[Note: the content below was originally sent to clients and contacts on a private weekly note from Post Oak Labs on July 15, 2018.]

Earlier this week, the Mueller investigation indicted a dozen GRU officers as part of its investigation into the 2016 elections.

In the indictment, the DoJ alleges that these officers used bitcoin to finance some of its operations.  This was not limited to simply exchanging bitcoins for services, but also mining them. It is unclear how many bitcoins were mined or which specific mining pool was involved.

If you have read my articles and papers in the past, this is an issue I and others have raised with respect to FMI: the possibility of illicit actors not only running infrastructure but profiting and having the ability to launder proceeds of crime.  See “know your miner” in Chapter 3.

For example, in early 2015, after publishing Consensus as a service, several coin journalists chain’splained to me that it is not a problem if North Korea or other actors were running mining pools that regulated institutions used to process financial instruments.  This was back in the heyday of maximalism — the view that everything would run on top of Bitcoin, laws be damned.

Turns out, they were probably wrong because financial institutions likely would be violating AML / OFAC / sanctions check requirements if they were sending payments to pools/miners that were sanctioned and/or located in sanctioned countries.  Vendors such as Symbiont eventually shifted to non-public chain infrastructure because of this legal constraint too (though they originally started by using Bitcoin).

An ironic thing that most of the ideological bitcoin proponents miss is: that savvy state actors could be using the infrastructure nominally built by anarchists… in order to carry out the state-sponsored activities (such as what the GRU allegedly did, but also less sophisticated operations).

Why did the GRU use bitcoins?  According to the indictment, to avoid direct relationships with traditional financial institutions.  We can only speculate at this time for other reasons but consider that if you mine a coin, a 3rd party cannot immediately track the purchase of newly minted coins… because they haven’t been purchased.  This is one reason why “virgin” coins carry a premium over others. For instance, Blocktrail provided the service (although it has since removed its announcement).

In the future, perhaps mining equipment manufacturers could be subpoenaed to learn their customer list, but keep in mind that there is a secondary market for miners as well, and some of those have ended up in both North Korea and Russia.

Anyone have a guess for how much state-sponsored activity comprises cryptocurrency networks today?

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