Binance is the largest cryptocurrency exchange in the world, handling billions of dollars in trading volume on a daily basis.
STR | NurPhoto via Getty Images
Federal prosecutors unsealed an indictment against a little-known cryptocurrency exchange called Bitzlato on Wednesday, alleging it facilitated the laundering of $700 million in tainted cryptocurrency linked to the now-closed dark web marketplace Hydra, and millions more in ransomware proceeds.
Blockchain data shows that tens of millions of dollars that passed through Bitzlato eventually ended up in Binance deposit wallets, despite strict anti-money laundering standards that Binance says are in place. And it 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 illicit funds, though the exchange is under its own criminal investigations by the Department of Justice regarding its compliance. With anti-money laundering laws, or AML.
The movement of Bitzlato funds raises questions about the effectiveness of Binance’s anti-money laundering practices, especially given that Binance’s third-party anti-money laundering vendor, Chainalysis, released a report in February 2022 estimating that 48% of Bitzlato’s 2019-2021 cryptocurrency receipts were “illicit or full of dangers”.
Top cryptocurrency from Bitzlato The balance has been assessed Just $6.6 million, according to Arkham Intelligence. By comparison, the highest balance on Binance is worth more than $60 billion. But total flows to and from Bitzlato were in the hundreds of millions of dollars, suggesting that Bitzlato was a way station for users looking to hold their cryptocurrency on more established exchanges.
On a larger exchange like Binance or CoinbaseFor example, many customers choose to allow the platform to hold their tokens. But smaller exchanges can often act as a kind of bridge between the entity looking to transfer its coins and the final destination where the tokens will be held. Encryption may remain on one of these temporary platforms for a few minutes.
How did the money flow?
A FinCEN report released Wednesday indicated that Binance was the largest counterparty to Bitzlato, but the blockchain data reveals initial efforts to hide the source of funds before they reached Binance.
Much like traditional finance, where funds move from one bank to another and between holding companies, moving crypto assets across multiple wallets is an elementary way to disguise the flow of funds. But tracking assets through the blockchain is a relatively straightforward process, as every transaction is recorded in a publicly available ledger.
Throughout 2022, and the short weeks that Bitzlato worked in 2023, only $9.7 million went directly from Bitzlato to Binance, according to data from Arkham Intelligence. In the four years that Bitzlato has been in business, only $52 million has moved directly from the exchange to Binance, as the same data set shows.
But a quick review of some of Bitzlato’s largest exchange partners indicates that tens of millions more have flowed from Bitzlato via other crypto wallets to Binance, in an apparent attempt to hide the source of the funds.
CNBC reviewed transaction data for the top ten recipients of Bitzlato’s outflows, which have raised more than $45 million in funds set up by Bitzlato. These wallets have also received millions more in funds from other exchanges, including Huobi, FTX, Poloniex, Nexo, and WhiteBIT, a Ukrainian exchange.
One Bitzlato whale moved just over $21 million in cryptocurrency, incl ether And Rope, a stablecoin pegged to the dollar, from Bitzlato to an intermediary wallet. From there, over the course of four years, that broker wallet has deposited about $15 million in cryptocurrency on Binance, according to data from Arkham Intelligence.
Overall, the top five Bitzlato-connected wallets have sent more than $30 million directly to Binance. Millions of small transactions ended up in Binance wallets.
The on-chain data cannot account for any additional funds that moved to Binance from Bitzlato through mixers, which are services that allow users to hide the origin and endpoint of their cryptocurrency. Nor does it provide any information on what kind of enforcement action Binance might take to defend against nefarious deposits, including seizing those funds once they land in Binance wallets.
But Binance CEO Changpeng Zhao has often touted the exchange’s aggressive efforts to clamp down on illicit money flowing onto the platform. Earlier this week, Binance announced that it had seized millions of dollars’ worth of cryptocurrency linked to a North Korean hacking group called Harmony.
CNBC has reached out to Binance to ask the exchange to share its approach to preventing tainted funds from landing on the platform. We also asked if Binance was aware that Bitzlato was being used for money laundering, and if so, why the funds from Bitzlato were being held on its platform. We did not immediately receive a response to our request for comment.
However, Reuters reported in December that federal prosecutors are considering filing charges in a “long-running” criminal investigation into Binance and Zhao’s compliance with anti-money laundering laws. The pace of enforcement action indicates that US regulators already have an eye on tracking the flow of illicit cryptocurrency, wherever it may occur.
“Doing business overseas or moving your servers outside the continental United States will not protect you,” Deputy Attorney General Lisa Monaco noted Wednesday. “Whether you broke our laws from China or Europe or abused our financial system from a tropical island – you can expect to be answered for your crimes in a United States courtroom.”