected to and integrated with anti-money laundering frameworks. VASPs will be able to give a unique perspective on the regulatory landscape, if given the opportunity to cooperate with regulators.
The primary reason for the FCA seeking to ensure that crypto asset providers are registered is so that it can be satisfied that the exchange seeking registration has adequate anti-money laundering procedures in place – in order to prevent scenarios such as the one that has unfolded around Bitzlato.
The Bitzlato case can, however, also be seen as a dramatic indicator of the extent to which authorities from differing jurisdictions will co-operate with each other when investigating cybercrime. The UK is no exception to this and continues to regularly work closely with various authorities around the world. Policing of the cryptocurrency sector is, arguably, becoming more carefully thought-out. And those in the sector have to be aware of this and ensure they are doing nothing to attract the authorities’ attention.
Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.