The promise of cryptocurrency’s decentralization and transparency is being challenged by the revelation of a complex web of shell companies and nested crypto exchanges that facilitate the laundering of millions in illicit funds. A case involving a Dutch lawyer, a defrauded model, and a tangled network spanning from Europe to the Caribbean exposes critical flaws in the global regulatory landscape for virtual assets.
Marius Hupkes, an Amsterdam-based attorney specializing in cross-border criminal networks, took on the case of Bas Zijlstra, a Dutch model who lost $1.5 million in a crypto investment scam. This seemingly isolated incident uncovered a much larger scheme involving the crypto exchange Kyrrex and its relationship with major players like HTX (formerly Huobi Global).
Zijlstra, seeking investment advice, was defrauded by someone posing as a financial advisor. He invested his family’s savings into Bitcoin, which then disappeared into a labyrinth of crypto wallets. The trail led to a wallet address at Huobi Global, prompting Hupkes to demand the exchange freeze the account and reveal its owner. However, he encountered bureaucratic obstacles and was referred to authorities in the Seychelles, where Huobi was then registered.
Undeterred, Hupkes pursued legal action, eventually obtaining a Dutch court order compelling Huobi to comply or face substantial fines. By this time, however, Huobi had rebranded to HTX and relocated its operations, further complicating the investigation.
In November 2023, HTX finally revealed the wallet’s owner: Kyrrex Ltd., another crypto exchange.
Kyrrex, registered in the lightly regulated jurisdiction of St. Vincent and the Grenadines, operates as a “nested” exchange, providing trading services through accounts hosted on larger platforms like HTX. This practice, while not inherently illegal, obscures the flow of funds, making it more difficult to trace illicit cryptocurrency and providing deniability to both the host and nested exchanges.
According to The Coin Laundry investigation, Kyrrex allegedly onboarded customers without proper due diligence, some of whom were later accused of fraud and other crimes. Despite promoting a Malta-licensed affiliate as fully transparent, the company’s operations in St. Vincent allowed it to circumvent stricter regulatory oversight.
Paul Beckett, a lawyer specializing in offshore finance, stated: “Malta, respectable, ‘that’s the one we tell the world about,’ St. Vincent is the ugly sister, and that’s where the mischief happens. The result: absence of accountability of any kind.”
The Kyrrex case highlights weaknesses in the European Union‘s approach to regulating virtual asset providers, where supervision is delegated to individual member states. Maltese authorities reportedly dismissed allegations against Kyrrex’s St. Vincent entity, arguing it was legally separate from its Malta-based affiliate, despite evidence of common ownership.
ICIJ’s investigation revealed that HTX continued to host Kyrrex as a client even with knowledge that law enforcement agencies and investors were investigating the company’s wallets for suspected criminal activity.
The investigation uncovered that dozens of crypto investors from at least nine countries lost nearly $6.5 million to suspected fraudsters who sent funds to the same Kyrrex wallet address hosted on HTX. Furthermore, the wallet was allegedly used by a Russian official accused of bribery and a sanctioned Russian organization supporting military operations in Ukraine.
Hupkes now represents over 20 Dutch scam victims seeking to recover more than $11 million in a lawsuit against Kyrrex, alleging the exchange facilitated fraud through untraceable structures. HTX is not a party in the litigation.
Kyrrex co-founder Mykhailo “Mike” Romanenko denied the “nested exchange” label, describing the company’s business model as similar to a brokerage and asserting its commitment to compliance and cooperation with law enforcement. He declined to comment on the Dutch case.
The Kyrrex case underscores the urgent need for stronger international cooperation and more robust regulatory frameworks to combat money laundering and other illicit activities in the cryptocurrency space. The layering of complex corporate structures, the use of secrecy jurisdictions, and the rise of nested exchanges pose significant challenges to law enforcement and regulators worldwide.
As the digital asset landscape continues to evolve, the ability to trace and recover stolen funds remains a critical concern for investors and regulators alike. The promise of transparency in blockchain technology is undermined when bad actors exploit regulatory loopholes and jurisdictional arbitrage to conceal their activities. The ongoing legal battles and investigations surrounding Kyrrex and HTX could set a precedent for future cases and shape the future of crypto regulation globally.
