I saw that Malvo gets consistently portrayed as entirely vague and entirely evil. The only solid characterizations for him are the cassette tapes he carries around of all these recorded conversations. It's hinted at a lot, but when we see him living as the dentist, we finally see an unequivocal scene where he is just sitting alone, listening to the tape, and having some kind of existential, sadistic joy at the horrific circumstances that Lester caused by killing his wife.
There was always a thought that perhaps the tapes are insurance, for blackmail, but I think this scene after his dinner party (as the dentist) shows that he really is just keeping them and listening to them for his own pleasure.
So if you keep this in mind and look back on the circumstances surrounding Milos, he saw an opportunity and he took it. I think it's nothing more than his own pleasure, to sadistically mess with this petty, dumb, and selfish man.
Originally he's there on behest of the crime organization he works for, and he's supposed to determine who the original blackmailer is. But when he realizes how dumb the whole situation is, and how he's been brought in to solve this "problem", it simply becomes a game for him.
I think it'd be too forgiving to ignore that this also ate up a LOT of the season's episodes, and it was a convenient way to write in these crazy situations while Lester's character was fleshed out and was digging deeper and deeper into his own sadistic insanity. Also it kept Malvo around Bemidji and Fargo, so that he could run into Wrench and Numbers, and Molly, and continually mess with the entire situation.
Because the whole thing started when he hit a deer and had to kill a cop and get to the hospital, where he meets Lester. He doesn't know or care who Sam Hess is, and doesn't even realize that his own organization is sent out to kill him for killing Sam Hess. Malvo's just sorta doing whatever he wants.
So, I think from the thematic sense of the show, the heart of the plot is really the first two or three episodes and the last two, and everything happening in-between, while I admit I loved it, is thematically sort of stretched-out for "fun". We get all the crazy characters and all the random circumstances and the build-up of coincidences, so that everything can finally come together for the final episode.
Milos was essentially just a big distraction, and if he could get a huge payday out of it, then it's doubly-enjoyable. And note that the show takes place in 2006 and Malvo goes around with essentially the same clothes and the same walkman and cassettes. He certainly didn't care about money or things, so he was doing it all to entertain himself in his sadistic nature.