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Cryptocurrencies are designed to be independent of any particular nation-state – but that doesn’t mean countries are indifferent to them. Governments have watched the rise of bitcoin and similar systems, and some have imposed regulations to counter their use in money laundering and cybercrime.
Some nation-states have even started using cryptocurrencies for their own benefits to promote their agendas, project influence and power beyond their borders, and circumvent economic sanctions.
The crypto-enabled activities of certain nation-state actors pose real and significant risks to the legitimacy of the cryptocurrency industry. That’s why compliance officers need to be aware of the nature of these threats and how they can use Elliptic’s software to address them.
In this blog, we summarize some of the ways in which nation-states exploit cryptocurrencies and how blockchain analysis can shed light on these activities.
He deals with espionage and warfare
Warfare and espionage are increasingly moving to the Internet. To carry out such operations, nation-state actors will typically acquire external resources and infrastructure ranging from software exploits to anonymous VPN services or command and control servers.
By paying for these resources using traditional, traceable payment methods, these actors risk exposure. Therefore, they began to switch to more anonymous payment methods such as cryptocurrencies.
One example of this is the campaign of cyberattacks allegedly carried out by Russian operatives to interfere in the 2016 US presidential election. As we described earlier, bitcoin was the primary means of payment for the infrastructure used in the hack, including website domain registrations, servers, and VPN services.
Despite the measures taken by Russian agents to avoid detection, techniques such as those introduced by Elliptic helped reveal their activity. Analysis of the bitcoin blockchain by US government investigators allowed them to link the online personas used to leak the stolen data back to the agents themselves.
Leveraging Cryptocurrency for Capital Gains
Cryptocurrency transactions are largely censorship-resistant and irreversible, meaning that no party can stop a transaction from happening or reverse it. For nation-states such as North Korea, whose access to the international financial and trading systems is restricted by economic sanctions, this presents an opportunity to raise funds by new, nefarious means.
In 2017, the WannaCry ransomware hit thousands of computers around the world, requiring its victims to send a ransom payment in bitcoins. Law enforcement agencies could use Elliptic’s block analysis tools to trace funds and obtain information about perpetrators. This, along with other evidence, helped build the case against North Korean actors.
North Korea has also been linked to cryptojacking activities; they have effectively stolen power over affected computer systems to mine cryptocurrencies such as monero. Analysis of such malware showed links to servers at Kim Il Sung State University in Pyongyang.
Far more lucrative was the alleged theft of funds from cryptocurrency exchanges by the North Korea-linked Lazarus Group. Exchanges have long been attractive targets for cybercriminals, as they store hundreds of millions of dollars worth of digital assets that can be stolen remotely and irretrievably through rudimentary cyber security. It can be difficult to quantify these thefts, but we conservatively estimate that at least $50 million has been stolen from South Korean stock markets in the past two years alone by North Korean-linked actors.
Avoiding economic control
The ability of the US and its allies to enforce economic sanctions depends on the global dominance of the US dollar and its influence on the SWIFT cross-border payment system. Cryptocurrencies provide a way to potentially circumvent economic sanctions, offering a combined currency and global payment system impervious to control or surveillance by foreign powers.
This was the primary motivation behind Venezuela’s “petro,” a state-owned cryptocurrency explicitly designed to circumvent US and EU sanctions and shore up the struggling regime. However, despite the Venezuelan government’s impressive claims about petro’s success, it remains unclear whether the crypto token even exists.
It nevertheless represents a significant turning point; other sanctioned countries are scrutinizing the nation-state’s use of decentralized blockchain-based assets to circumvent economic controls.
Russia and Iran are reported to be developing state-backed cryptocurrencies, and Vladimir Putin himself is said to have been personally involved in the petro scheme.
Addressing Cryptocurrency Sanctions Compliance
The use of cryptocurrencies to avoid sanctions has not escaped the attention of the US Treasury. A presidential executive order was issued banning US persons from doing business at Petro. Recently, OFAC began adding cryptocurrency addresses to its sanctions blacklists. Elliptic’s transaction screening tools enable businesses to monitor transactions associated with these sanctioned entities and avoid inadvertently enabling sanction evasion.
However, sanctions laws and compliance best practices were developed in the context of traditional payment systems, and it remains unclear how they should apply in the cryptocurrency world. At Elliptic, we are working to set the standard for cryptocurrency sanctions compliance and will be publishing guidance to help our customers operate safely in this challenging space.
The future of cryptocurrency exploitation threats
Nation states are still experimenting with cryptocurrencies and it remains to be seen where they will have the biggest impact. The issues mentioned above have already had material consequences, but other issues are just beginning to emerge.
Privacy coins such as monero will be valuable espionage tools as Elliptic’s block analysis tools are increasingly used to track established and transparent cryptocurrencies like bitcoin. The repercussions of China’s dominance in cryptocurrency mining will only increase as these assets become more widely accepted.
The adoption of cryptocurrencies by nation-states seeking to influence geopolitics illustrates the power and growing influence of this technology, as well as the need to monitor and address the risks it presents. Compliance officers in the crypto space must be alert to these threats and the associated sanctions implications.
Compliance
