Regulatory scrutiny post-FTX’s dramatic implosion has prompted a crisis of confidence in other industry actors.
Perhaps no other firm has bee affected more so than rival cryptocurrency exchange Binance, itself in no small way responsible for the chain of events that led to FTX’s multi-billion-dollar evaporation in November of last year.
This, as the world’s largest cryptocurrency exchange publicly admitted that management of its customer funds “has not always been perfect,” and a Reuters report published Tuesday (Jan. 24) revealed that Binance had served for years as one of the top thoroughfares for crypto exchange Bitzlato, which recently got a federal citation.
The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) stated in its “Imposition of Special Measure Prohibiting the Transmittal of Funds Involving Bitzlato” order that Binance was among Bitzlato’s top three counterparties by the amount of digital assets received between May 2018 and September 2022.
Binance was the only major cryptocurrency exchange among the list of top counterparties per the FinCEN report, which also listed Russian-language darknet drugs marketplace Hydra Market, a smaller exchange called LocalBitcoins, and Russia-based Finiko as Bitzlato’s biggest partners by transaction volume.
FinCEN described Finiko in the special measure order as “an alleged crypto Ponzi scheme.”
Hydra, which has since been seized and shut down, was the world’s largest and longest running darknet marketplace, per a U.S. Department of Justice (DOJ) report. The platform allowed users to purchase illicit drugs and other services anonymously using cryptocurrency.
“The Department of Justice will not allow darknet markets and cryptocurrency to be a safe haven for money laundering and the sale of hacking tools and services,” said Deputy Attorney General Lisa O. Monaco in a release announcing Hydra’s closure.
Not the most reassuring company for Binance to keep, particularly as the global exchange’s U.S. arm is currently under federal investigation for unlicensed money transmission, conspiracy and criminal sanctions violations.
According to a separate Reuters investigation in June of last year that referenced available blockchain data, buyers and sellers on Hydra’s darknet marketplace used Binance to make and receive crypto payments totaling more than three-quarters of a billion dollars, or $780 million.
The enigmatic exchange, which does not disclose its parent company’s location or headquarters, has allegedly processed a minimum of $10 billion in payments to-date for criminals and companies seeking to evade U.S. sanctions.
Binance has not replied to a request from PYMNTS for comment as of this writing.
In total, $346 million of digital assets ran between Binance and Bitzlato across some 205,000 transactions. Per the Reuters report, the numbers were compiled by leading U.S. blockchain researcher Chainalysis, which regularly works with governments on crypto industry data and analysis.
Over a quarter of that amount, or $90 million, was transferred after Binance had said it would require its users to submit valid identification in order to transact across its platform so as to help combat the funding and laundering of money from illicit activities.
As reported by PYMNTS, Bitzlato has had assets seized, and its founder was arrested last week (Jan. 17) in Miami.
The transmission of funds to Bitzlato by the U.S. and other financial institutions will be effectively cut off as of Feb. 1, according to the FinCEN filing.
Read more: Binance Skeptics Seek Answers Concerning Similarities With FTX Crypto Business Model
Crypto firms’ management of their customers’ reserves held in custody has become a hot-button topic for the digital asset industry following FTX’s alleged misappropriation of its own user bases’ assets to fuel bad bets that resulted in a disastrous multi-billion-dollar bankruptcy and a historic disintegration of wealth.
That context is what makes it so surprising, and potentially unnerving, that Binance reportedly kept collateral for tokens in the same wallet as customer assets as well.
That’s per a PYMNTS report Tuesday (Jan. 24) that also relayed the exchange is aware of the issue and planning to change its procedures to address the comingling of assets.
This, as New York’s top financial watchdog the New York State Department of Financial Services (NYDFS) is cautioning crypto firms to segregate customers’ cryptocurrency assets from their own, something traditional financial leaders, including Stifel CEO and Chairman Ron Kruszewski, are calling on the crypto industry to do as well.
“DFS’s virtual currency regulation has protected New Yorkers since 2015,” said NYDFS Superintendent Adrienne Harris. “[Agency] guidance reminds DFS-regulated virtual currency companies of our expectations regarding the safekeeping of customer assets.”
While leading crypto actors have repeatedly said they are aware of their mistakes, it remains to be seen if that have learned from them.
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