All about the seized Bitzlato crypto exchange: Hydra darknet market, money laundering, Russia, and Binance connections

The US Department of Justice (DoJ) on January 18 claimed a major international crypto enforcement action. After such an intriguing announcement, it turned out that international efforts had shut down the crypto exchange Bitzlato.

The majority shareholder and one of the co-founders was arrested in Miami. He is Anatoly Legkodymov (also known as “Anatolii Legkodymov”, “Gandalf”, and “Tolik”), a Russian citizen living in China. Legkodymov is accused of laundering hundreds of millions of dollars.

FinCEN, the financial intelligence unit of the U.S. Treasury Department, has banned all financial institutions from transferring funds and conducting financial transactions with this cryptocurrency exchange. 

If you go to the Bitzlato website, you will see a message that law enforcement agencies have arrested the service.

And shortly before the U.S. authorities’ official announcement, Bitzlato wrote that the service was not working because of hacking.

Why so much buzz over a little-known exchange?

Many investors and traders reacted to the news with incomprehension. Why did they so loudly proclaim the closure of a crypto exchange that many of them had never even heard of?

I’ve covered crypto for 6 years and have never heard of Bitzlato

I’m sure the mainstream press will cover it like it’s a death knell for the industry

— Frank Chaparro (@fintechfrank) January 18, 2023

It’s not about the size of the exchange itself, but about who it cooperated with and what it specialized in.

“Today marks the elimination of the Hydra-Bitzlato cryptocrime axis. We have also busted the business model of the cyber criminals that Bitzlato supported,” the DoJ representative said.

• The Financial Crimes Enforcement Network (FinCEN) published an order stating that two-thirds of the major counterparties cooperating with or receiving cryptocurrency from Bitzlato are associated with the darknet and fraud. 
• Bitzlato has processed $4.58 billion in cryptocurrency transactions since May 3, 2018, according to U.S. prosecutors.
• 48% of all known Bitzlato transactions during this time were linked to illegal financing from Russia or other risky sources.
• Crypto exchange Bitzlato is ultimately part of a larger ecosystem of cyber criminals that are allowed to operate with impunity in Russia.
• Hydra Market users exchanged over $700 million in cryptocurrency with Bitzlato directly or through intermediaries until the black market was shut down by U.S. and German law enforcement in April 2022. Before its closure, it was the largest darknet market in the world, representing nearly 80% of all traceable darknet market transactions in 2021. 
• Bitzlato processed over 1.46 million direct transfers with the Hydra darknet marketplace between May 2018 and early April 2022, representing transactional flows of nearly 20,000 BTC sent and received during that time.
• Bitzlato also received more than $15 million in revenue from ransomwareA type of virus designed for extortion. It blocks access to a computer system or prevents reading the data recorded on it, and then demands a ransom from the victim to restore the computer to its original state..

Consequences of DoJ’s actions

Even just the announcement caused a stir in the crypto market. Traders and investors began to wonder if this concerns the Binance exchange, or if the US authorities want to ban altcoins.

🤷 The #DepartmentOfJustice has taken enforcement against #Bitzlato, a minor Russian #crypto exchange. Speculation led to a -4.1% #Bitcoin price drop as traders feared the DOJ were honing in on something more drastic. Prices have now mildly come back. https://t.co/lcvNfq5Pfq pic.twitter.com/n8JPwfcutM

— Santiment (@santimentfeed) January 18, 2023

Following that, the Bitcoin price fell below $21,000, and most of the altcoins began to decrease.

Global conspiracy theories supporters even suggested that the action with the exchange was started only to stop Bitcoin from initial growth.

Enough is enough

Can we have one week without a black swan? pic.twitter.com/Rs7TqfwRDa

— DonAlt (@CryptoDonAlt) January 18, 2023

The co-founder of Frensprotocol, who goes by the nickname Science&SELFHOSTED, claimed that authorities try to create a precedent:

• no platform should let people trade without a KYC (customer identification).
• If you contribute to P2P exchange, you may face charges.
• Criminalization of P2P trades.

Here are key takeaways from Science&SELFHOSTED’s tweet:

• Bitzlato was actually a P2P exchange with 0 commissions. American Justice criticized it for adopting a “minimum identification” policy for its customers, “bragging” about not asking for selfies or passports.
• Privacy and confidentiality are in great danger. People are making fun of Bitzlato, but it was an easy pick that they can justify in the name of good against evil (Russia, Darknet etc.). To do crypto, you’ll have to be fully KYC’d and use a trackable intermediary.
• Authorities want to make people understand that if you are not using Central Bank Digital Currency (CBDC), not fully identifying yourself, or trying to make private transactions, you are a criminal.

Binance was named Bitzlato’s largest counterparty

The cryptocurrency exchange Binance is listed as one of the largest partners, according to FinCEN. Between May 2018 and September 2022, the platform received the most bitcoins from Bitzlato.

The second place is taken by Hydra, the largest Russian darknet marketplace, which operated from 2015 to 2022. Last April 5, the German Federal Criminal Police Office reported the liquidation of the organization and the confiscation of bitcoins worth about 23 million euros (at the time, Bitcoin was worth about $40,000). The trading platform had about 17 million registered customers and more than 19,000 sellers.

The alleged Russia-based Ponzi scheme “TheFiniko” came in third place.