It was announced by the US government on the 18th of January 2023 that it would be taking enforcement action upon Bitzalo, an unknown exchange accused of laundering hundreds of millions. With a brief impact to the market, the announcement was considered insignificant and shrugged off the brief dip in the recent BTC rally.
This has brought speculation and started a ripple of investigations that could impact the market greatly in the future.
WHAT HAPPENED?
In 2014, Russia's invasion of Ukraine led to severe economic sanctions being imposed on the country, freezing or seizing the funds of Russian banks, companies, and citizens. The sanctions also had a significant impact on Russia's central bank, with its entire $630 billion reserves being immobilized in the U.S, causing inflation to reach historical highs.
As the sanctions became more restrictive, law enforcement agencies around the world became increasingly concerned about Russia's potential use of cryptocurrencies to circumvent the sanctions. However, a report from Chainalysis in 2022 found that Russia was responsible for a disproportionate amount of crypto-based crime and was believed to be a hub for crypto services suspected of money laundering, but an analysis of cryptocurrency transfers to and from Russia found no evidence of large-scale money laundering.
The US government has taken a strong stance against illegal activities involving cryptocurrency by accusing Bitzlato Ltd, a digital currency exchange, of money laundering and arresting its founder, Anatoly Legkodymov, in Miami. Bitzlato was reportedly involved in $700 million in illegal transactions in recent years and was also tied to routine transactions with the Russian-based Hydra Market, a darknet market targeted by US authorities last year.
The Treasury's Financial Crimes Enforcement Network (FinCEN) labelled Bitzlato a “primary money-laundering concern,” which is one of the most severe sanctions the government can impose and usually results in a business being cut off from the global financial system. This crackdown against Bitzlato is the most significant US action against a crypto criminal network to date, although many fear that this could be part of a bigger plan to target illegal activities involving cryptocurrency.
MARKET IMPACT
The cryptocurrency market experienced a slight drop in the value of BTC shortly before the government announced action against Bitzlato, causing a temporary panic among investors. This caused a brief sell off and a sharp dip in price.
Many believed that the target of the government's enforcement was Binance, a prominent and widely-used cryptocurrency exchange, which had been under scrutiny by the US government for some time. This led to a mass sell-off, resulting in the liquidation of millions of dollars from the market. However, after the announcement, the price of BTC quickly recovered and even reached a higher support level in the following days. It is worth noting that, even though the market experienced a short-term panic, the recovery suggests that investors did not see the government's action as a major threat to the overall stability of the crypto market.
The Chainalysis report found that around 26% of all the cryptocurrencies Bitzlato received from 2019 to 2023 came from illicit sources, while another 27% came from sources considered high risk. The Exchange processed a total of 2.5 billion worth of US dollars in assets, and reportedly could be facing at least 650 million US dollars in charges. These allegations provide more ammo for lawmakers in the U.S.
THE PLOT THICKENS
On January 24th, 2023, it was reported that a major cryptocurrency exchange, Binance, was involved in moving funds for Bitzlato. According to the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN), Binance was one of Bitzlato's top three counterparties for bitcoin transactions between May 2018 and September 2022. Bitzlato was known for having lax background checks for clients and allowing the use of false identities, which enabled criminals to move money around from unverified accounts.
Binance reportedly moved over 20,000 bitcoin, worth $345.8 million at the time, across 205,000 transactions for Bitzlato between May 2018 and its closure last week. The Justice Department has charged Bitzlato's co-founder and majority shareholder for processing $700 million in illicit funds, raising concerns that other exchanges may have been involved.
As a result of these developments, there are concerns that other exchanges may have also been involved with Bitzlato. Binance, being a major crypto exchange, processed a large sum of bitcoin for Bitzlato. According to data compiled by leading U.S. blockchain researcher Chainalysis, bitcoin worth about $175 million was transferred to Binance from Bitzlato in that period, making Binance the largest receiving counterparty among Bitzlato's top counterparts. FinCEN stated that Binance was the only major crypto exchange among Bitzlato's top counterparts, with the others being the Russian-language darknet drugs marketplace Hydra, a small exchange called LocalBitcoins.
In addition to the legal issues, Binance is also working to assure its customers that it will not face the same fate as FTX, another crypto exchange that faced similar issues a few months ago. Binance has admitted to in error keeping some of its collateral for 94 tokens it regularly issues in the same wallet as customer funds and is working to move the collateral funds out of the customer wallet. Binance has previously relied on a limited audit of its finances to show that its assets are backed, but the company conducting the audit ended its relationship with crypto companies.
For now, customers have to rely on the word of Binance and its executives.
CONCLUSION
If there's evidence to conclude that major exchanges were involved, further measures could be introduced to aid further regulation. This could be in the way of further sanctions against Russia, or the Crypto industry itself. It's impossible to speculate right now what like looks like for us average users. Many fear that this could be the beginning of new regulations set in place by the US Government.
However, it's worth noting that stopping illegal activities such as money laundering is ultimately beneficial for the growth and development of the crypto market and must be encouraged.
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As always, many thanks for reading folks.
Peace.
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References:
https://finance.yahoo.com/news/exclusive-binance-moved-346-million-120123053.html
https://cryptoslate.com/a-look-at-whats-going-on-with-bitzlato-and-its-impact/
https://gizmodo.com/binance-crypto-bizlato-changpeng-zhao-1850023317
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