Week In Crypto: US AML Probe Leads To Arrest Of Russia-Linked Exchange Founder, MiCA Vote Postponed

January 20, 2023
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The US Department of Justice has arrested and charged a Russian national as part of a major crypto AML investigation, the EU has pushed back its vote on MiCA, and Three Arrows Capital has re-emerged as a bankruptcy claims exchange.

The US Department of Justice (DOJ) has arrested and charged a Russian national as part of a major crypto AML investigation, the EU has pushed back its vote on MiCA, and Three Arrows Capital (3AC) has re-emerged as a bankruptcy claims exchange.

This week, the DOJ announced that it has arrested and filed criminal charges against a Russian national who is accused of helping to facilitate more than $700m in illicit finance offences.

Anatoly Legkodymov, 40, is the founder of Bitzlato, a Hong Kong-registered but China-based crypto exchange. He normally resides in Shenzhen, but was managing Bitzlato from Miami when he was arrested.

Legkodymov, whose nicknames include "Gandalf" and "Tolik", is accused by the DOJ of conducting an unlicensed money transmitting business — a charge that carries a maximum of five years in prison.

Separately, Legkodymov is being charged by French law enforcement agencies and the US Treasury’s Financial Crimes Enforcement Network (FinCEN) for transporting illicit funds and failing to meet US regulatory safeguards, including anti-money laundering (AML) requirements.

“Today the Department of Justice dealt a significant blow to the crypto-crime ecosystem,” said Lisa Monaco, deputy attorney general.

“Overnight, the department worked with key partners here and abroad to disrupt Bitzlato, the China-based money laundering engine that fueled a high-tech axis of crypto-crime.”

She added that the DOJ’s action sends a clear message: “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.”

According to court documents, Bitzlato allegedly marketed itself as requiring minimal identification from users, specifying that “neither selfies nor passports [are] required” to sign up.

When Bitzlato did direct users to submit identifying information, the DOJ alleges that it allowed them to provide information that clearly belonged to “straw man” registrants.

Due to these “defective” know-your-customer (KYC) policies, Bitzlato allegedly became a haven for criminal proceeds and funds intended for use in criminal activity.

Hail Hydra - Russia’s crypto-powered darknet market

Bitzlato’s largest counterparty was Hydra, an anonymous, Russian-language darknet market where illegal drugs, stolen financial information, fraudulent ID documents and money laundering services were sold.

Between 2016 and 2022, more than $700m worth of crypto was sent between Hydra and Bitzlato, including $15m in ransomware proceeds.

In April last year, when Hydra was shut down by US and German authorities, it was at the time the largest and longest-running darknet market in the world.

In its complaint, FinCEN noted that about two thirds of Bitzlato’s top receiving and sending counterparties were associated with darknet markets or scams.

However, also among the major counterparties was Binance. Between 2018 and 2022, Binance received an even greater value of bitcoin transactions from Bitzlato than Hydra did.

Legkodymov and other Bitzlato managers were allegedly aware that Bitzlato’s accounts were rife with illicit activity, and that many of its users were registered under false identities.

In May 2019, for example, Legkodymov wrote to a colleague that Bitzlato’s users were “known to be crooks” who had used other people’s ID documents to register their accounts.

On other occasions, Legkodymov was warned by colleagues that Bitzlato’s customers consisted of “drug traffickers” and “addicts who buy drugs at Hydra”.

However, to avoid hurting the company’s profitability, the DOJ alleges that one senior executive said that Bitzlato should still continue to service these drug dealers.

Although Bitzlato claimed not to accept US users, it allegedly did “substantial” business with US-based customers, and its customer service representatives advised users that they could transfer funds from US financial institutions.

Concurrent with Legkodymov’s arrest, French authorities working with Europol and partners in Spain, Portugal and Cyprus dismantled Bitzlato’s digital infrastructure, seized its cryptocurrency and launched their own enforcement actions.

EU not yet ready for MiCA vote, says MEP

In Europe this week, a Member of the European Parliament (MEP) was quoted as saying that the chamber is not yet ready for the final vote on its landmark crypto regulation.

As reported by crypto news site The Block, an unnamed MEP said the final vote on the EU’s Markets in Crypto-Assets (MiCA) regulation will be pushed out until April this year.

The vote, which was supposed to take place next month, has now been postponed for a second time due to “technical” issues, most likely related to the translation of MiCA into the EU’s 24 official languages.

Last year, the vote was expected to take place in November, but was pushed back due to similar issues, according to a source who spoke with The Block.

In September last year, VIXIO was given a sneak preview of the full 377-page MiCA text, before it was made public one month later.

After June 2022, when MiCA received provisional approval from the European Council and European Parliament, it underwent several significant changes.

Its former provisions on decentralised finance (defi) and non-fungible tokens (NFTs) were dropped, after lawmakers opted to monitor and assess these areas on a periodic basis before legislating on them.

A mid-bankruptcy surprise from 3AC

In this week’s crypto bankruptcy news, it has been confirmed that the co-founders of the collapsed hedge fund Three Arrows Capital (3AC) are working on a bankruptcy claims exchange.

According to a leaked slide deck, 3AC co-founders Su Zhu and Kyle Davies are currently working on GTX, a crypto exchange where users can trade their bankruptcy claims with one another, as well as crypto-assets.

“The $20bn crypto claims market should trade on a public marketplace,” the slide deck notes, adding that “We can dominate the crypto claims market within 2-3 months of go-live.”

As a new entrant to the crypto claims space, Zhu and Davies believe that GTX can “fill the power vacuum” left by FTX, while appealing to the “crypto trading appetite” of claim holders.

“Customers are looking to diversify exchange risk post-FTX,” they said. “Claimants are stuck with illiquid/locked debt capital, which they would like to unleash.

“GTX unlocks FTX, Celsius etc. claims for immediate trading. Creditors may continue to hold their claims to maturity or elect to sell them into crypto, while using claims as margin capital.”

Zhu and Davies noted that more than 1m customers who deposited funds to FTX are now caught up in bankruptcy proceedings.

They stated that some are selling their claims at 10 percent of face value, while others may have to wait ten years or more for disbursements to be paid.

As such, GTX is aiming to raise $25m in seed capital to launch the exchange by the end of February.

In the slide deck section titled "Founding Team", Zhu and Davies are described as the 3AC co-founders who turned $1.2m into $4bn before 3AC “went bust” in 2022.

The other half of the founding team is Mark Lamb and Sudhu Arumugam, who are the co-founders and current executives at CoinFLEX, a UK-based crypto trading and lending platform.

In response to the leaked document, CoinFLEX posted a statement on its website confirming its authenticity.

“Building a marketplace for trading claims is an evolution of CoinFLEX’s commitment to building open and transparent financial markets,” it said.

“This avenue will not only be an opportunity to serve a large number of existing crypto creditors but, in doing so, will also bring new volumes to the exchange through crypto trading.”

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