The Shady Cryptocurrency Boom on the Post-Soviet Frontier (2024)

Privacy is the key to blockchain’s potential usefulness to sanctioned economies like Crimea’s. Bitcoin, the original and most famous cryptocurrency, keeps its ledger of transactions public, making it hard for anyone using it to remain anonymous. That thwarted Hamas, the terror-listed Palestinian militia, in its first attempt to use cryptocurrencies to gather donations and circumvent the sanctions that block it from gathering money through the banking system. A series of schoolboy errors, such as posting their bitcoin wallet address on public social media accounts and using a US-based cryptocurrency exchange that requires users to input their real name and address, meant that the regulators quickly caught on and shut the wallets down before they had gathered more than a few hundred dollars. Soon though, Hamas and others had figured out new ways to keep ahead of the authorities.

“When Hamas were soliciting donations to their own wallet, it was very easy to track them,” says Brenna Smith, a researcher who has monitored cryptocurrency funding going to sanctioned groups. “The issue is that the group has started using a new wallet for each transaction. The intelligence services have more powerful tools, but tracking them all would require major surveillance.”

Russia’s GRU used fake names, addresses, and email accounts to register the hundreds of bitcoin wallets it used to pay the Clinton email hackers in 2016. Nonetheless, thanks to the public ledger, Robert Mueller’s investigators were able to untangle the web and pinpoint the accounts and transactions.

But there are already private cryptocurrencies with anonymous ledgers on the open market, some developed in the US, which makes it unlikely that Russian intelligence will use trackable bitcoin again. If a place like Crimea were to develop its own cryptocurrency and limit who controls the nodes—the computers that verify each transaction and update the ledger—then the identities of the people making payments would be known only to Russia and its vetted users. Other countries have tried to mint their own cryptocurrencies, most famously Venezuela. Its experiment, meant in part to circumvent US sanctions, was a flop; called the Petro, the currency is not sold on any major crypto exchange or accepted in any Venezuelan shops. Nonetheless, analysts say the effort has formed part of a learning and development process, shared between all nations that are suffering under Western sanctions.

“Russia is prepared to play the long game. It can wait years until it gets a net return,” Smith says.

Kulachenko is coy about what exactly his network is developing, but the end goal, he says, is to develop an entirely self-sustaining cryptocurrency system that cannot be intercepted or cut off by any outside hand. That means not only building the mining servers and all components in Crimea to evade embargoes, but also thinking about how they could be run off-grid, using solar power or other renewables.

“We have to pay for the electricity for the mining in dollars, euros, or rubles, so at the moment we can’t say that cryptocurrencies are independent. And we can’t speak about freedom because the electricity providers can switch off the supply,” he says. “But we’re at the beginning of a new digital world. The financial system should be free. It should be controlled only by the algorithm.”

If a new crypto order is coming, then Vladimir Putin has a sprinting head start. Russia’s huge energy reserves and ready-made network of underused power plants is the cryptocurrency equivalent of a blank check. The US, complacent in its old position as gatekeeper of global finance, hasn’t yet fully grasped the danger. Some US states have passed blockchain laws, but the treasury hasn’t yet touched it. (Although the IRS is pursuing cryptocurrency traders for tax on their profits.)

The most obvious and easiest first step is to target the exchanges—the entry and exit points where cryptocurrencies are changed for traditional money. After all, there is still little that you can spend digital money on in the real world—for now—outside the dark web and at isolated businesses, like a handful of luxury car dealerships. The Financial Action Task Force, a Swiss-based global money-laundering and terrorist-financing watchdog, introduced rules for digital currencies in June, including a requirement that exchanges carry out checks on their customers and share information, just as banks are obliged to do. To date, it’s the most ambitious global attempt to contain and control cryptocurrencies’ nefarious potential.

Belarus has adopted the task force’s guidelines, but there are no signs that Crimea, Transnistria, or Abkhazia will do the same, even as they cherry-pick bits of Belarus’ regulatory system. The task force has few teeth other than putting countries on its black and gray lists, which can damage their credit rating. North Korea and Iran are on the lists, but currently Russia is not.

“You either abide by the law, or you don’t touch US citizens and you develop a parallel system in the East,” says Denis Aleinikov, the lawyer whose firm helped draft Belarus’ cryptocurrency legislation. “We recommend all our clients abide by the law. But the US should understand that the world needs to move ahead. This is not a joke, it’s not just speculation about the future. Nobody can stop disruptive technology—not even the US.”