​Bitzlato crypto exchange co-founder released after a brief questioning

Anton Shkurenko, a co-founder of Russian crypto exchange Bitzlato shuttered by the U.S. Department of Justice (DOJ) in January, disputed money laundering allegations by U.S. and E.U. authorities.

Shkurenko spoke with CoinDesk after Russian media reported he had been arrested in Moscow on Monday. He said he had been stopped by the police for an ID check, and was released after a conversation. Though he declined to identify what unit of law enforcement detained him, he said he signed an obligation to appear when requested by investigators and received a no-detention warrant to avoid further arrests.

Police detained him because he is on the Interpol wanted list, Shkurenko said, but he is unaware of any active criminal cases involving him in Russia. “Otherwise, I wouldn’t be speaking to you now,” he said on a Zoom call, sitting against what looked like an apartment wall decorated with patterned wallpaper.

“I hope I convinced the prosecutor of my innocence,” he said, adding he cannot disclose details of an ongoing investigation. Bitzlato shut down last month following a cross-jurisdictional investigation by several U.S. and European agencies, which found connections between the then-little-known exchange and darknet marketplace Hydra.

Shkurenko said he is a “tech consultant” for Bitzlato, but apparently one with a lot of power: He used to be one of the key holders for the exchange’s crypto wallets. He allegedly handed control over those wallets to other members of the team, he told CoinDesk.

As for Bitzlato and the allegations it processed over $700 millions of illicit funds, according to authorities, Shkurenko said the exchange did everything to cut off criminals and “is not ashamed” of its work. The U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) formally labeled the exchange a “primary money-laundering concern,” a powerful measure often used to cut off a business from the global financial system.

Bitzlato, Shkurenko said, was only “a bulletin board” for crypto trades. In an earlier interview given to a Russian YouTube channel, Shkurenko said Bitzlato did not have any bank accounts and all of its revenue came in crypto.

Even before the January enforcement action, Bitzlato had begun migrating its infrastructure from Europe to Russia, and most of the users’ funds are now under control of the team, he said. Bitzlato is ready to relaunch and gradually refund users who lost money as a result of the law enforcement shutdown, according to Shkurenko.

It won’t take a lot of effort, he said: “I could launch the exchange from my apartment. Two small servers are enough.”

Arrests around the world

Bitzlato, a Hong Kong-registered exchange with Russian founders, had been operating since 2016 and went down in January, when Department of Justice representatives working with FinCEN arrested founder Anatoly Legkodymov in Miami and charged him with unlicensed money transmitting.

Almost simultaneously, Europol arrested four more people allegedly connected to Bitzlato in Europe and seized a server hosting the exchange's hot wallet at a data center in France. As a result, the authorities confiscated 18 million euros worth of crypto – accounting for 35% of Bitzlato users’ funds, Shkurenko said. European authorities also froze over 100 accounts at other crypto exchanges linked to Bitzlato, bringing $32 million euros worth of assets under their custody.

The U.S. Department of Justice said Bitzlato's largest counterparty was the sanctioned and now defunct darknet marketplace Hydra. It also received over $15 million of ransomware proceeds, and had associations with a Russia-based Ponzi scheme “TheFiniko.” Europol said 46% of all the crypto that went through Bitzlato, worth roughly 1 billion euro, “had links to criminal activities.” Also according to Europol, 3,500 bitcoin addresses and over a 1,000 user details from Bitzlato systems “showed links with various criminal cases reported in Europol’s systems.”

In an interview to a Russian-language crypto YouTube channel Satoshkin Live on Jan. 31, Shkurenko identified the four people arrested in Europe in January as the former CEO Mikhail Lunev, marketing director Alexander Goncharenko, contractor Pavel Lerner and dev-ops engineer Konstantin (no family name). The first three are still in custody, while Konstantin was released on bail and is currently in Cyprus.

Legkodymov remains in custody in the U.S.

Dirty crypto

The DOJ and Europol said the flow of criminal money was a result of Bitzlato’s loose approach to KYC (know-your-customer) and AML (anti-money laundering) measures. Shkurenko claimed Bitzlato has been following E.U. protocols and using “AML services,” which would flag suspicious transactions and trigger an investigation at the company, since July 2021.

“How should I react when a person...gives me money, until there are criminal allegations against him?”

Shkurenko declined to name exactly what blockchain analytics products Bitzlato used, saying he did not wish to cause problems for the provider.

Shkurenko also claims Bitzlato always responded to requests from law enforcement agencies, including the U.S. Federal Bureau of Investigation. Asked if he remembers what came out of those interactions he said he did not check. In general, Bitzlato’s approach was to presume all users innocent until proven guilty, Shkurenko said.

“How should I react when a person standing in front of me gives me money, until there are criminal allegations against him?” he said.

The answer for Bitzlato apparently was: do nothing.

At the same time, he said the team was proactive about catching potentially criminal use of the exchange and from time-to-time even browsed the Hydra darknet marketplace in search of Bitzlato users. When found, those accounts would be blocked, he said. On one occasion, Shkurenko recalled, a tech support employee walking to the office saw an ad for an illicit drug shop painted on a fence – it turned out to be a Bitzlato user, upon investigation. The exchange blocked the account, he said.

According to U.S. court documents in Legkodymov’s case, “although Bitzlato sometimes blocked or terminated users who had transacted with Hydra or were otherwise suspected of engaging in drug transactions, its employees sometimes helped users to carry out transactions with Hydra, and sometimes took no action either way.”

An old exchange

Legkodymov and Shkurenko were former coworkers at Russia’s government-owned communications provider Rostelecom, who quit to start other businesses. One effort, a joint crypto mining business named A-XBT, operated mining farms in Russia, China and Abkhazia (a breakaway region of Georgia with a disputed international status).

According to Russia’s company registry, A-XBT’s revenue in 2021 was a bit over $1 million. However, a year later, the company ceased operations after Russian law enforcement opened a criminal case against the owner of the data center in Siberia where A-XBT hosted its ASIC mining machines, Shkurenko said. After that, Shkurenko and Legkodymov decided the project did not justify their efforts, he added.

The idea to open a crypto exchange, in 2016, came from the experience of operating mining farms in different regions, Shkurenko said. The partners realized there was no convenient way to trade bitcoin available to them, so they created a Telegram chat bot called BTC Banker, which matched crypto sellers and buyers – later it became Bitzlato.

Now, Bitzlato has over 100 employees, Shkurenko said.

Bitzlato was not the first Russian exchange facing legal crackdown for allegedly lax KYC and AML procedures. In October 2021, OFAC sanctioned SUEX, a Moscow-based OTC that processed large amounts of crypto linked to scams, drug market and ransomware. Soon after that, the agency sanctioned Chatex, a Telegram-based crypto trading and wallet service linked to SUEX.

In April 2022, the U.S. Treasury sanctioned Garantex, another exchange with Russian roots. All four exchanges – SUEX, Chatex, Garantex and Bitzlato – used Binance as a major liquidity source. Binance earlier said that it froze the accounts of SUEX, as well as Garantex, even before the OFAC sanctioned them.