Ben Strack

While enforcement actions against crypto-related entities aren&#8217;t anything new, industry participants said the recent <a href="https://blockworks.co/news/doj-busts-crypto-exchange">measures lobbied against exchange Bitzlato</a> show a persistent focus on controlling illicit activity in the sector — with a twist.



Law enforcement has, for the past 18 months, combatted what Ari Redbord, head of legal and government affairs at TRM Labs, called “the illicit underbelly of the overwhelmingly lawful crypto economy.”&nbsp;



The US Treasury department had implemented sanctions against crypto exchanges <a href="https://home.treasury.gov/news/press-releases/jy0364" target="_blank" rel="noreferrer noopener">Suex</a>, <a href="https://home.treasury.gov/news/press-releases/jy0471" target="_blank" rel="noreferrer noopener">Chatex</a> and <a href="https://home.treasury.gov/news/press-releases/jy0701" target="_blank" rel="noreferrer noopener">Garantex</a> within the last two years — each of which operated out of Federation Tower in Moscow, Russia.



These exchanges, while largely <a href="https://blockworks.co/news/doj-busts-crypto-exchange">unknown and considered insignificant</a> in crypto industry circles, <a href="https://blockworks.co/news/us-justice-department-to-launch-national-cryptocurrency-enforcement-team">have been prime targets</a> of US law enforcement aided by blockchain intelligence firms with government contracts such as <a href="https://blockworks.co/tag/trm-labs">TRM</a> and <a href="https://blockworks.co/tag/Chainalysis">Chainalysis</a>.



Garantex’s average monthly inflows, however, <a href="https://blockworks.co/news/ofac-sanctions-eased-crypto-crime">more than doubled</a> after the US took action against it last April, Chainalysis data showed, as Russia’s government did not enforce the sanctions.



Illicit crypto transaction volume overall rose for the second consecutive year in 2022, according to a Chainalysis <a href="https://blog.chainalysis.com/reports/2023-crypto-crime-report-introduction/" target="_blank" rel="noreferrer noopener">report</a> published earlier this month. Such activity hit an all-time high of $20.1 billion — up from roughly $18 billion in 2021.



Experts in illicit finance find the Bitzlato case more significant, according to Nick Smart, director of blockchain intelligence at Crystal, a compliance and risk management specialist.



“I think a lot of the reaction to Bitzlato has been a bit confused across the industry, and sort of misses why this is a bigger deal than at first glance,” Smart told Blockworks.&nbsp;



<h3>Treasury uses new tool</h3>



The Treasury’s Financial Crimes Enforcement Network (FinCEN) last week went a different route than sanctions. It identified Bitzlato as a “primary money laundering concern” pursuant to section 9714(a) of the Combating Russian Money Laundering Act — passed as part of the 2020 National Defense Authorization Act.



The designation came the same day the US Department of Justice (DOJ) <a href="https://blockworks.co/news/doj-busts-crypto-exchange">charged</a> Anatoly Legkodymov, a Russian national and senior executive of Bitzlato, with allegedly processing more than $700 million in illicit funds.



Bitzlato’s <a href="https://bitzlato.com/" target="_blank" rel="noreferrer noopener">site</a> has been shut down and could not be reached for comment. 



“OFAC sanctions are certainly one tool, but 9714 specifically targets Russian illicit finance,” said Redbord, a former senior adviser to the under secretary for terrorism and financial intelligence at the Treasury department.



This action is “very significant,” Redbord said, adding that it was the first designation under 9714(a), which allows the Treasury department to take severe action against a foreign financial institution to combat Russian money laundering.



French and US law enforcement authorities led the take-down of Bitzlato’s France-based digital infrastructure and interrogated platform managers, Europol said Monday.&nbsp;



About 46% of the assets exchanged through Bitzlato — worth roughly $1 billion — had links to criminal activities, Europol said. It added that roughly 1.5 million bitcoin transactions were made from Bitzlato users and the Hydra network, which the DOJ and German authorities took down in 2022.



Five individuals had been arrested as of Monday.



“[The] arrest of the founder, and with international cooperation in jurisdictions often enjoyed by Russian business people has a much bigger message,” Smart said, adding “particularly for other Russian P2P exchanges with similarly poor reputations, who must now be wondering ‘who’s next?’”



Money laundering service providers are crucial to the wider crypto crime ecosystem, according to Andrew Fierman, Chainalysis’s head of sanctions strategy.&nbsp;



“If cybercriminals cannot reliably convert the cryptocurrency generated by their activities into cash, the incentives to commit those crimes plummet,” he told Blockworks.



The powers granted under 9714(a) differ from traditional sanctions in that they provide FinCEN with a menu of special measures with which they can order financial institutions to comply. These range from information collection and record keeping, as well as prohibiting the opening of certain types of accounts or the transmittal of funds.&nbsp;



The special measures give compliance teams across the crypto industry valuable information to keep their platforms safe from illicit activity, Fierman said.



“This is also another proof point for the US government’s — together with their allies — ability to go after the Russian crypto crime ecosystem,” he added. “The overall disruption of the wider crypto crime ecosystem is what makes this action so significant.”



<h3>A sign of more to come?</h3>



Treasury Deputy Secretary Wally Adeyemo said in a statement last week that the designation marked a unique step taken only “a handful of times” in the Treasury’s history for what he called “some of the <a href="https://www.fincen.gov/resources/statutes-and-regulations/311-special-measures" target="_blank" rel="noreferrer noopener">most egregious</a> money laundering cases.”



The only other crypto-related entity the Treasury department designated a “primary money laundering concern” was Costa Rica-based Liberty Reserve in 2013. That was done under Section 311 of the USA Patriot Act.&nbsp;



Liberty Reserve founder Arthur Budovsky <a href="https://www.justice.gov/opa/pr/founder-liberty-reserve-pleads-guilty-laundering-more-250-million-through-his-digital" target="_blank" rel="noreferrer noopener">pleaded guilty</a> in 2016 to conspiring to commit money laundering.



“Because of its significant operations in, and connection to, Russia and Russian illicit finance, Bitzlato threatens US national security, the integrity of the US and international financial sectors, and businesses and institutions worldwide,” Adeyemo said. “Identifying Bitzlato as a ‘primary money laundering concern’ effectively renders the exchange an international pariah.”



Adeyemo added that “we will not hesitate” to expose and hold accountable virtual asset service providers going forward.



A Treasury department spokesperson declined to comment further.&nbsp;



Hacks on DeFi targets and cross-chain bridges last year resulted in a record $3.6 billion in stolen funds through November 2022, according to TRM Labs.&nbsp;



“This is certainly not the last time we will see the use of 9714 and similar authorities against non-compliant exchanges, darknet markets, darknet mixers — like Helix and Bitcoin Fog — and other money laundering concerns,” Redbord said.



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Bitzlato May Make Crypto Scoff, but Law Enforcement Thinks Otherwise

Shalini Nagarajan

Brazil lawmakers have formally approved a regulatory framework set to govern the country’s crypto sector.



The bill <a href="https://blockworks.co/news/historic-brazilian-bill-regulating-crypto-heads-to-senate-vote" target="_blank" rel="noreferrer noopener">drew attention</a> earlier this year after a previous version passed through the Senate in April. It had since since been stuck in the Chamber of Deputies, the government&#8217;s lower house.



Local media <a href="https://www.infomoney.com.br/mercados/camara-aprova-marco-regulatorio-dos-criptoativos-no-brasil/" target="_blank" rel="noreferrer noopener">reported</a> that the text, written by federal deputy Aureo Ribeiro, includes a new crime: digital asset embezzlement, which appears targeted at exchange operators. 



Penalties include prison time between two to six years along with fines, which can also be handed out to entities which operate in Brazil without a physical presence. 



There&#8217;s also a rule requiring crypto companies such as exchanges and other intermediaries to hold a virtual service provider license, similar to rules set in place across the US and Europe.&nbsp;



The country’s efforts to regulate local crypto players comes amid turmoil in the wider digital asset space. Strife was most recently prompted by the collapse of FTX, which has left up to one million users out of pocket including regular investors, crypto projects and hedge funds. 



Former FTX CEO Sam Bankman-Fried allegedly siphoned user funds to make risky bets across crypto markets via sister trading unit Alameda Research, leading to a multibillion-dollar black hole in its balance sheet and a crippling liquidity crisis.



Brazil lawmakers however disagreed over whether to demand crypto exchanges ensure client funds are segregated from operational cash. This would hypothetically protect customers from corporate malfeasance and other crippling events such as exchange bankruptcy.



But Ribeiro effectively opposed this proposed change, saying it would stifle the crypto market. Currently on hold, the asset segregation issue will be debated at a later date.



<h3>Crypto is big in Brazil</h3>



Government-appointed bodies will reportedly decide which digital assets can be listed for trade, and relevant companies will have an 180-day grace period to comply with the incoming rules.



Brazil, which has suffered from high <a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">inflation</a> for decades, is one of the most active crypto markets in the world, according to recent <a href="https://blog.chainalysis.com/reports/2022-global-crypto-adoption-index/" target="_blank" rel="noreferrer noopener">Chainalysis data</a>. <a href="https://thepaypers.com/thought-leader-insights/the-crypto-landscape-in-brazil--1258289" target="_blank" rel="noreferrer noopener">About 5%</a> of its population actively invests in crypto, and more than 900 Brazil-based companies currently accept crypto as payment. 



One silver lining could be that the domino-style tumbling of unregulated crypto firms over the past year may usher in regulated institutions with stronger compliance frameworks and robust risk systems. At least, that&#8217;s what Brazil&#8217;s incoming crypto regulations could inspire.



Brazil’s bill is already approved, but it will now head for a signature from outgoing president Jair Bolsonaro before his term ends on Dec. 31. Luiz Inácio Lula da Silva is expected to take up office on Jan. 1.



Some lawmakers reportedly preferred the bill be approved during Bolsonaro&#8217;s term, over fears Silva may not be as enthusiastic about cryptocurrency.



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Brazil Crypto Laws Demand Up to 6 Years Prison for Embezzlement

Sebastian Sinclair

<div id="highlights-block_632d72df2b40a" class="highlights">
 <ul>
 <li>The wide-reaching Economic Crime and Corporate Transparency Bill seeks to amend parts of the UK’s Proceeds of Crimes Act</li>
 <li>Included in the bill&#8217;s provisions is a section dedicated to crypto proceeds and sanctions evasion</li>
 </ul>
 
</div>



The UK government has introduced a bill that, among other things, will grant authorities additional powers to seize and recover crypto tied to suspected criminals.



Its <a href="https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/fact-sheet-economic-crime-and-corporate-transparency-bill-overarching" target="_blank" rel="noreferrer noopener">Economic Crime and Corporate Transparency Bill</a> pushed through on Thursday seeks to amend several parts of the country’s Proceeds of Crime Act, while also bolstering anti-money laundering powers.



The legislation also represents the largest shakeup to the UK’s registrar of companies, the Companies House, with new powers to check, challenge or decline incorrect or fraudulent company information.



Designed to bolster laws aimed at curbing illicit proceeds, the government’s latest bill also targets sanctions evasion, for instance by Russia and Iran.



“Red tape around confidentiality liability will be eased to enable businesses to share information to more proactively prevent and detect economic crime including fraud and sanctions evasion,” the government said in a <a href="https://www.gov.uk/government/news/new-crackdown-on-fraud-and-money-laundering-to-protect-uk-economy" target="_blank" rel="noreferrer noopener">separate statement</a>.



The <a href="https://bills.parliament.uk/bills/3339#:~:text=Government%20Bill&amp;text=A%20Bill%20to%20make%20provision,the%20registration%20of%20overseas%20entities." target="_blank" rel="noreferrer noopener">250-page bill</a>, which has passed its first reading through Parliament, will now undergo a second reading in October before heading to the committee stage for assessment from experts and interested parties.



<h3>UK Crypto Regulations</h3>



The UK has made several steps to increase its oversight of digital assets and streamline regulation around the nascent asset class this year.



That included the introduction in July of a wide-ranging financial bill designed to phase out hundreds of pieces of EU-retained law and which <a href="https://cms.blockworks.co/uk-to-regulate-stablecoins-as-a-form-of-payment-via-new-bill/" target="_blank" rel="noreferrer noopener">seeks to regulate “certain types” of stablecoins</a> as a form of payment. 



It would also grant the government new powers to direct regulators to review their financial rules under conditions deemed in the public interest.



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UK Seeks Enhanced Crypto Seizure Power

<div id="highlights-block_62fdea0f69dbf" class="highlights">
 <ul>
 <li>Denis Dubnikov is alleged to have laundered more than $400,000 as part of a ransomware scheme involving crypto</li>
 <li>The Ryuk ransomware threat attempts to lock up systems in a bid to extract bitcoin payment</li>
 </ul>
 
</div>



A 29-year-old Russian citizen has been extradited from the Netherlands to the US to face money laundering charges involving tens of millions of dollars in crypto-ransomware proceeds.



The US Department of Justice accuses Denis Dubnikov of laundering more than $400,000 in funds lifted from Ryuk ransomware attacks as part of a $70 million scheme, according to a statement by the <a href="https://www.justice.gov/opa/pr/alleged-russian-money-launderer-extradited-netherlands-us" target="_blank" rel="noreferrer noopener">Department of Justice</a> on Wednesday.



Dubnikov and others involved in the scheme are alleged to have laundered funds from the attacks through various national and international transactions in a bid to conceal the funds’ provenance.



First appearing in 2018, Ryuk is designed to infiltrate private networks and gain administrative access to multiple systems. Once inside, Ryuk encrypts local files to lock up multiple computers before soliciting payment in crypto — usually bitcoin — to restore services.



Ryuk along with several other high-profile ransomware threats have been used to extract payment from government institutions, healthcare providers, hospitals and other businesses.&nbsp;



In May of last year, Colonial Pipeline was forced to halt its services and pay more than $4 million in bitcoin following an attack that subsequently ignited fuel shortage fears across the US.



Weeks later, the world’s largest meat producer by total sales, JBS Holding, shelled out $11 million in bitcoin in an attempt to circumvent ransomware impacting its business and supply chains.



Efforts from North Korea’s Lazarus Group, Eastern Europe’s Darkside and others have been linked to various hacks across the industry, including a <a href="https://cms.blockworks.co/sky-mavis-ronin-network-bridge-exploited-for-over-600m/" target="_blank" rel="noreferrer noopener">$625 million hack</a> of the on Axie Infinity-tied Ronin Network bridge earlier this year.



Cryptocurrencies have repeatedly been blamed by law enforcement officials for facilitating anonymous transactions and assisting hackers in their attempts. However, the ability to <a href="https://cms.blockworks.co/the-purpose-and-perils-of-crypto-privacy-tools/" target="_blank" rel="noreferrer noopener">transparently track transactions</a> on-chain, has also helped law enforcement <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">trace and reclaim</a> stolen funds. 



Lazarus and others are said to have used crypto mixing service <a href="https://cms.blockworks.co/tag/tornado-cash/" target="_blank" rel="noreferrer noopener">Tornado Cash</a> in a bid to launder proceeds and conceal provenance. The <a href="https://cms.blockworks.co/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash/" target="_blank" rel="noreferrer noopener">Office of Foreign Asset Control</a> banned its use for US citizens as well as 45 Ethereum addresses on Aug. 8.



Roughly three-fourths of funds passing through the privacy tool, however, are unconnected with criminal activity or sanctions evasion, and only 10.5% are stolen funds, <a href="https://blog.chainalysis.com/reports/tornado-cash-ofac-designation-sanctions/" target="_blank" rel="noreferrer noopener">according to</a> on-chain analytics firm Chainalysis.



A five-day jury trial is expected to commence on Oct. 4 where Dubnikov faces a maximum sentence of 20 years in prison for his alleged involvement.



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Alleged Crypto Ransomware Money Launderer Extradited to US

Casey Wagner

<div id="highlights-block_620ec093bb1f7" class="highlights">
 <ul>
 <li>Federal investigators now have a dedicated division to probe blockchain-based crimes</li>
 <li>The unit&#8217;s formation comes as the Biden administration is expected to issue an executive order on cryptocurrencies as soon as next week</li>
 </ul>
 
</div>



The FBI is ramping up its enforcement efforts when it comes to cryptocurrency crimes.



The Justice Department on Thursday touted a new unit focused on digital asset seizure and blockchain-based lawbreaking. Eun Young Choi, former senior counsel to the Deputy Attorney General, will serve as director of the National Cryptocurrency Enforcement Team (NCET).



“The department has been at the forefront of investigating and prosecuting crimes involving digital currencies since their inception,” Choi said in a <a href="https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team" target="_blank" rel="noreferrer noopener">statement</a>. “The NCET will play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds.”&nbsp;



The NCET will identify and pursue cases involving the criminal use of digital assets, especially when it comes to crypto exchanges and infrastructure companies.&nbsp;&nbsp;



Its formation could bring overdue oversight to the space, according to industry participants.



“As a custodian, we need very powerful cybersecurity,” said Henson Orser, president of cryptocurrency custodian Komainu. “In 2022, we now see more traditional financial institutions looking to come into the space, but they can&#8217;t do that through self-custody, and so they&#8217;re very much welcoming and using regulated instances.”



Additional regulatory scrutiny is only going to be welcomed by traditional financial players dabbling in digital assets, Orser said.



The new unit comes weeks after the Justice Department notched its <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">largest seizure</a> of financial assets ever, clawing back more than $3.6 billion in bitcoin stolen during a 2016 hack of the exchange Bitfinex.



Though assets and transactions in crypto are traceable on the blockchain, identifying who owns a wallet is more challenging, according to Orser. Investigators were able to pin down the alleged couple in question as they shifted funds around to use them, he added.



“At some point, those publicly viewable wallets have to figure out a way to intersect with NCET-legitimate exchanges and payment mechanisms,” he said. “The more that regulators embrace making sure that the legitimate exchanges and payment apps and platforms have oversight, then the more likely it is they&#8217;re going to catch people at that point of friction.”



NCET is already calling on crypto companies to help root out bad actors.



&#8220;We are issuing a clear warning to criminals who use cryptocurrency to fuel their schemes,&#8221; Deputy Attorney General Lisa Monaco said at the Munich Cyber Security Conference. &#8220;We also call on all companies dealing with cryptocurrency — we need you to root out cryptocurrency abuses. To those who do not, we will hold you accountable where we can.&#8221;



With regulators increasingly on the lookout, crypto professionals may need to be more mindful about their dealings with policymakers and law enforcement.



Andrew Morfill, chief information security officer at Komainu, said the industry’s narrative “needs to mature, especially from a regulatory perspective.”



“Telling people that you&#8217;re the new kid in town and you’re going to revolutionize the industry is probably not the best way to go about influencing and cajoling the regulator that is cautious and has key stakeholders [in] traditional finance,” Morfill said.



The Biden administration, meanwhile, is reportedly planning to issue an executive order on cryptocurrencies as soon as next week in an effort that could add clarity to fragmented past policy.&nbsp;



“I do have a concern about the patchwork quilt of initiatives surrounding this space, with no formal ‘tip of the spear,’” said Michael Fasanello, director of training and regulatory affairs at Blockchain Intelligence Group. “I am cautiously optimistic that the executive branch will issue a mandate providing clarity and guidance for a more uniform approach to oversight of the digital assets ecosystem.”



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FBI Doubles Down on Crypto Crimes With New Unit

<div id="highlights-block_620d155093d0d" class="highlights">
 <ul>
 <li>Illicit transaction volume increased 79% year over year while total crypto volume rose by 567%, according to Chainalysis</li>
 <li>Cybercriminals have laundered roughly $33 billion worth of crypto since 2017</li>
 </ul>
 
</div>



Illicit crypto transactions reached an all-time high $14 billion last year, but criminal activity’s share of cryptocurrency transaction volume has never been lower, according to a Chainalysis report published Wednesday.



Although the value of illicit transactions surged in 2021 from $7.8 billion the year before, these nefarious transactions accounted for 0.15% of crypto volume last year, down from 0.62% in 2020, the report said.



<div class="wp-block-image"><figure class="alignleft size-large"><img decoding="async" loading="lazy" width="1024" height="558" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg" alt="" class="wp-image-17495" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=1642 1642w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Source: Chainalysis Report</figcaption></figure></div>



Total transaction volume across cryptocurrencies tracked by Chainalysis grew to $15.8 trillion in 2021, up 567% from 2020.



“Given that roaring adoption, it’s no surprise that more cybercriminals are using cryptocurrency,” the report states. “But the fact that the increase in illicit transaction volume was just 79% — nearly an order of magnitude lower than overall adoption — might be the biggest surprise of all.”



Crypto-based crime spiked in 2019 as transactions involving illicit addresses represented nearly 3.4% of crypto transaction volume, the Chainalysis report notes. The <a href="https://en.wikipedia.org/wiki/PlusToken" target="_blank" rel="noreferrer noopener">PlusToken</a> Ponzi scheme occurred that year, reportedly defrauding investors out of more than $2 billion worth of crypto.



Decentralized finance (DeFi) protocols played a much greater role in laundering illicit funds in 2021, the report adds. Laundering through DeFi protocols increased by 1,964% from the prior year, reaching $900 million.



Cybercriminals have laundered roughly $33 billion worth of crypto since 2017, with most of that moving to centralized exchanges over time.



The amount of crypto that criminals are holding is hard to know, according to Chainalysis, as law enforcement has seized illicitly obtained assets.



The IRS Criminal Investigation team <a href="https://www.irs.gov/pub/irs-pdf/p3583.pdf" target="_blank" rel="noreferrer noopener">announced in November</a> that it had seized $3.5 billion worth of cryptocurrency in 2021. The Department of Justice also <a href="https://www.justice.gov/opa/pr/department-justice-seizes-23-million-cryptocurrency-paid-ransomware-extortionists-darkside" target="_blank" rel="noreferrer noopener">recovered $2.3 million</a> from the ransomware group responsible for the attack on Colonial Pipeline.



More recently, the DOJ <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">announced last week</a> that it had recovered the majority of the cryptocurrency stolen during the 2016 Bitfinex hack, valued at roughly $3.6 billion.



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