Does the Bitzlato arrest signal a bigger crypto crackdown? 

The Justice Department’s bust last week of a crypto exchange had all the international ingredients of a headline-grabbing takedown. A Chinese headquarters, a Russian national in charge, a Miami arrest and Europol’s involvement in the case.

What it didn’t have was an exchange anybody had heard of prior to the much-hyped announcement.

The takedown of the unheralded Bitzlato left some in the industry scratching their heads — with many expecting officials to have targeted a much larger exchange. For other crypto watchers, the Justice Department’s move felt like a signal that a much larger case may be on the horizon.

“It's not hard for someone to reasonably speculate that one enforcement action could be a sign of more to follow,” said Ty Gellasch, president and CEO of the Healthy Markets Association.

Law enforcement “disrupted” the China-based Bitzlato with much fanfare last week. Bitzlato founder Anatoly Legkodymov, a Russian national, was arrested in Miami for allegedly processing $700 million in illicit funds on his exchange. The arrests continued this week: French and U.S. authorities have arrested five people in connection with the Bizlato case, according to Europol.

“Whether you break our laws from China or Europe – or abuse our financial system from a tropical island – you can expect to answer for your crimes inside a United States courtroom,” Deputy Attorney General Lisa Monaco said during a highly-anticipated press conference last week.

But whether the announcement will be a harbinger of higher profile prosecutions to come in the crypto space, or a continuation of the U.S. government’s longstanding watchfulness for money laundering in digital assets, depends on who you talk to.   

A stepping stone?

For some crypto experts, the Justice Department’s move looked like a signal that a larger case is on the way. The action felt like “a mere stepping stone to the next thing that’s bigger,” Washington lawyer Carol Van Cleef, the CEO of the Luminous Group, said in an interview last week.

During their announcement of the case, a pair of FBI officials called the Bitzlato enforcement action an “example” and a “reminder” to others who use cryptocurrency to break the law.

“Looked at through a criminal law and national security lens, Bitzlato has it all: money laundering that allowed the purchase of cyber hacking tools, drugs and other illicit goods and services from the Hydra darknet market, all because Bitzlato marketed itself as a [Know Your Customer]-free exchange,” said Gus Coldebella, a partner at the venture capital firm True Ventures. “Know Your Customer” guidelines require financial institutions to verify the identity of their clients. 

The Treasury Department’s Financial Crimes Enforcement Network issued an order banning the transmission of funds by any financial institution involving Bitzlato, a significant blow to the exchange. The FinCEN order named Binance as a counterparty, and a spokesperson for the exchange giant told CoinDesk that the firm aided law enforcement in the investigation.

Reading the tea leaves

Not every informed observer saw the announcement as an indication of more immediate shoes to drop, though. 

“It’s tempting to speculate who the next target will be, especially now that regulators are being public about their willingness to go after crypto companies. But we don’t have enough information right now to make any judgment. We will have to wait and see,” said Josh Garcia, a partner at the digital asset and fintech-focused law firm Ketsal. 

Gellasch, the Better Markets president who previously served as counsel to former Democratic Securities and Exchange Commissioner Kara Stein, was similarly skeptical.

“Experts have been trying to read the tea leaves for years now and have been predicting for years now that there would be a crackdown coming, myself being one of those experts,” Gellasch said. “I'll believe it when I see it.”

Sarah Wynn contributed reporting.