North Korea's crypto activity dangerously underestimated
Watch: North Korea's crypto activity dangerously underestimated - The Crypto Mile
North Korea's exploitation of cryptocurrency back-channels for sanctions evasion is a growing threat and one that has not been fully understood.
The US Office of Foreign Assets Control, OFAC, sanctioned Tornado Cash on August 8 over fears the 'mixer' platform aided North Korean hackers.
But, the illicit funds flowing through Tornado Cash are just the tip of the iceberg and Pyongyang's exploitation of cryptocurrency mixers to aid the proliferation of its deadly arsenal is developing.
According to blockchain analysis, North Korea has successfully seized roughly $1bn worth of cryptocurrency from 2021 to March 2022 alone.
Pyongyang is the greatest state-sponsored cyber threat to the traditional global financial order and to the developing cryptocurrency sector.
On this week's The Crypto Mile, we are joined by King Mallory, the director of the Centre for Global Risk and Security at the RAND Corporation, to talk about how pariah states are using crypto to violate sanctions.
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Mallory explained how North Korea has already used crypto to launder hundreds of millions of dollars of stolen funds.
He said: "Using Tornado Cash is far from the first case."
"At the moment very little can stop North Korea from using other crypto platforms that permit anonymous transfers and do not enforce 'know your customer' rules to aid its import and export flows.
"However, as we already discussed, I expect that governments will increasingly clamp down on such providers.
"Furthermore, I expect governments will move to forbid transactions with providers in jurisdictions that refuse to clamp down on crypto platforms that allow anonymous transfers."
US and EU government agencies are now flexing their ability to strike against the open-source crypto-code that enables pariah states to evade sanctions.
This move by OFAC sets a precedent that has the crypto-industry stepping back with a nervous pause.
The recent developments have led the cryptocurrency ecosystem to find itself at a crossroads; whether to champion the anonymity and privacy provided by the creative algorithms of its brightest developers or acquiesce to the strong-arm tactics of government agencies.
Mallory warned that the window of opportunity for the crypto sector to self-regulate is closing and that major resources could soon be directed by the international community to crush crypto channels that allow sanctions evasion.
Speaking on this week's The Crypto Mile, he said: "The Tornado cash indictment is an indication that the window for the international crypto market to self-regulate if it was ever doing so, is closing.
"I anticipate that governments will increasingly intervene to prosecute and shut down crypto operators that continue to allow anonymous transfers."
One of the developers behind Tornado Cash has now been arrested, and this so-called 'war against code' could imperil any decentralised application or even major crypto-networks such as Ethereum, through guilt by association.
Crypto-clampdown resources expected to soar
The director of the Centre for Global Risk and Security at the RAND Corporation stressed that it is only part of the crypto-ecosystem that allows such anonymous exchanges of funds, such as Tornado Cash, and that he expects governments will increasingly clamp down on such providers.
He said: "Crypto of this kind is allowing sanctions evaders to circumvent the formal financial system and the relatively effective controls that are in place to prevent that system’s abuse."
Mallory estimated that the current share of resources directed at halting cryptocurrency pathways for sanctions circumvention currently lies around 5%.
But, he expects this share will rise as sanction violators increasingly adopt crypto-channels for their illicit funding pathways.
He said: "As the amount of money laundered via crypto continues to move into the billions I expect that share will grow rapidly, perhaps reaching a level as high as 25% within ten years, if the abuse of crypto continues unchecked."
Tornado Cash
Tornado Cash is a transaction privacy tool that works by mixing users’ crypto up in a common pool before sending it off to its intended destination. In this way, it completely obfuscates who sent what to whom, and is contrary to what makes a publicly distributed ledger, or blockchain significant, which is that all trades are visible and cannot be corrupted.
Tornado Cash is not a traditional company, but an open-source software project based on the Ethereum blockchain.
It is run in a decentralised manner by people, usually anonymous, through servers speckled across the earth.
Tornado Cash is maintained by a Decentralised Autonomous Organisation, or DAO, which makes it difficult to corner a direct owner, and seize intellectual property, as the algorithms behind the platform are open source. In 2020, the Tornado Cash team wrote a blog post that said, “from now on, Tornado.cash is largely living by the precepts that code is law.
"No one can modify the smart contracts and the protocol is decentralised and unstoppable, as long as Ethereum isn’t changed or taken down.”
This of course draws the world's second-largest crypto-blockchain by market capitalisation into the fray and the decision to sanction code, and those that interact with it could have far-flung consequences for the 'smart contract' network co-founded by Vitalik Buterin.
A fork in the road
Battle lines are being drawn and the whole cryptocurrency ecosystem that first drew breath when Satoshi Nakomoto launched the bitcoin network in 2009 is at a fork in the road. One way could lead to mass adoption by submitting to the regulatory restrictions and overseeing hand of centralised authority. But, this compromise is anathema to many in the sector.
The other way leads to further antagonism of the powers that be through a multitude of loopholes where government agencies find themselves always playing catch up. But this move could make it impossible for crypto to mature and reach its goal of mass adoption.
In this way, the only hope for bitcoin (BTC-USD), ethereum (ETH-USD) and the plethora of other cryptocurrencies is the full-scale collapse of the legacy systems of finance, trade and governance, and the rise of a new order where the green shoot of a decentralised world sprouts from the ashes of its forebear.
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