Binance is the world’s largest crypto exchange, handling billions of dollars in trading volume on a daily basis.
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Federal prosecutors unsealed an indictment on Wednesday against a little-known crypto exchange called BitzLato, alleging that it facilitated the laundering of $700 million in tainted crypto linked to the now-shuttered dark-web market Hydra , and millions more in ransomware income.
Blockchain data shows hundreds of millions of dollars passing through Bitzlato eventually ended up in Binance deposit wallets, despite what Binance says is strict anti-money laundering standards has been implemented.
Binance, the world’s largest crypto exchange, has not been linked to any criminal activity, nor has regulators accused it of knowingly accepting illegal funds, although the exchange is reportedly under its own criminal investigation by the Department of Justice regarding its compliance. with anti-money laundering, or AML, laws.
The movement of Bitzlato’s funds raises questions about the efficacy of Binance’s AML practices, especially given that Binance’s own external AML vendor, Chainalysis, released a report in February 2022 estimating that Bitzlato’s 2019 – 48% of 2021 cryptocurrency receipts were “illegal or risky”.
Bitzlato’s Highest Crypto balance assessed According to Arkham Intelligence, a mere $6.6 million. By comparison, Binance’s highest balance was valued at over $60 billion. But total flows in and out of Bitzlato were in the tens of millions of dollars, suggesting that Bitzlato was a way station for users who want to hold their crypto on more established exchanges.
on a large exchange like Binance or coinbaseFor example, many customers opt to let the platform hold their crypto tokens. But smaller exchanges can often act as a bridge of sorts between the entity moving its coins and the final destination where the tokens will be held in custody. Crypto can sit on one of these interim platforms for mere minutes.
how did the money go
A FinCEN report on Wednesday noted that Binance was Bitzlato’s largest counterparty, but blockchain data showed rudimentary efforts were made to hide where the funds came from before coming into Binance custody.
Like traditional finance, where money moves from bank to bank and between holding companies, moving crypto assets through multiple wallets is a primary way to obscure the flow of funds. But tracing assets through a blockchain is a relatively straightforward process, as every transaction is recorded on a publicly accessible ledger.
For all of 2022, and the brief weeks operated by Bitzlato in 2023, only $9.7 million moved directly from Bitzlato to Binance, according to data from Arkham Intelligence. The same dataset shows that Bitzlato moved only $52 million directly from the exchange to Binance over four years.
But a cursory review of some of Bitzlato’s largest exchange partners indicates that tens of millions more flowed out of Bitzlato via other crypto wallets, in an apparent attempt to hide the origin of the funds.
CNBC reviewed transaction data for the ten largest recipients of Bitzlato outflows, which collected more than $45 million in Bitzlato-generated funds. Those wallets also received millions from other exchanges including Huobi, FTX, Poloniex, Nexo and WhiteBit, a Ukrainian exchange.
A Bitzlato whale took away a little over $21 million worth of cryptocurrency, including ether And lanyard, a dollar-pegged stablecoin, from Bitzlato to an intermediary wallet. From there, over the course of four years, that intermediary wallet stored roughly $15 million worth of cryptocurrency on Binance’s platform, according to data from Arkham Intelligence.
In total, the five largest wallets connected to Bitzlato sent more than $30 million directly to Binance. Millions in smaller transactions eventually ended up in Binance wallets.
On-chain data cannot account for any additional funds that have moved from Bitzlato to Binance through mixers, services that allow users to obscure the origin and endpoint of their crypto. Nor does it provide any information about any kind of enforcement action that Binance may take to defend against nefarious deposits, including confiscating those funds once they are in a Binance wallet.
But Binance CEO Changpeng Zhao has often touted his exchange’s aggressive efforts to clamp down on illegal money flowing into the platform. Earlier this week, Binance announced that it had seized millions of dollars worth of crypto linked to a North Korean hacking group called Harmony.
CNBC reached out to Binance to ask if the platform shares its approach to preventing contaminated funds on the platform. We also asked whether Binance was aware that Bitzlato was allegedly being used for money laundering and, if so, why Bitzlato funds were held on its platform. We did not immediately hear back on our request for comment.
Nevertheless, Reuters reported in December that federal prosecutors were considering charges in a “long-running” criminal investigation regarding Binance and Zhao’s compliance with AML laws. The pace of enforcement actions suggests that US regulators already have an eye on tracking the flow of illegal crypto, wherever it is.
“Offshore operations or moving your servers outside the continental US will not protect you,” Deputy Attorney General Lisa Monaco said Wednesday. “Whether you break our laws from China or Europe or abuse our financial system from a tropical island – you can expect to answer for your crimes inside a United States courtroom.”