• According to the court document, Bitzlato is a Hong Kong-registered crypto exchange that operates globally. 

• It was observed that the exchange requires minimal identification from users. 

Bitcoin broke multiple resistance levels over the weekend to trade above $21k after remaining below its late 2017 all-time high for months. However, the asset seems to be taking a nosedive with its current sentiment moving from bullish to neutral.

The fall has been linked to the recent press release from the US Justice Department concerning the arrest of 40-year-old Anatoly Legkodymov, who appears to be the founder and the majority owner of the cryptocurrency exchange, Bitzlato Ltd. (Bitzlato).

According to the court document, Bitzlato is a Hong Kong-registered crypto exchange that operates globally. It was observed that the exchange requires minimal identification from users. Bitzlato reportedly allowed users to register with information belonging to “straw man” registrants on multiple occasions. 

Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division, stated that the defendant’s inability to implement required anti-money-laundering safeguards provided a gateway for criminals to profit from their wrongdoings.  

The National Cryptocurrency Enforcement Team’s tremendous efforts to disrupt Bitzlato and arrest the defendant demonstrate that we will continue to work with our partners – both foreign and domestic – to combat cryptocurrency-fueled crimes, even if they transcend international borders.

The investigation also led to the discovery that Bitzlato’s main counterparty in crypto transactions was the infamous Hydra Market. This market operated anonymously on the darkweb and facilitated the trade of narcotics, stolen financial information, fraudulent identification documents, etc.

According to reports, users from the Hydra market used Bitzlato to exchange over $700 million in cryptocurrency. Interestingly, the exchange received over $15 million in ransomware proceeds. In April 2022, a joint effort by the U.S. and German law enforcement took down Hydra Market. 

Bitzlato executives knew about the illicit activities

Authorities noted that Legkodymov and Bitzlato’s other managers were aware of the illicit activities being perpetrated on the platform. Investigation disclosed that on May 29, 2019, Legkodymov, confirmed to a colleague using the company’s internal chat system that the Bitzlato users were “known to be crooks.” He observed that customers repeatedly used others’ identity documents to register their accounts. He also confirmed that their customer base is addicts who buy drugs on Hydra.

A senior executive of the exchange even advised that they fight drug dealers normally to avoid hurting the company. It is interesting to note that a spreadsheet found on the company’s shared management folder described Bitzlato’s view of itself: “Positives: No KYC. . . . Negatives: Dirty money. . . .”

The US Justice Department also discovered that even though the exchange states not to accept customers from the US, it did business with US-based customers. Legkodymov also reportedly received reports that Bitzlato’s website received traffic from US-based internet protocol addresses. This includes 250 million of such visits in July. Legkodymov faces up to five years in prison if convicted.

Associate Deputy Director Brian Turner of the FBI stated:

The FBI will continue to pursue actors who attempt to mask their criminal activity behind keyboards and use means such as cryptocurrency to evade law enforcement. We, along with our federal and international partners, will work relentlessly to disrupt and dismantle these types of criminal enterprises. Today’s arrest should serve as a reminder the FBI will impose risk and consequences upon those who engage in these activities.

It is yet unknown whether this arrest could have a long-term negative impact on the Bitcoin price. 

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