Binance is the largest crypto exchange in the world, handling billions of dollars in trading volumes daily.
STR | NurPhoto via Getty Images
On Wednesday, federal prosecutors unveiled an indictment against a little-known crypto exchange called Bitzlato, alleging it facilitated the laundering of $700 million in tainted crypto linked to the now-shutdown dark web market Hydra, and millions more in ransomware products.
Blockchain data shows that tens of millions of dollars that passed through Bitzlato eventually ended up in Binance’s depository wallets, despite Binance’s strict anti-money laundering standards. set up.
Binance, the world’s largest crypto exchange, has not been linked to any criminal activity, and regulators have not accused it of knowingly accepting illicit funds, although the exchange is subject to its own criminal investigation by the Department of Justice regarding its compliance. with anti-money laundering or AML laws.
The movement of Bitzlato funds raises questions about the effectiveness of Binance’s AML practices, especially since Binance’s own outside AML provider, Chainalysis, released a report in February 2022 estimating that 48% of crypto receipts were Bitzlato currency for 2019-2021 were “illicit or risky”.
Bitzlato’s Highest Crypto the balance was valued at just $6.6 million, according to Arkham Intelligence. In comparison, Binance’s highest balance was valued at over $60 billion. But Bitzlato’s total inflows and outflows were in the hundreds of millions of dollars, suggesting that Bitzlato was a stopover station for users looking to hold their crypto on more established exchanges.
On a larger exchange like Binance or Coinbase, for example, many clients choose to let the platform hold their crypto tokens. But small exchanges can often work as a kind of bridge between the entity looking to transfer its coins and the final destination where the tokens will be kept. Crypto can sit on any of these tentative platforms for just a few minutes.
how the money flowed
A report from FinCEN on Wednesday noted that Binance was Bitzlato’s largest counterparty, but blockchain data reveals rudimentary efforts to disguise the provenance of funds before they came into Binance’s custody.
Much like in traditional finance, where money moves from bank to bank and between wallet companies, moving crypto assets across multiple wallets is a basic way to obfuscate the flow of money. . But tracking assets through a blockchain is a relatively straightforward process, since every transaction is recorded on a publicly accessible ledger.
For all of 2022 and the brief weeks that Bitzlato ran in 2023, only $9.7 million went directly from Bitzlato to Binance, according to data from Arkham Intelligence. In Bitzlato’s four years of operation, only $52 million went directly from the exchange to Binance, according to the same dataset.
But a cursory look at some of Bitzlato’s biggest exchange partners indicates that tens of millions more have moved from Bitzlato through other crypto wallets to Binance, in an apparent effort to disguise the origin of the funds.
CNBC reviewed transaction data for the top ten beneficiaries of Bitzlato exits, which raised over $45 million in funds from Bitzlato. These wallets have also received millions of additional funds from other exchanges, including Huobi, FTX, Poloniex, Nexo and WhiteBIT, a Ukrainian exchange.
A Bitzlato whale moved just over $21 million worth of cryptocurrencies, including ether and attached, a dollar-pegged stablecoin, from Bitzlato to an intermediate wallet. From there, in four years, this intermediary wallet deposited around $15 million worth of crypto to Binance’s platform, according to data from Arkham Intelligence.
Overall, the top five Bitzlato-connected wallets have sent over $30 million directly to Binance. Millions of other smaller transactions eventually ended up in Binance wallets.
On-chain data cannot account for additional funds transferred to Binance from Bitzlato through mixers, services that allow users to hide the origin and endpoint of their crypto. It also does not offer information on what kind of enforcement actions 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 his exchange’s aggressive efforts to crack down on illicit funds flowing through the platform. Earlier this week, Binance announced that it had seized millions of dollars worth of crypto connected to a North Korean hacking group called Harmony.
CNBC reached out to Binance to ask the platform to share its approach to preventing tainted funds from landing on the platform. We also asked if Binance knew that Bitzlato was allegedly used to launder money, and if so, why Bitzlato funds were kept on its platform. We did not immediately respond to our request for comment.
Still, Reuters reported in December that federal prosecutors were considering bringing charges in a “long-running” criminal investigation into Binance and Zhao’s compliance with AML laws. The pace of enforcement action suggests that US regulators already have an eye on tracking the flow of illicit crypto wherever it occurs.
“Operating overseas or moving your servers outside of the continental United States will not protect you,” Deputy Attorney General Lisa Monaco noted Wednesday. “Whether you’re breaking our laws from China or Europe or abusing our financial system from a tropical island, you can expect to answer for your crimes in US court.”