Anatoly Legkodymov's Blog

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Bitzlato's operations were shut down on the night of January 17–18, 2023. Waking up the next morning, every programmer at the company discovered that, right there in bed, they had turned into an international terrorist. Much like Gregor Samsa, who woke up transformed from a man into a giant insect and caused universal horror.

Only in our case the transformation happened on paper. Many employees found themselves on an Interpol list, which local authorities informed them of in short order.

The media wrote a great deal of speculation based on the New York prosecutor's press releases. The dust has now settled and the facts can be reviewed. At this point, Anatoly Legkodymov, Bitzlato's co-founder, has been released from pre-trial detention and the case against him is closed. That was a major victory.

Nevertheless, Anatoly faces extradition to France and a new charge over the same case, carrying up to 20 years. Other team members remain under arrest in France as well.

But first things first.

What Bitzlato Was

Bitzlato was a cryptocurrency exchange registered in Hong Kong that operated in the CIS market for 7 years. Its creators were Russian and Ukrainian crypto enthusiasts who managed, in 2016, to build a peer-to-peer trading competitor to Binance for the domestic market.

Bitzlato was one of the first crypto companies to introduce mandatory KYC and AML (Know Your Customer and Anti-Money Laundering) procedures. Despite this being a clearly negative factor for the business, the company started doing two things back in 2021: requiring passports from all users, and screening transactions for links to prohibited services. Bitzlato introduced these procedures only a few months after Binance did. Notably, in the company's own jurisdiction — Hong Kong — equivalent requirements only took effect in May 2023 (5 months after the events described here). Russia still has no such regulation at all to this day.

Bitzlato cooperated with Russian and foreign authorities on law-enforcement requests. There is official confirmation of this — for example, a letter of thanks to Bitzlato from Russia's Ministry of Internal Affairs "for professionalism and high responsibility in fulfilling civic duty." This fact will matter later in the story.

Given the transparency and openness of the company as described, Anatoly felt completely safe going to the United States to learn to fly.

This was long before Durov's well-known trip to France, and no one yet knew that Interpol arrest warrants could be issued on the fly.

The Attack on the Company

At midnight on January 17, all the cryptocurrency held on the company's French servers, where some of the wallets were stored, was withdrawn by unknown parties. Programmers, alerted to the emergency, began working to block what looked like a hacking attack.

This event prompted Anatoly to respond in the company chats — for the first time during his vacation. Interestingly, this very fact of Anatoly's involvement was later used by prosecutors to argue that Anatoly had "illegally worked from U.S. territory."

Anatoly went for a walk around a lake, and when he came back, the house was surrounded by police cars.

I come back and see some police lights. I thought it was some local raid — looking for some drug users, maybe. Because when you walk around Miami, everything reeks of weed. As it turned out later, they weren't interested in weed at all. And it wasn't a shoot for "CSI: Miami" (the crime-investigation show — ed.). Turns out they were interested in me.

— Anatoly Legkodymov, co-founder of Bitzlato

Anatoly was handcuffed. He didn't have his house keys on him, but FBI agents needed to search the house. His frightened 11-year-old daughter could be seen in a second-floor window.

They gave me a megaphone. Gave me this bullhorn. And I'm shouting, "Sweetie, go get mom." Turned out my wife was in the shower. My daughter called for her for a long time, like 5 minutes. So basically I was helping arrest myself. Not only did I show up voluntarily, I also helped them get the door to the house open.

*laughs*

And I worked as an interpreter too. (At the time of the arrest, Anatoly's family didn't speak English — ed.)

— Anatoly Legkodymov, co-founder of Bitzlato

It later emerged that the withdrawal of funds from the company's French servers wasn't a hacking attack at all. It was a coordinated operation by American and French intelligence services.

So what violations did the U.S. find in a Hong Kong company's dealings with users from the CIS? More on that below.

The Charges

It's worth noting that the prosecution isn't directed at the company itself. The company is implicitly treated as a criminal organization by default — which follows from the fact that it's not a legal entity being held accountable, but the individual people who worked there. Here are the charges against Anatoly Legkodymov personally:

Bitzlato lacked a U.S. license to conduct money transmission for its users.

Bitzlato lacked AML and KYC procedures meeting U.S. requirements. As evidence, correspondence between users and the company's support team was cited. It shows that there were cases where support knew users were transferring funds from Bitzlato to prohibited services but did nothing about it.

Although users were mostly from Russia and Eastern Europe, the case is said to bear directly on the U.S. Why? Because there were American users too — evidenced by American IP addresses and American bank cards.

Anatoly was careless enough to work for the company from U.S. territory. This is confirmed by internet provider data (recall the January 17 attack). This, prosecutors argued, gave grounds for his immediate arrest, since he had thereby facilitated a criminal organization's work from U.S. soil.

The Defense

The defense's response to each point:

No U.S. license was required because Bitzlato screened out American users at the KYC stage. In other words, an American couldn't register on the service. And in fact, neither Americans nor other nationals had been able to add American bank cards for a long time — users were warned of this in advance in the terms of service. U.S. IP addresses could only belong to those who connected through a VPN.

KYC and AML were continuously improved. Any staff training takes time, including for support agents. As for AML (transaction screening), independent companies were hired for this back in 2021 — first Valega, then ScoreChain. Significant funds were spent on transaction-screening services. However, testimony from these companies was not presented by the prosecution; instead, reports from a third company, Chainalysis, were used.

"Chainalysis does not guarantee the accuracy, completeness, timeliness, suitability or reliability of the information contained in the reports" — chainalysis.com. So why was their report used by the FBI?

The American who supposedly successfully registered on the exchange turned out to be an FBI agent. The prosecution relied specifically on him. However, even he registered not with U.S. documents but with the passport of another country — he held dual citizenship. Importantly, even the FBI agent did not, and could not have, completed a single transaction through Bitzlato within U.S. jurisdiction.

Anatoly came to the U.S. on vacation with his wife and three young children. That hardly matches the behavior of someone with criminal intent.

Despite how simple the case might seem, it took the lawyers 1.5 years to bring these points before the court. The trial was constantly postponed for various reasons.

The Trial

Anatoly spent the full year and a half at the Metropolitan Detention Center — the notorious New York jail where rapists and murderers are sent.

Thanks to the efforts of the Russian embassy and personally Anatoly Antonov (Russia's ambassador to the U.S. at the time), Anatoly Legkodymov was moved from the 5th to the 8th floor. The 8th floor housed people convicted of political and financial offenses, and at least there were no fights there.

Now it's important to note a peculiarity of U.S. federal courts. A federal court is one where the prosecutor is the state itself, since in its view a federal law was violated. Winning a case in a U.S. federal court is essentially impossible. In other words, the state prevails in 88% of cases. Fewer than 12% of cases end with the defendant actually winning against federal courts. This is public data from uscourts.gov for 2023. A sitting American judge wrote about this oddity in his own book.

At the same time, defendants take on enormous risk — if they lose, the sentence increases many times over. For Anatoly, for instance, it would have grown from 5 to 20 years in prison. This success rate (88% in the state's favor) is achieved partly because judges and juries tend to trust the prosecution — that is, the state — more. The state, in turn, has leverage over colleagues and family through the FBI. The book mentioned above describes, with specific cases, how this plays out in practice.

Given all of this, the only reasonable option for Anatoly was to plead guilty to part of the charges before trial. That way, the court only needed to determine the sentence. This no longer requires a jury trial — the matter is decided by a federal judge.

In the end, Anatoly admitted that, while the company itself wasn't criminal, it hadn't done enough to stop criminals who used it to launder money, buy drugs and other goods on the black market. The prosecution sought 5 years, but the judge sided with Anatoly.

Below is an interesting excerpt from the court transcript. The judge compared Bitzlato's operations to a post office, which could likewise be used to send drugs.

THE COURT (TO THE PROSECUTOR): I take it you wouldn't deny that among the transactions [made by Bitzlato users — ed.] are ones that are entirely legal under both U.S. and international law.

PROSECUTOR: Yes, I'm sure of that.

THE COURT: In that sense the company is like a post office.

PROSECUTOR: Yes, it's like a post office. But imagine a post office where, say, 25 percent of the packages are drugs.

THE COURT: In that case, would you send the postmaster to prison?

PROSECUTOR: Well... I suppose we'd ask him to double-check the numbers.

— from the court transcript, 07/18/2024, U.S. District Court, New York, p. 49

The conversation then moved on to other matters.

The judge's final ruling: the time Anatoly had already served clearly covered the sentence for this case. Having served 1.5 years in pre-trial detention, Anatoly was released with no further claims from the court.

But freedom didn't last a single second. Immediately after his formal release, Anatoly was sent to a U.S. immigration prison in Pennsylvania. The reason: he had brazenly overstayed his visa, remaining in the U.S. for a full 1.5 years. This practice — sending the released into immigration detention — is very common in the U.S.

Anatoly is still in immigration detention at this time. Moreover, while he's been there, a new order was issued — for his extradition from the U.S. to France. In France, he is set to be charged all over again in connection with Bitzlato, despite having already served the legally determined sentence.

In Lieu of a Conclusion

In the civilized world, when a service violates a country's laws, the country blocks that service and opens a case against the company. Brazil, for instance, recently did this with Elon Musk's X (formerly Twitter). The blocked company then hires lawyers in that country and defends itself while fixing the violations. That is a path that can genuinely lead to improvements in the business and in people's lives.

Bitzlato was never given a chance to defend itself. A surprise-attack approach was chosen instead. No one received any warning; no lawyers had been lined up in the U.S. in advance. Everyone was caught off guard.

One could speculate at length about why it was done this way. Is it connected to politics? But the company was never under sanctions. The multinational team always maintained political neutrality. The very nature of cryptocurrencies implies a rejection of geopolitical constraints.

Anatoly himself put it this way:

I wasn't put away because I supposedly ran shady stuff, and not because I supposedly broke the law, not because of a whole bunch of other things... including the guys — they got locked up too. It's all because there's a war being waged against crypto.

— Anatoly Legkodymov, co-founder of Bitzlato