Binance is the world’s largest crypto exchange, handling billions of dollars in trading volume 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 linked to the now-shuttered dark web market Hydra, and millions more in ransom proceeds.
Blockchain data shows that tens of millions of dollars that passed through Bitzlato eventually ended up in Binance deposit wallets, despite the strict anti-money laundering standards that Binance says it has. has completed.
Binance, the largest crypto exchange in the world, has not been linked to any criminal activity, nor have regulators accused it of knowingly accepting illegal funds, although the exchange is reportedly under its own criminal investigation by the Department of Justice regarding its compliance. with laws against money laundering, or AML.
The movement of Bitzlato’s funds raises questions about the effectiveness of Binance’s AML practices, especially given that Binance’s own external AML provider, Chainalysis, issued a report in February 2022 that estimated that 48% of Bitzlato’s 2019-2021 cryptocurrency receipts or exposures were “.”
Bitzlato’s highest crypto balance was valued at just $6.6 million, according to Arkham Intelligence. By comparison, Binance’s peak balance was valued at over $60 billion. But the total flows into and out of Bitzlato were in the hundreds of millions of dollars, suggesting that Bitzlato was a stopover for users who wanted to keep their crypto on more established exchanges.
On a larger exchange like Binance or Coin base, for example, many customers choose to let the platform keep their crypto tokens. But smaller exchanges can often act as a kind of bridge between the entity that wants to transfer its coins and the final destination where the tokens will be kept. Crypto can sit on one of these temporary 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 attempts to hide where the funds came from before they entered Binance’s custody.
Just like in traditional finance, where money is moved from bank to bank and between holding companies, moving crypto assets through multiple wallets is an elementary way to hide the flow of money. But tracking assets through a blockchain is a relatively simple process, since every transaction is recorded in a publicly accessible ledger.
In all of 2022, and the short weeks that Bitzlato operated in 2023, only $9.7 million was moved directly from Bitzlato to Binance, according to data from Arkham Intelligence. During the four years that Bitzlato operated, only $52 million was moved directly from the exchange to Binance, the same data set shows.
But a cursory review of some of Bitzlato’s largest exchange partners indicates that tens of millions flowed from Bitzlato through other crypto wallets to Binance, in an apparent attempt to hide the origin of the funds.
CNBC reviewed transaction data for the top ten recipients of Bitzlato payouts, which raised over $45 million in Bitzlato-originating funds. These wallets also received millions in funding from other exchanges, including Huobi, FTX, Poloniex, Nexo and WhiteBIT, a Ukrainian exchange.
One Bitzlato whale moved just over $21 million worth of cryptocurrencies, inclusive ether and tether, a dollar-pegged stablecoin, from Bitzlato to an intermediary wallet. From there, over four years, the intermediary wallet deposited about $15 million in crypto on Binance’s platform, according to data from Arkham Intelligence.
In total, the five largest Bitzlato-connected wallets sent more than $30 million directly to Binance. Several millions in smaller transactions eventually ended up in Binance’s wallets.
The on-chain data cannot account for any additional funds moved to Binance from Bitzlato through mixers, services that allow users to hide the origin and endpoint of their crypto. It also provides no information on what kind of enforcement Binance can take to defend itself against malicious deposits, including confiscation of those funds when they land in Binance’s wallets.
But Binance CEO Changpeng Zhao has often touted the exchange’s aggressive efforts to crack down on illegal funds flowing on the platform. Earlier this week, Binance announced that it had seized millions of dollars worth of crypto linked 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 was aware that Bitzlato was allegedly being used for money laundering and, if so, why funds from Bitzlato were stored on the platform. We did not immediately hear back to our request for comment.
Still, Reuters reported in December that federal prosecutors were considering bringing charges in a “protracted” 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 offshore or moving your servers out of the continental United States will not shield you,” Deputy Attorney General Lisa Monaco said 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 in a US courtroom.”