Binance is the world’s largest crypto exchange, handling billions of dollars in daily trading volume.
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Federal prosecutors unveiled an indictment against a crypto exchange called Bitzlato on Wednesday, alleging that it facilitated the laundering of $700 million in tainted crypto linked to the now-shuttered Hydra dark web market, and millions more in ransomware proceeds.
Blockchain data shows that tens of millions of dollars passing through Bitzlato ended up in Binance’s deposit wallet, despite what Binance says are strict anti-money laundering standards. has been implemented.
Binance, the world’s largest crypto exchange, has not yet been linked to criminal activity, or regulators accused of knowingly receiving illegal funds, although the exchange is reportedly under its own criminal investigation by the Department of Justice related to compliance. with anti-money laundering, or AML, laws.
Bitzlato’s fund movement raises questions about the efficacy of Binance’s AML practices, especially since Binance’s own external AML vendor, Chainalysis, released a report in February 2022 that estimated that 48% of Bitzlato’s 2019-2021 cryptocurrency receipts were “illegal or risky.”
Top Crypto at Bitzlato This balance is valued at just $6.6 million, according to Arkham Intelligence. By comparison, Binance’s top balance is worth more than $60 billion. But the total flow in and out of Bitzlato is in the hundreds of millions of dollars, showing that Bitzlato is a way station for users who want to store crypto in a more established exchange.
On larger exchanges like Binance or Coinbase, for example, many customers choose to have the platform hold crypto tokens. But smaller exchanges can often act as a bridge between the entity that wants to transfer the coins and the main destination where the tokens will be held. Crypto may be sitting on one of these interim platforms for just a few minutes.
How money flows
A FinCEN report from Wednesday notes that Binance is Bitzlato’s largest partner, but blockchain data shows an underlying effort to hide where the funds came from before they arrived in Binance’s custody.
As in traditional finance, where money moves from bank to bank and between holding companies, moving crypto assets through multiple wallets is a basic way to disguise the flow of money. But tracking assets through blockchain is a relatively simple process, as every transaction is recorded in a publicly accessible ledger.
For all of 2022, and the short week that Bitzlato operated in 2023, only $9.7 million was transferred directly from Bitzlato to Binance, according to data from Arkham Intelligence. In the four years Bitzlato has been in operation, only $52 million has been transferred directly from the exchange to Binance, the same data shows.
But a cursory review of some of Bitzlato’s largest exchange partners showed that tens of millions more flowed from Bitzlato through other crypto wallets to Binance, 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 funds originating from Bitzlato. The wallet also received millions of funds from other exchanges, including Huobi, FTX, Poloniex, Nexo, and WhiteBIT, a Ukrainian exchange.
One Bitzlato whale moved more than $21 million in cryptocurrencies, incl ether and tether, a dollar-pegged stablecoin, from Bitzlato to an intermediary wallet. From there, over the course of four years, the intermediary wallet deposited about $15 million in crypto on the Binance platform, according to data from Arkham Intelligence.
Overall, the five largest wallets connected to Bitzlato sent more than $30 million directly to Binance. Millions more in small transactions eventually ended up in the Binance wallet.
On-chain data cannot record additional funds transferred to Binance from Bitzlato through the mixer, a service that allows users to confuse the origin and endpoint of the crypto. It also does not provide information on the types of enforcement actions Binance may take to protect malicious deposits, including seizing the funds after they enter the Binance wallet.
But Binance CEO Changpeng Zhao has often cited the exchange’s aggressive efforts to reduce illegal funds flowing through the platform. Earlier this week, Binance announced it had seized millions of dollars worth of crypto linked to a North Korean hacking group called Harmony.
CNBC contacted Binance to request that the platform share its approach to prevent affected funds from landing on the platform. We also asked whether Binance knew that Bitzlato was allegedly used for money laundering and, if so, why funds from Bitzlato were being held on the platform. We did not immediately hear back to our request for comment.
Still, Reuters reported in December that Federal prosecutors were mulling bringing charges in a “long-running” criminal investigation into Binance and Zhao’s compliance with AML laws. The pace of enforcement action shows that US regulators are keeping an eye on illicit crypto flows, wherever they occur.
“Operating offshore or moving your servers out of 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 in the courtroom of the United States.”