The company run by Legkodymov, a Russian national who resides in China, allegedly “transported and transmitted” illicit funds while failing to comply with American safeguards against money laundering, according to a press release from the Justice Department. Bitzlato allegedly permitted users on Hydra, an “anonymous, illicit online marketplace for narcotics, stolen financial information, fraudulent identification documents, and money laundering services,” to exchange more than $700 million in cryptocurrency.
“Institutions that trade in cryptocurrency are not above the law and their owners are not beyond our reach,” U.S. Attorney Breon Peace of the Eastern District of New York said in a statement. “As alleged, Bitzlato sold itself to criminals as a no-questions-asked cryptocurrency exchange, and reaped hundreds of millions of dollars’ worth of deposits as a result. The defendant is now paying the price for the malign role that his company played in the cryptocurrency ecosystem.”
Bitzlato required minimal user authentication, rendering the platform a “haven for criminal proceeds and funds intended for use in criminal activity,” according to the press release. Beyond the $700 million in assets transferred by users on Hydra, which was shuttered by American and German authorities last year, Bitzlato received some $15 million in ransomware proceeds. Hydra users allegedly admitted to Bitzlato personnel that they were using the cryptocurrency platform under false identities, and Legkodymov allegedly told a colleague on the company’s internal chat system many users were “known to be crooks.”
The Treasury Department requires financial institutions to implement stringent due diligence procedures for users, including a “requirement to identify and verify the identity of beneficial owners,” according to a rule from the agency’s Financial Crimes Enforcement Network.
“As alleged, the defendant helped operate a cryptocurrency exchange that failed to implement required anti-money laundering safeguards and enabled criminals to profit from their wrongdoing, including ransomware and drug trafficking,” Assistant Attorney General Kenneth Polite said in a statement.
The arrest of Legkodymov follows the indictment of former FTX CEO Sam Bankman-Fried on a number of charges, which include conspiracy to commit wire fraud, conspiracy to commit securities fraud, and conspiracy to commit money laundering. The entrepreneur garnered worldwide controversy after users learned that he commingled funds between FTX and sister trading firm Alameda Research, losing untold billions of customer assets.
The bankruptcy of FTX has also spurned lawmakers to call for increased scrutiny of the cryptocurrency sector. Members of the Senate considered various proposals for more regulations on digital asset markets with Commodity Futures Trading Commission Chairman Rostin Behnam, while members of the House of Representatives discussed the bankruptcy proceedings of FTX with attorney John Ray III.
House Financial Services Committee Chairman Patrick McHenry (R-NC), for instance, asserted that regulation is necessary for the continuation of a legitimate cryptocurrency sector. “It appears to be the same old-school fraud, just using new technology,” he said. “We have to separate out the bad actions of an individual from the good created by an industry.”