Bitcoin faces day of reckoning as oligarchs rescue cash

Lisa Monaco, the US deputy attorney general, said this week that American prosecutors have set up a cross-departmental task force to go after oligarchs and anyone trying to evade sanctions. “We’re coming for you,” she warned in an interview with Bloomberg. “We’re coming for your yacht. We’re coming for your jet. We’re coming for your ledger.”

Headaches for police

That may prove harder than it sounds, however. In a report last year, the US Treasury warned that cryptocurrencies could undermine sanctions by allowing criminals to evade the dollar-based banking system – and even give them the ability to build entirely new and separate networks.

Jonathan Benton, former head of the National Crime Agency’s global corruption unit, says this separateness from traditional systems can cause headaches for police because there is no authority to send them suspicious activity reports.

If criminals move money through jurisdictions with lower levels of transparency, and different currencies, it can also be almost impossible to know if they actually hold any Bitcoin.

“The first we would know about it sometimes is when you crack open their safe and inside there’s a [digital] pen drive, containing loads of codes and IDs which you find are linked to crypto-assets,” adds Benton.

“It is a massive issue. And quite often, the exchanges where the transactions take place are in jurisdictions where there is only very light regulation.”

Zero verification

Some crypto exchanges have been criticised for requiring almost zero verification of users wanting to carry out transactions, including a minority that let people act anonymously.

These concerns were echoed this week by US Federal Reserve chairman Jerome Powell.

“We have this burgeoning industry which has many parts to it, and there isn’t in place the kind of regulatory framework that needs to be there,” he told Congress.

However, Changpeng Zhao, the boss of cryptocurrency exchange Binance, has argued digital currencies are no more susceptible to money laundering than physical assets such as cash.

Loading

He rejected calls for a blanket ban on Russian purchases at exchanges, a measure called for by the Ukrainian government, saying this would only hurt ordinary people using the platform for legitimate purposes. Binance carries out “know your customer checks” and abides by sanctions, he added.

Zhao told the BBC: “If people want to evade sanctions, there’s always multiple methods. You can evade sanctions using US dollars, using cash, using diamonds, using gold. I don’t think crypto is anything special there.”

There is some evidence that law enforcement is already adapting to the challenges posed by Bitcoin.

New York husband and wife Ilya Lichtenstein and Heather Morgan were recently arrested by US authorities in connection with one of the biggest cryptocurrency heists on record: the theft of $US4.5 billion ($6.1 billion) of Bitcoin stolen from the Bitfinex exchange in 2016.

‘Good old-fashioned police work’

FBI investigators said they used “good old-fashioned police work” to track a complex string of transactions back to the pair.

Timothy Spangler, a crypto expert and partner at US law firm Dechert, says this is a prime example of the “misconception” that Bitcoin is suited to criminals – or even Russian oligarchs. The real value of Bitcoin, he says, is it gives an alternative route for transferring money.

Meanwhile, the only way it can safely cut banks out of the loop is by maintaining a publicly available ledger of “literally every Bitcoin transaction that has ever taken place”, as a backstop against fraud.

This means that, while there is mountains of information to process, savvy law enforcement agencies with the right knowhow can expose every single deal that criminals or oligarchs strike.

Loading

Linking the string of numbers and letters that represents a Bitcoin wallet to its owner can be as simple as linking it to a device that initiated the transaction, such as a phone.

“Oligarchs could absolutely start putting their wealth into Bitcoin,” Spangler says, “but if they do, I think they will learn some very expensive lessons about its limitations.”

He says ordinary Russians are more likely to adopt Bitcoin during the Ukraine crisis, to try to protect their savings from the collapsing rouble.

This is not a far cry from the original reason Bitcoin was created in 2008, at the height of the banking crisis. Spangler adds: “The central appeal of Bitcoin is: why not be your own bank?“.

It is a question that more Russians – oligarchs or not – will likely ask themselves in days to come.

Daily Telegraph, London

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.