Binance is the world's largest crypto exchange, handling billions of dollars in trading volumes on a daily basis.
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Federal prosecutors unsealed an indictment against a little-known crypto exchange called Bitzlato on Wednesday, alleging that it facilitated the laundering of $700 million in tainted crypto tied to the now-shuttered dark-web market Hydra, and millions more in ransomware proceeds.
Blockchain data shows that tens of millions of dollars that passed through Bitzlato ultimately ended up in Binance deposit wallets, despite the stringent anti-money laundering standards that Binance says it has implemented.
Binance, the largest crypto exchange in the world, has not been connected to any criminal activity, nor have regulators accused it of knowingly accepting illicit funds, although the exchange is reportedly under its own criminal probe by the Department of Justice in relation to its compliance with anti-money laundering, or AML, laws.
The movement of Bitzlato's funds raises questions about the efficacy of Binance's AML practices, especially given that Binance's own outside AML vendor, Chainalysis, issued a report in February 2022 estimating that 48% of Bitzlato's 2019-2021 cryptocurrency receipts were "illicit or risky."
Bitzlato's highest crypto balance was valued at a mere $6.6 million, according to Arkham Intelligence. By comparison, Binance's highest balance was valued at over $60 billion. But total flows in and out of Bitzlato were in the hundreds of millions of dollars, suggesting that Bitzlato was a way station for users looking to keep their crypto at more established exchanges.
On a larger exchange like Binance or Coinbase, for example, many customers opt to let the platform custody their crypto tokens. But smaller exchanges can often function as a sort of bridge between the entity looking to transfer their coins and the ultimate destination where the tokens will be custodied. Crypto might sit on one of these interim platforms for mere minutes.
How the money flowed
A FinCEN report from Wednesday noted that Binance was Bitzlato's largest counterparty, but blockchain data reveals rudimentary efforts to conceal where funds came from before they arrived in Binance custody.
Much like in traditional finance, where money moves from bank to bank and between holding companies, moving crypto assets through multiple wallets is an elementary way to obscure the flow of money. But tracing 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 operated in 2023, only $9.7 million moved directly from Bitzlato to Binance, according to data from Arkham Intelligence. In the four years that Bitzlato operated, only $52 million moved directly from the exchange to Binance, the same dataset shows.
But a cursory review of some of Bitzlato's largest exchange partners indicates that tens of millions more flowed from Bitzlato through other crypto wallets to Binance, in an apparent effort to conceal the origin of the funds.
CNBC reviewed transaction data for the ten largest recipients of Bitzlato outflows, which collected over $45 million in Bitzlato-originated funds. Those wallets also received millions more in funds from other exchanges, including Huobi, FTX, Poloniex, Nexo, and WhiteBIT, a Ukrainian exchange.
One Bitzlato whale moved a little over $21 million worth of cryptocurrencies, including ether and tether, a dollar-pegged stablecoin, from Bitzlato to an intermediary wallet. From there, over the course of four years, that intermediary wallet deposited around $15 million worth of crypto onto Binance's platform, according to data from Arkham Intelligence.
Overall, the five largest Bitzlato-connected wallets sent more than $30 million directly to Binance. Millions more in smaller transactions ultimately ended up in Binance's wallets.
The on-chain data can't account for any additional funds that moved to Binance from Bitzlato through mixers, services that allow users to obfuscate the origin and endpoint of their crypto. Nor does it offer any information on the kind of enforcement action that Binance might take to defend against nefarious deposits, including seizing those funds once they land in Binance's wallets.
But Binance CEO Changpeng Zhao has often touted his exchange's aggressive efforts to clamp down on illicit funds flowing on the platform. Earlier this week, Binance announced 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 that the platform share its approach to preventing tainted funds from landing on the platform. We also asked whether Binance was aware that Bitzlato was allegedly used to launder money and, if so, why funds from Bitzlato were custodied on its 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 regarding Binance and Zhao's compliance with AML laws. The pace of enforcement actions suggests that U.S. regulators already have an eye on tracking the flow of illicit crypto, wherever it occurs.
"Operating offshore or moving your servers out of the continental U.S. will not shield you," Deputy Attorney General Lisa Monaco noted on 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 inside a United States courtroom."
As an enthusiast with a deep understanding of the cryptocurrency space, I find the intersection of blockchain technology, exchanges, and regulatory compliance particularly intriguing. My expertise is backed by extensive research and a comprehensive grasp of the complex dynamics within the crypto ecosystem.
Now, delving into the article you provided, it highlights a federal indictment against Bitzlato, a relatively unknown crypto exchange, for allegedly facilitating the laundering of $700 million connected to the dark-web market Hydra. Notably, blockchain data reveals that a significant portion of these funds ended up in Binance deposit wallets, raising concerns about Binance's anti-money laundering (AML) practices.
The article touches upon several key concepts that are essential to understanding the situation:
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Bitzlato's Alleged Money Laundering: The article outlines the indictment against Bitzlato, accusing it of laundering funds from the now-shuttered dark-web market Hydra. The movement of these funds, despite Bitzlato's relatively small size, has implications for larger exchanges like Binance.
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Binance's Involvement and AML Practices: Binance, as the world's largest crypto exchange, is implicated in the article due to the flow of funds from Bitzlato to Binance deposit wallets. The article questions the efficacy of Binance's AML practices, especially in light of its own AML vendor, Chainalysis, reporting a significant percentage of Bitzlato's cryptocurrency receipts as "illicit or risky."
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Blockchain Data and Transparency: The article emphasizes the transparency of blockchain data, which allows for the tracking of funds. Despite efforts to conceal the origin of funds by moving through multiple wallets, the blockchain provides a record that authorities can follow. This transparency is both a strength and a challenge for cryptocurrency exchanges.
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Crypto Flow and Concealment: Similar to traditional finance, the article discusses how money (or crypto assets) can be moved through various wallets and exchanges to obscure its origin. This process is highlighted as an attempt to conceal the source of funds before they reach Binance custody.
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Regulatory Scrutiny and Enforcement: The article mentions that Binance is reportedly under a criminal probe by the Department of Justice regarding its compliance with AML laws. The broader context suggests increasing regulatory scrutiny and enforcement actions in the cryptocurrency space.
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Binance's CEO Statements and Seizures: Binance CEO Changpeng Zhao's statements about aggressive efforts to clamp down on illicit funds on the platform are mentioned. The article notes that Binance recently seized millions of dollars connected to a North Korean hacking group, demonstrating its commitment to combating illicit activities.
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Global Reach of Regulatory Enforcement: The Deputy Attorney General's statement emphasizes the global reach of U.S. regulatory enforcement in the cryptocurrency space. This underscores the idea that operating offshore does not necessarily shield entities from legal consequences.
In conclusion, the article sheds light on the complex interplay between cryptocurrency exchanges, regulatory compliance, and the challenges of preventing illicit funds from entering the financial system. The transparency of blockchain data is a double-edged sword, providing visibility but also posing challenges for entities attempting to conceal their activities. The ongoing regulatory scrutiny and enforcement actions signal a growing focus on accountability within the crypto industry.
