Cryptocurrency is Too Immature to Help Russia Dodge Sanctions. But it Could Cause Similar Measures to Fail in the Future.
It’s a reasonable question, something like comparing the weight of a rock to the length of a line: Will cryptocurrency permit Russia to evade financial sanctions more than it facilitates aid to Ukraine?
As it stands, cryptocurrency is probably too small and immature to have a significant effect on the titanic financial battle the United States, its allies, and its partners are waging against Russian interests in lieu of direct kinetic action. But what happens when cryptocurrency is more significant? Sanctions need not fail in a crypto world, but they may have to change.
Several years ago, while I was advising the Bitcoin Foundation, I was put in touch with an investigator from a government in Oceania who said he was seeing Bitcoin used to fund child exploitation. The anonymity of transactions has receded a great deal since then. Network analytics firms can ferret out movements of value with surprising skill, and exchanges that are fully compliant with financial surveillance mandates make it all the easier. But at the time, it was looking like Bitcoin could form up as too-useful a criminal tool.
I tried to figure out how a community of technology users who were fierce defenders of privacy could help thwart criminal uses of Bitcoin. It would be a failure if the Bitcoin (now cryptocurrency) community were so oppositional to promiscuous government data demands that it allied with criminals by resisting legitimate law enforcement and national or global security needs.
That word, legitimate, is actually the nub of the issue. The solution I devised was to move the decision about the legitimacy of investigations out of legislatures, courts, and law enforcement agencies and into the community.
In a way, cryptocurrency networks are like traditional payment networks turned inside out. Traditional networks prevent law enforcement from seeing much of anything, but when they have something to go on (a warrant in the United States), they can get lots of information about particular transactions and transactors. With most cryptocurrencies, law enforcement can see all transactions and analyze them extensively, but it is more difficult to link transactions to transactors. These are vast oversimplifications, but they represent the basic dynamics.
I can’t imagine and wouldn’t support a global system for seizing non-public cryptocurrency transaction data related to criminal activities. The better approach is to ask nicely for information, making the case to the community that there is a legitimate law enforcement or security interest at stake. This can be done globally in a partially automated way.
The system I envision has two parts: organizations that vet law enforcement/national security requests for the community, and wallet software that facilitates information-sharing when people experience monetary proximity to wrongdoing.
Veterans of the spam wars still probably feel ghost pains from the early years of blacklisting, but the concept here is the same. Law enforcement agencies and others with suspicion that a certain cryptocurrency address was used to transfer proceeds of crime, for war-making, kleptocracy, and so on would submit evidence to an organization or a group of them. Those organizations would adjudicate the request on behalf of the community and decide whether to recommend bringing information forward.
The wallet software would resemble a highly focused and relevant Amber Alert. It would provide users notice when an input to a transaction they had participated in was adjacent to wrongdoing. It would offer the user the opportunity to report the facts and circumstances around their transaction so that leads could be pursued, wrongdoers apprehended, kleptocrats and war-makers stymied, and so on.
This idea is audacious, and there are countless details to sort out, such as the proof needed to signal the community, the mechanics of information-sharing, remedies for abuses of the system, and so on. I conceived of this idea before shielded transactions came into their own; I can see engineering challenges in having a system like this on such networks. But it’s a crypto kind of audacious.
Backers of independent global value-transfer networks should see this kind of thing as an important adjunct to their work. Ransomware and hack after hack on cryptocurrency service providers have produced a system of shadow wealth that clouds the reputation of this world. The cryptocurrency community should want to assure that such networks are used for maximal good and minimal evil. Today, with the pillars of European security under Russian military siege, it’s worth thinking about integrating cryptocurrency into global security — in a crypto kind of way.
Jim Harper is a nonresident senior fellow at the American Enterprise Institute.
