Binance is the world’s largest crypto exchange, processing billions of dollars in trading volume every day.
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Federal prosecutors on Wednesday unsealed an indictment against a little-known crypto exchange called Bitzlato, alleging it had laundered $700 million of tainted crypto tied to the now-shuttered dark web market Hydra, and Millions more ransomware proceeds facilitated.
Blockchain data shows tens of millions of dollars that flowed through Bitzlato ended up in Binance deposits, despite Binance’s strict anti-money laundering standards implemented.
Binance, the world’s largest crypto exchange, has not been linked to any criminal activity, nor have regulators accused it of knowingly accepting illegal funds, although the exchange is reportedly under criminal investigation by the Justice Department over its 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 provider, Chainalysis, released a report in February 2022 that estimated that 48% of Bitzlato’s cryptocurrency revenues were “illegal or risky” in 2019-2021.
Bitzlato’s highest crypto Credit has been assessed according to Arkham Intelligence only 6.6 million US dollars. In comparison, Binance’s top balance has been estimated at over $60 billion. But total flows in and out of Bitzlato were in the hundreds of millions of dollars, suggesting that Bitzlato was a stopover for users looking to store their cryptos on more established exchanges.
On a larger exchange such as Binance or Coinbase, many customers choose to let the platform store their crypto tokens. But smaller exchanges can often act as a kind of bridge between the entity that wants to transfer their coins and the final destination where the tokens are held. Crypto could just be sitting on one of these intermediate platforms for a few minutes.
How the money flowed
A FinCEN report on Wednesday found that Binance was Bitzlato’s biggest opponent, but blockchain data reveals rudimentary efforts to disguise where the funds came from before they arrived in Binance’s custody.
Similar to traditional finance, where money moves from bank to bank and between holding companies, moving crypto assets through multiple wallets is a primary way to obfuscate the flow of funds. However, tracking assets through a blockchain is a relatively straightforward process, as each transaction is recorded in a publicly available ledger.
For the entirety of 2022 and the short weeks that Bitzlato was active in 2023, only $9.7 million flowed directly from Bitzlato to Binance, according to data from Arkham Intelligence. In the four years that Bitzlato has been in operation, only $52 million has been moved directly from the exchange to Binance, the same dataset shows.
But a cursory review of some of Bitzlato’s largest exchange partners reveals that tens of millions more have flowed from Bitzlato to Binance via other crypto wallets in an apparent attempt to disguise the origins of the funds.
CNBC verified transaction data for the top ten recipients of Bitzlato drains, which raised over $45 million in Bitzlato-originated funds. These 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 tether, a dollar-pegged stablecoin, from Bitzlato to an intermediary wallet. From there, this intermediary wallet deposited around $15 million worth of crypto into Binance’s platform over the course of four years, according to data from Arkham Intelligence.
In total, the top five wallets connected to Bitzlato sent more than $30 million directly to Binance. Millions more in smaller transactions ended up in Binance wallets.
The on-chain data cannot account for additional funds that have migrated from Bitzlato to Binance via Mixer, services that allow users to obfuscate the origin and destination of their crypto. Nor does it offer any information on the type of enforcement actions Binance might take to defend itself against nefarious deposits, including confiscating those funds once they land in Binance’s wallets.
But Binance CEO Changpeng Zhao has often touted his exchange’s aggressive efforts to crack down on illicit 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 their approach to preventing tainted funds from ending up on the platform. We also asked if Binance is aware that Bitzlato is allegedly being used for money laundering, and if so, why Bitzlato funds are being held on its platform. We did not immediately receive a response to our request for comment.
Still, Portal reported in December that federal prosecutors were considering filing charges in a “long-term” criminal investigation into Binance and Zhao’s compliance with AML laws. The pace of enforcement action suggests that US regulators are already keeping an eye on tracing the flow of illicit crypto wherever it occurs.
“Operating offshore or moving your servers out of the continental US will not protect you,” Assistant Attorney General Lisa Monaco stated Wednesday. “Whether you’re breaking our laws from China or Europe, or abusing our financial system from a tropical island, you can expect to face justice for your crimes in a United States courtroom.”