Binance is the world’s largest crypto exchange, handling billions of dollars in trading volumes every day.
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Federal prosecutors filed suit on Wednesday against a little-known crypto exchange called Bitzlato, alleging it laundered $700 million in compromised crypto linked to the now-closed dark web marketplace Hydra, and millions more in ransomware proceeds. , has made possible.
Blockchain data shows tens of millions of dollars passed through Bitzlato ended up in Binance deposit wallets, despite strict anti-money laundering standards Binance says has implemented.
Binance, the largest crypto exchange in the world, has not been linked to any criminal activity, nor have regulators accused it of knowingly accepting illicit funds, although the exchange is reportedly under its own criminal investigation by the Ministry of Finance. Justice with regard to compliance. with anti-money laundering or AML laws.
The movement of Bitzlato’s funds raises questions about the effectiveness of Binance’s AML practices, especially given that Binance’s own third-party AML vendor, Chainalysis, released a February 2022 report estimating that 48% of Bitzlato’s 2019-2021 cryptocurrency receipts were “illegal or risky”.
Bitzlato’s top cryptocurrency balance was valued at just $6.6 million, according to Arkham Intelligence. By comparison, Binance’s highest balance was valued at over $60 billion. But Bitzlato’s total in and outflows ran into the hundreds of millions of dollars, suggesting that Bitzlato was a go-between for users who wanted to hold their crypto on more established exchanges.
On a bigger exchange like Binance or Coin baseFor example, many customers choose to let the platform hold their crypto tokens. But smaller exchanges can often act as a kind of bridge between the entity wanting to transfer their coins and the final destination where the tokens are held. Crypto can sit on one of these temporary platforms for just a few 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 funds came from before entering Binance custody.
Just like in traditional finance, where money moves from bank to bank and between holding companies, moving crypto assets through multiple wallets is a basic way to obscure the flow of money. But tracking assets through a blockchain is a relatively simple process, as every transaction is recorded in a publicly accessible ledger.
For all of 2022, and the short weeks that Bitzlato was active in 2023, only $9.7 million went directly from Bitzlato to Binance, according to Arkham Intelligence data. In Bitzlato’s four years of operation, only $52 million has moved directly from the exchange to Binance, according to the same dataset.
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 attempt to hide the funds’ origins.
CNBC reviewed transaction data for the top ten recipients of Bitzlato outflows, which collected more than $45 million in Bitzlato-sourced funds. Those wallets also received millions more in funds from other exchanges, including Huobi, FTX, Poloniex, Nexo, and WhiteBIT, a Ukrainian exchange.
A Bitzlato whale moved just over $21 million worth of cryptocurrencies, including ether and necklace, a dollar-pegged stablecoin, from Bitzlato to an intermediary wallet. From there, that intermediate wallet deposited about $15 million worth of crypto on Binance’s platform over the course of four years, according to Arkham Intelligence data.
Overall, the five largest Bitzlato-connected wallets sent more than $30 million directly to Binance. Millions more in smaller transactions eventually ended up in Binance’s wallet.
The on-chain data cannot account for any additional funds moved from Bitzlato to Binance through mixers, services that allow users to obfuscate the origin and end point of their crypto. It also offers no information on the kind of enforcement measures Binance might take to defend against nefarious deposits, including seizing those funds as soon as they hit Binance’s wallet.
But Binance CEO Changpeng Zhao has often touted his exchange’s aggressive efforts to curb illicit funds flowing onto the platform. Earlier this week, Binance announced 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 entering the platform. We also asked if Binance was aware that Bitzlato was allegedly being used to launder money and, if so, why Bitzlato funds were held on its platform. We did not immediately hear back from our request for comment.
Still, Reuters reported in December that federal prosecutors were considering filing charges in a “long-running” criminal investigation into Binance and Zhao’s compliance with AML laws. The pace of enforcement action suggests that US regulators are already keeping a close eye on the flow of illicit crypto wherever it occurs.
“Operating offshore or moving your servers outside of the mainland US will not protect you,” Deputy Attorney General Lisa Monaco noted Wednesday. “Whether you break our laws from China or Europe or abuse our financial system from a tropical island – you can expect to be held accountable for your crimes in a courtroom in the United States.”