High­way Rubel-ry

Rus­sia is fi­nally em­brac­ing vir­tual cur­ren­cies. But to what end? Hint: It rhymes with honey wan­der­ing

Newsweek - - CONTENTS - BY OWEN MATTHEWS @owen­matth

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 fi­nance spe­cific 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 def­i­nitely 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 first 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 fi­nan­cial 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 off 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 flow 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 fi­nanciers 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.


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-pro­file Rus­sian fans of cryp­tocur­ren­cies is law­maker and for­mer KGB of­fi­cer 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 of­fi­cials 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 pro­lific at cre­at­ing new—and of­ten bizarre—cryp­tocur­ren­cies. Zr­coin, for in­stance, raised over $7 mil­lion from its “ini­tial coin of­fer­ing” (the crypto equiv­a­lent of an ini­tial pub­lic of­fer­ing) 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 off­shore banks and shell com­pa­nies that Krem­lin-con­nected oli­garchs use to flout sanc­tions and park stolen money—so far, in con­ven­tional ways. Be­tween 2011 and 2017, the NGO re­ported, more than 20 Rus­sia-con­nected shell com­pa­nies fired out 26,746 trans­fers to laun­der some $20.8 bil­lion—through a sin­gle scheme.

Blockchain cur­ren­cies could make that type of laun­der­ing much eas­ier. Vir­tual cur­ren­cies “are a po­ten­tial night­mare for in­ves­ti­ga­tors,” says one for­mer U.S. law en­force­ment of­fi­cial with ex­pe­ri­ence in Moscow, who asked for anonymity be­cause of his on­go­ing con­sult­ing work for gov­ern­ment clients. “It’s pretty easy to trace how money goes from bank to bank. Same for bit­coins…. You know what on­line en­tity owned them at what time. But [who] is be­hind that on­line iden­tity? Laun­der­ing is all about cre­at­ing fake own­er­ship. That’s where cryp­tocur­rency’s anonymity be­comes a prob­lem.”

It’s a strange irony that both Rus­sian crim­i­nals and the gov­ern­ment should fa­vor cryp­tocur­ren­cies—one as a means of money laun­der­ing, the other as a way to trace gov­ern­ment money. But blockchain tech­nolo­gies are flex­i­ble enough to do both. The U.S. Trea­sury and the Rus­sian Cen­tral Bank have an­nounced plans to reg­u­late the mar­ket, though it’s not clear how new rules would con­trol vir­tual cur­rency trad­ing con­ducted out­side their na­tional ju­ris­dic­tions. “The Rus­sians are draft­ing leg­is­la­tion, but that is laugh­able,” says Klim­burg. “The whole coun­try is a mas­sive money laun­der­ing and tax-eva­sion op­er­a­tion.”

Blockchain tech­nolo­gies have other crim­i­nal ap­pli­ca­tions too. They’re a gold mine for hack­ers with ac­cess to gi­ant net­works of com­put­ers known as bot­nets. A bot is a com­puter that has been in­fected with a type of virus known as a Tro­jan horse that al­lows the bot­net’s owner to re­motely con­trol the ma­chine. Bot­nets can num­ber in the hun­dreds of thou­sands of ma­chines and are nor­mally used to gen­er­ate enor­mous traf­fic that can crash web­sites. Their dis­rup­tive power al­lows them to be weaponized to de­mand ran­som money or wage po­lit­i­cal war­fare.

Back in 2007, Rus­sian hack­ers showed the of­fen­sive ca­pa­bil­ity of bot­nets for the first time when they at­tacked and briefly crashed much of tiny Es­to­nia’s e-in­fra­struc­ture. Most re­cently,


though, bot­nets have been put to a dif­fer­ent use: steal­ing com­puter ca­pac­ity to crack the codes of new bit­coins.

Le­git­i­mate bit­coin min­ers have to in­vest in ex­pen­sive com­puter equip­ment and cut deals with power com­pa­nies to buy their spare elec­tric­ity. (Rus­sian en­ergy gi­ants Gazprom and Eurosi­ben­ergo re­cently an­nounced that they were ne­go­ti­at­ing the sale of cheap megawatts to around 70 bit­coin-min­ing com­pa­nies.) But bot masters sim­ply steal that com­put­ing ca­pac­ity by hi­jack­ing strangers’ com­put­ers. The lat­est ex­am­ple was a group of hack­ers—“prob­a­bly North Korean ac­tors based in China,” ac­cord­ing to Klim­burg—who in late April used a vul- ner­a­bil­ity in the Win­dows op­er­at­ing sys­tem to cre­ate a bot­net they used for bit­coin min­ing.

That vul­ner­a­bil­ity—known in the trade as an “ex­ploit”—was most likely dis­cov­ered by the U.S. Na­tional Se­cu­rity Agency as a hack­ing tool that could be used to get into com­puter sys­tems via faults in pro­grams. The ex­ploit, dubbed “Eter­nal­blue,” was prob­a­bly one of thou­sands of hack­ing tools stolen from the agency’s highly sen­si­tive Tai­lored Ac­cess Op­er­a­tions by Navy re­servist Harold Martin III, a for­mer con­trac­tor for Booz Allen Hamil­ton in­dicted in Oc­to­ber 2016 for ab­scond­ing with ap­prox­i­mately 50 ter­abytes of secret hacks and other data from the NSA and CIA.

Ex­actly how the Eter­nal­blue ex­ploit got into the hands of a hacker group called Shadow Bro­kers—closely linked to Rus­sia’s Fed­eral Se­cu­rity Ser­vice—isn’t clear. But on April 14, hack­ers leaked the ex­ploit code on­line, free for any hacker who wanted to use it. Within two weeks, more than 230,000 com­put­ers in 150 coun­tries had been in­fected with viruses us­ing Eter­nal­Blue. The North Korean bit­coin min­ers were the first to take ad­van­tage of this back­door. But oth­ers soon fol­lowed, us­ing Eter­nal­blue to dis­trib­ute viruses called Wan­nacry and Not­petya. Both so-called ran­somware pro­grams threat­ened to de­stroy the in­fected com­puter’s sys­tem un­less they re­ceived a pay­ment in bit­coins. By May 12, Wan­nacry had frozen large parts of the com­puter sys­tems of Bri­tain’s Na­tional Health Ser­vice, Spain’s Tele­fónica, Ger­many’s Deutsche Bahn and Fedex.

Cryp­tocur­ren­cies may not be in­her­ently du­bi­ous. But it’s clear that there’s a deep cross­over be­tween the worlds of hack­ing and the darker cor­ners of the cryp­tocur­rency world. As huge sums of money start to pour into the mar­ket— bit­coin grew 7.5 times in value over the past year alone, and Ethereum’s flag­ship to­ken, the ether, was up 4,000 per­cent for the year ear­lier this sum­mer—it is turn­ing into a play­ground for bril­liant entrepreneurs, risk-hun­gry in­vestors and in­ven­tive crim­i­nals. Rus­sia, with its unique nexus of com­puter ge­nius and money laun­der­ing ex­per­tise, looks set to be­come the new cryp­tocur­rency world’s Wild East.

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.

MO’ BIT­COIN, MO’ PROB­LEMS: A mon­u­ment to Bit­coin in Yeka­ter­in­burg, above. Be­low, Rus­sia’s Cen­tral Bank. Be­cause own­er­ship of vir­tual cash isn’t at­trib­ut­able to peo­ple or busi­nesses, it could be a boon to money laun­der­ers.

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