Last week, the US Department of Justice (DOJ) and the US Treasury Department announced a coordinated crackdown on non-compliant Hong Kong-registered cryptocurrency exchange Bitzlato and the arrest of its owner in Miami for facilitating Russian illicit financing. Within minutes of posting “What is Bitzlato?” was trending on crypto-Twitter with a litany of snooze emojis filling feeds. A few even asked (no pun intended) if Bitzlato was the new drink offering at Starbucks
Everything revolves around Russia as the Ministry of Finance uses powerful new powers for the first time
First, while the Bitzlato operation was viewed mostly through a crypto lens, it was actually much more about Russia. Since Russia’s invasion of Ukraine, the US, Europe and democratic allies have been waging a relentless campaign of sanctions in an attempt to cut Russia off from the global financial system. The actions directly link Bitzlato to Russian illicit financing — specifically the ransomware and darknet markets — allowing the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to issue a warrant under Section 9714(a) of Russia’s Anti-Money Laundering Act for the first time. . The order designates Bitzlato as a “major money laundering concern” in connection with Russian illicit financing and prohibits certain transfers of funds involving Bitzlato by any covered financial institution.
If for nothing else, the first use of the 9714(a) itself makes the Bitzlato action a big deal. As Carole House, a former senior official at FinCEN and the White House National Security Council, who led many of the US government’s digital asset efforts, explained to Forbes, “the 9714 Bitzlato mark marks a historic, first-ever mark under the critical authority of Congress has assigned FinCEN in 2021 to combat Russian illicit financing aimed at Russia’s continuing war of aggression against Ukraine, as well as Russian-operated ransomware groups that launder their proceeds through institutions around the world.”
The use of 9714(a) authority under Russia’s Anti-Money Laundering Act—enacted as part of the National Defense Authorization Act of 2020 (NDAA), which included the Anti-Money Laundering Act of 2020—signals the Treasury Department’s focus on Bitzlato as a Russian Issue of illegal financing more widely. The government’s intent — think of it as what Patriot Act section 311 does for terrorist financing — is to isolate and cut off foreign financial institutions that are used to launder money from the American financial system. As Ms. House explained, “These measures can range from record-keeping or reporting requirements to even prohibiting US financial institutions and agencies from engaging in certain fund transfers.” Action 9714 could spell death for foreign financial institutions.
Over the past 18 months, we’ve seen the US and partner countries implement a scalpel-like strategy to attack what Treasury Department official Todd Conklin called the “illegal underground” of the crypto ecosystem. We have seen actions against non-compliant Russian exchanges Suex, Chatex and Garantex, such as Bitzlato, for having weak or no AML controls and for enabling ransomware and darknet activity. In her prepared remarks, Deputy Attorney General Lisa Monaco directly linked the Bitzlato operation to the earlier takedown of Hydra, explaining: “Hydra and Bitzlato formed a high-tech axis of crypto-crime: Hydra’s customers financed illicit purchases — illegal drugs, stolen financial data, and services hacking — from crypto accounts hosted at Bitzlat, and sellers of illegal goods and services in Hydra sent the proceeds of crime to Bitzlat accounts — totaling over $700 million in direct and indirect transfers between 2018 and 2022.” Action Bitzlato is another example — like actions against Suex, Chatex, Garantex, Hydra and darknet mixers Helix and Bitcoin
Sending a message
In addition to making a statement in the context of Russia, the Bitzlato action also aimed to send a message to the broader crypto space that breaking the rules is a non-starter. The DOJ’s criminal complaint is an unprecedented discussion of the entity’s lack of anti-money laundering (AML) controls and is filled with references to Bitzlat’s willful disregard for compliance. According to the DOJ, “Bitzlato marketed itself as requiring minimal identification from its users, stating that “neither selfies nor passports [are] required. . . As a result of these flawed know-your-customer (KYC) procedures, Bitzlato allegedly harbored proceeds of crime and funds intended for use in criminal activities, including $700 million in transactions with the Hydra-sanctioned darknet market and $15 million in ransomware proceeds. The DOJ and Treasury Department’s focus on Bitzlat’s lack of AML controls is an attempt to drive a bad actor — particularly one that facilitates Russian illicit financing — out of the financial system, but also sends a clear message to other exchanges that authorities expect strong AML controls. While strong AML controls are already the norm for US-based exchanges like Coinbase and Kraken, actions like Bitzlat’s against non-compliant virtual asset service providers (VASPs) aim to send a message that every exchange – wherever it is located – must prioritize protection against unauthorized actors.
After all, Bitzlato’s actions involved not only US authorities, but law enforcement agencies around the world. In the Bitzlato case, law enforcement agencies in the United States, the Netherlands, France and EUROPOL were involved in the takedown and arrest. For example, we saw how US police in Miami arrested the owner of Bitzlat, a Russian citizen living in China. Meanwhile, French authorities took down Bitzlato’s website, and FinCEN used its authority to cut Bitzlato off from the US financial system. This global approach to crypto-related investigations was a key component of the White House’s digital asset framework as both the DOJ and the Treasury Department issued reports on the importance of international engagement and cooperation in response to last year’s crypto executive order.
The DOJ report, for example, emphasizes the importance of cross-border cooperation, information sharing, and global capacity-building efforts to ensure global standards for anti-money laundering and other controls.
Despite the knee-jerk reaction of many on crypto-Twitter, the Bitzlato action was indeed significant as the first use of a powerful new finance authority and as part of a much larger puzzle about the US and global response to illicit finance, and particularly Russian aggression. So if you decide to order that Bitzlato – two glasses of sugar-free vanilla – take a sip knowing that the bad actor has been removed from the growing crypto-economy.