Russia is finally embracing virtual currencies. But to what end? Hint: It rhymes with honey wandering
NOBODY DOES the dark side of the internet better than the Russians. From Allofmp3.com, once the world’s most popular piracy site, to the campaign to disrupt the U.S. presidential election, Moscow’s hackers have long been world leaders in cybercrime. So it’s no wonder Russian computer geniuses are heavily involved in the internet’s latest craze: virtual currency. And it’s not just attracting cybercriminals—the Kremlin wants to get in on the cryptocurrency revolution by issuing state-backed “bit-ruble.”
Cryptocurrencies, such as bitcoin, work on a technology known as blockchain, a decentralized network of synchronized online registries that track the ownership and value of each token. They can be used as virtual cash and traded like currency. Private companies can issue their own virtual currencies to nance speci c ventures, similar to crowdfunding or bonds. And their future value can also be traded, like options.
With approximately $70 billion in bitcoins in circulation and more than 100,000 merchants around the world—including Russia’s largest online retailer, Ulmart—accepting similar forms of payment, “suddenly, everyone has to take cryptocurrency seriously,” says Richard Titus, an investor of cybermoney. Virtual currencies are also a potential bonanza for money launderers, online blackmailers and cybercriminals—especially in Russia. And with the market still basically unregulated, Titus warns, “it’s de nitely the Wild West.” Even Jpmorgan Chase CEO Jamie Dimon, usually a bull on tech innovation, warned in September that virtual currencies are “a fraud.… It won’t end well. Someone is going to get killed. It will blow up.”
Russians have been involved in cryptocurrencies since their inception in the mid-2000s. Criminals used the rst virtual currencies, such as e-gold, to commit cross-border credit card fraud. The original technology was “mostly U.s.-based, but it was always linked to Russia,” where 80 to 90 percent of global card fraud activity took place, says Alexander Klimburg,
author of The Darkening Web, a newly published examination of cybersecurity threats.
The Kremlin has long been wary of cryptocurrencies, which are technically illegal in Russia— yet the government recently signaled it’s changing its stance. At the St. Petersburg International Economic Forum in June, President Vladimir Putin announced that Russia was considering launching its own “digital ruble” and praised the possibilities of virtual currencies. A group of nancial institutions under the supervision of the Russian Central Bank is testing a proprietary “master chain” based on a popular platform called Ethereum that could be used to issue bit-rubles.
There’s even been talk of creating a supranational cryptocurrency for the emerging BRICS nations—brazil, Russia, India, China and South Africa—as “a good alternative to the dollar,” Kirill Dmitriev, head of the Russian Direct Investment Fund, told state-run news agency Ria Novosti in August. Though the entire sum of cryptocurrencies in the world remains under $100 billion, a long way o the estimated 10.2 trillion U.S. dollars, the idea of undermining America’s dominion as owner of the world’s chief reserve currency appeals to Putin, who recently called for the BRICS nations “to overcome the excessive domination of the limited number of reserve currencies.”
There are other legitimate reasons Moscow is interested in cashing in on cryptocurrencies. The Kremlin is keen to attract the enormous cash ow being poured into blockchain projects around the world. It also wants to open up Russia to the bitcoin mining industry, in which anyone can claim newly issued bitcoins—generated automatically by a preprogrammed, blockchain-based computer network—by solving extremely complex codes that unlock each new coin. China is the world leader in bitcoin mining, with miners deploying huge power-hungry computer server banks to crunch the necessary numbers—and Moscow is eager to get into that business. Putin aide Dmitry Marinichev predicts that “Russia has the potential to reach up to 30 percent share in global cryptocurrency mining in the future,” which at current values would mean a $100 million annual market share for Russia.
The Russian Central Bank is also exploring the use of cryptocurrency to help regulate the country’s notoriously corrupt banking system, with dubious nanciers frequently making loans to fake companies, then closing down, leaving the government to return depositors’ money. Cryptocurrencies are traceable, which would allow closer oversight of where a bank’s money is going.
“SOMEONE IS GOING TO GET KILLED. IT WILL BLOW UP.”
It’s the third reason for Russia’s interest in virtual currencies that has international law enforcement agencies worried: their use as money laundering tools. Unlike with cash, all cryptocurrency transactions are recorded. That makes them perfectly trackable, so it’s easy to monitor dealings between legitimate businesses. However, the problem is that ownership of virtual cash isn’t necessarily attributable to people or businesses. And digital currency units can be anonymized by putting them through what’s known as a tumbler, a service that changes the owner’s identity by exchanging the tokens with ones belonging to other users also seeking anonymity. That gives virtual money the potential to become the perfect klepto-currency for anyone with shady motives—and it can be moved around the world with a few keystrokes.
One of the most high-pro le Russian fans of cryptocurrencies is lawmaker and former KGB o cer Andrei Lugovoi, the prime suspect in the fatal 2006 poisoning of former Russian spy Alexander Litvinenko in London. Lugovoi is one of dozens of Russian o cials and businessmen who are forbidden from traveling to or holding assets in Europe or the United States. Some have been the target of international sanctions because of their support of Moscow’s annexation of the Crimea, or their role in the 2009 killing of anti-corruption lawyer Sergei Magnitsky, or, like Lugovoi, their outstanding arrest warrants for crimes in the West. Despite being a murder suspect in the U.K., Lugovoi is deputy chair of the Duma committee on security and anti-corruption—and in this role, he appeared at an April cryptocurrency forum in Moscow to praise blockchain-based currencies. He argued that virtual money would allow Russian companies—he tactfully didn’t mention individuals— to get around Western restrictions. “This is a rare situation where the sanctions policy of the West gives rise to the opportunity for our own businesses to create something new,” he said.
Russians have certainly been proli c at creating new—and often bizarre—cryptocurrencies. Zrcoin, for instance, raised over $7 million from its “initial coin o ering” (the crypto equivalent of an initial public o ering) in April for a project to recover zirconium from industrial waste in Magnitogorsk, Russia. The value of each Zrcoin is backed, says the company, by a kilogram of synthetic zirconium. One Moscow region farmer, Mikhail Shlyapnikov, raised over $2 million in two months earlier this year by issuing his farm’s virtual currency. Known as the Kolion— named after Shlyapnikov’s village of Kolionovo and based on the agricultural production of his farm—the currency had doubled in value since it was launched in May. Even Russian Burger King has gotten involved, issuing loyalty tokens called Whoppercoins, which can be exchanged for burgers but also swapped and traded on the peer-to-peer Waves blockchain platform.
Many of these virtual currencies look like gimmicks. But money launderers are poised to take advantage of Russia’s cryptocurrency revolution too. The Organized Crime and Corruption Reporting Project, a nongovernmental organization, recently updated its 2014 study titled “The Russian Laundromat Exposed” to include the latest details of a vast and sophisticated network of o shore banks and shell companies that Kremlin-connected oligarchs use to
out sanctions and park stolen money—so far, in conventional ways. Between 2011 and 2017, the NGO reported, more than 20 Russia-connected shell companies red out 26,746 transfers to launder some $20.8 billion—through a single scheme.
+ BITCOIN RULES EVERYTHING AROUND ME: Many players have been dabbling in cryptocurrencies, from Putin aide Dmitry Marinichev, middle, who has a currency mining farm, above, to Burger King.