Myrotvorets, a controversial independent Ukrainian website that claims to track persons threatening Ukraine’s security, has called on the authorities in Kyiv to investigate Russia’s alleged use of cryptocurrencies (via the WEX digital currency exchange platform) to fund subversive activities potentially in support of one of the candidates in Ukraine’s presidential runoff election, scheduled for April 21 (Facebook.com/Myrotvorets4world, April 8). Myrotvorets contends that, on February 25, it obtained an e-mail written by Andrey Pinchuk and addressed to the “beneficiary owner of the WEX exchange,” Dmytro Khavchenko, who resides in Crimea. While the specific presidential campaign–related allegations pertaining to this incident should be treated with utmost scrutiny, the news nevertheless sheds light on Moscow’s apparent use of digital currencies to fund its ongoing “hybrid” (New Generation) war against Ukraine and possibly in other Eurasian conflicts.
The first named figure in the Myrotvorets allegation, Andrey Pinchuk, served as the initial “minister of state security” of the Moscow-backed self-declared Donetsk People’s Republic (DPR), from July 2014 through February 2015, and is one of the founders of the Donbas Volunteers Union (News24today.info, March 24, 2017). Pinchuk previously worked for the “security ministry” of the separatist Moldovan region of Transnistria. And after his high-level role in separatist Donetsk, he headed Rostec Corporation’s Security Department in Moscow. Pinchuk personally asserts that he has retired from the Russian Federal Security Service (FSB) (Moskovsky Komsomolets, June 4, 2017), although Myrotvorets refers to him as an “undercover FSB officer.”
The second person of interest is the alleged beneficiary owner of the WEX crypto exchange, Dmytro Khavchenko (a.k.a. Moryachok). He purchased the once highly popular crypto exchange BTC-e in the second half of 2018, in his daughter’s name, and subsequently renamed this exchange WEX to avoid sanctions. A year earlier, the United States’ Federal Bureau of Investigation (FBI) had seized BTC-e servers in a case related to cybercrime and money laundering (RBC, July 4, 2018). Reportedly, the notorious hacker group Fancy Bear (believed to be linked to Russian military intelligence) had also been using this exchange (RBC, December 13, 2017).
The apparent motivation behind Khavchenko’s investment was to use crypto currencies to fund the separatist regimes in each of Moscow’s unrecognized proxy states across the former Soviet Union—i.e., the Donetsk and Luhansk People’s Republics (DPR, LPR), Transnistria, as well as the Georgian territories of Abkhazia and South Ossetia—thereby avoiding Western sanctions (RBC July 4, 2018). Indeed, the de facto authorities of Crimea (RIA Novosti December 11, 2017), Abkhazia, Donbas and Transnistria have themselves publicly expressed interest in using cryptocurrencies to circumvent international sanctions on their financial transactions (Meduza, October 17, 2017).
Reportedly, Khavchenko’s deal to buy the WEX digital currency exchange was backed by Russian oligarch and “DPR and LPR supporter” Konstantin Malofeyev. Although both Malofeyev and Khavchenko have publicly denied the former’s interest in WEX (RBC July 4, 2018). Besides supporting conflicts in the post-Soviet space, Khavchenko also declared that his interest in cryptocurrencies stems from a desire to weaken the global influence of the US dollar (BBC—Ukrainian service, December 5, 2018).
Meanwhile, the Security Service of Ukraine (SSU) has long been preoccupied with tracking crypto payments to “unidentified representatives of the DPR and LPR” (RBC, February 9, 2018). The SSU has also flagged multiple cryptomining operations in occupied Donbas and concluded that the generated funds were being used to buy materiel and finance military and information operations (Ukranews.com, February 1, 2018). According to Ukrainian court documents, “nationalized” enterprises in occupied Donbas have been observed converting income into cryptocurrencies online and then attempting to convert the crypto into cash (US dollars) on Ukrainian-controlled territory (Sud-report.org.ua, June 8, 2018).
In addition to schemes for using crypto to support Moscow’s proxy “republics” and annexed Crimea, an idea has been floated in the past to create a “national cryptocurrency” for the Russian Federation as a means to help shield the country from Western sanctions. One of the foremost proponents of this suggestion was Kremlin adviser and economist Sergey Glazyev, whom Kyiv has accused of helping to manage 2014 Russian “hybrid” aggression against Ukraine (RIA Novosti, December 12, 2017; Meduza, August 22, 2016). At the same time, the FSB’s cryptographic specialists have reportedly been involved in designing a homegrown cryptographic accounting (so-called “blockchain”) system for new digital currencies (see EDM, September 11, 2017).
Crypto and related blockchain technologies are already quite popular among Russian businesses. And some companies, like the instant messaging service Telegram (TechCrunch, May 3, 2018), have considered so-called Initial Coin Offerings (ICO) as a way to raise capital while avoiding interference from the Russian government. Nevertheless, cryptocurrency has so far officially been treated with caution by all relevant Russian government agencies, including the Kremlin (TASS October 10, 2017), which fear its use in criminal activities such as money laundering, illegal drug flows and terrorism financing. The Russian parliament has yet to consider the bill on cryptocurrencies drafted by the Ministry of Finance in December 2018. At the same time, Russian scholars have been analyzing the risks of using crypto for funding illegal activities. Dmitri Larin has observed that the costs of tracking cryptocurrency miners and transfers are often too high; thus, law enforcement responses are often limited to wholly shutting down crypto exchanges (Cyberleninka.ru, 2018, accessed April 14, 2019). Whereas Elina Sidorenko argues that encryption complicates attempts to identify users of coins; the decentralized blockchain network is unfavorable to surveillance of cryptocurrency mining; while the transnational environment of cyberspace requires international integration of law enforcement efforts against cybercrime (Cyberleninka.ru, 2017, accessed April 14, 2019).
This paradoxical pattern of Russia using crypto and blockchain technology to achieve state goals and objectives while simultaneously attempting to restrictively regulate its expansion at home is likely to persist for the foreseeable future. Russian Central Bank representatives even speculated two years ago that they might consider shutting down all domestic crypto exchanges and restrict access to online foreign-domiciled exchanges (TASS, November 7, 2017). Russia’s use of cryptocurrencies to finance warfare and subversion, as the aforementioned Ukrainian cases show, will require a response based on an integrated intelligence approach, combining technology and human efforts. For Kyiv, close coordination with allies and partners will thus remain essential in its efforts to counter and deter Moscow.