Cross-posted from FTAlphaville:
Note: this is just a theory. One of those of things that pops into your head when you’re in the shower after a long run. It may be nuts — and we certainly can’t prove it — but it happens to be consistent with publicly-available information.
Part 1: The North Korean regime benefits from high crypto prices:
While the majority of activity from North Korea during this timeframe was not malicious, there was a smaller, but significant, amount of activity that was highly suspect. One instance was the start of Bitcoin mining by users in North Korea on May 17…The timing of this mining is important because it began very soon after the May WannaCry ransomware attacks, which the NSA has attributed to North Korea’s intelligence service, the Reconnaissance General Bureau (RGB), as an attempt to raise funds for the Kim regime.
By this point (May 17) actors within the government would have realized that moving the bitcoin from the three WannaCry ransom accounts would be easy to track and ill-advised if they wished to retain deniability for the attack.
It is not clear who is running the North Korean bitcoin mining operations; however, given the relatively small number of computers in North Korea coupled with the limited IP space, it is not likely this computationally intensive activity is occurring outside of state control.
–“North Korea’s Ruling Elite Are Not Isolated”, July 25, 2017.
Last week, the PUST [Pyongyang University of Science and Technology] faculty was treated to a splendid talk by Professor Federico Tenga of Italy. He explained in detail the fundamentals of Blockchain Technology and then spoke of its most notable application -Bitcoin. Many excellent technical questions were asked about the inner working of Bitcoin, its risks, and the measures taken to ensure security.
Not only was this talk informative, but it was also motivational in that several research ideas were conceived for possible future thesis topics at PUST.
–“PUST Research Lecture Series continues during the Fall 2017 Semester”, November 14, 2017.
“It is a fact that North Korea has been attacking virtual currency exchanges,” said Lee Dong-geun, a director with South Korea’s state-run Korea Internet and Security Agency. “We don’t know how much North Korea has stolen so far, but we do know that the police have confirmed the regime’s hacking attempts.”
–“North Korea may be making a fortune from bitcoin mania” December 13, 2017.
In November 2017, FinCEN issued an advisory to alert financial institutions about North Korea’s attempts to use front companies to launder money and evade sanctions. This information helps the private sector detect and report such activity, which in turn supports our efforts to target those persons and entities that help the regime fund its weapons program.
Our focus on depriving North Korea of its ability to earn and move revenue through the international financial system means that we must work with other countries to achieve this goal…We lead the world in mitigating the illicit finance risks of emerging technologies, such as the use of virtual currencies…We aggressively pursue virtual currency exchangers and others who do not take these obligations seriously.
–“Testimony of Sigal Mandelker Under Secretary, Terrorism and Financial Intelligence U.S. Department of the Treasury Senate Committee on Banking, Housing, and Urban Affairs”, January 17, 2018.
Part 2: China and South Korea had a summit in December where leaders discussed North Korea:
South Korea’s President Moon Jae-in arrived in Beijing on Wednesday for a four-day visit harbouring hopes of improving political and business relations between the North Asian neighbours…China opposes sanctions in favour of more dialogue with Pyongyang, and Beijing is using the incentive of improved economic ties to tempt Seoul away from the hard line towards Pyongyang favoured by the US and Japan, according to one Asian diplomat.
–“South Korea’s Moon targets China thaw during Beijing visit”, December 13, 2017.
Moon, who advocates dialogue with the North, also called on Beijing to help to chart a peaceful solution to the North Korea nuclear crisis. “I hope we will reaffirm our countries’ joint stance to peacefully resolve the North Korean nuclear problem that threatens peace and security – not only in Northeast Asia but the entire world – and discuss specific ways to cooperate,” Moon was quoted by South Korean news agency Yonhap as saying.
Xi said that Beijing would work with Seoul as the two countries shared “key and common interests” on the nuclear question. “The goal of denuclearisation on the Korean peninsula is unshakeable and chaos and wars will never be allowed on the peninsula,” Xi said.
–“Xi Jinping says war must never be allowed on Korean peninsula as South’s president tries to mend relations on visit to China”, December 14, 2017.
Part 3: China and South Korea have intensified their crackdown on crypto trading:
Measures include a ban on opening anonymous cryptocurrency accounts to boost transparency and legislation to allow regulators to close digital currency exchanges if needed…Earlier this month, South Korea said it was considering taxing capital gains from cryptocurrency trading to cool demand.
—“Bitcoin slips as South Korea threatens to shut exchanges”, December 29, 2017.
On Monday, South Korean financial regulators said they were looking into six local banks that offered virtual currency accounts to institutions to see if they were abiding by anti-money laundering rules and used real names for accounts. “Virtual currency is currently unable to function as a means of payment and it is being used for illegal purposes like money laundering, scams and fraudulent investor operations,” said Choi Jong-ku, the country’s top financial regulator.
–“South Korea clampdown on bitcoin gathers pace”, January 9, 2018.
A multi-agency task force has instructed provincial governments to “actively guide” companies in their respective regions to exit the cryptocurrency mining industry, according to a document seen by the Financial Times. The move to pressure miners follows China’s shutdown of local bitcoin exchanges and its ban on initial coin offerings.
—“China moves to shutter bitcoin mines”, January 9, 2018.
South Korea is planning a bill to ban cryptocurrency trading as a clampdown on virtual currencies gathers pace in one of the world’s most exuberant bitcoin markets…Earlier in the day, South Korean tax authorities raided the country’s main cryptocurrency exchanges — Bithumb and Coinone.
—“Bitcoin tumbles as South Korea plans trading ban”, January 11, 2018.
In other words, it’s possible the recent price collapse below $10,000 per bitcoin is part of a coordinated effort by regulators to apply unconventional pressure techniques on North Korean elites. If so, well done!
(South Koreans who bought near the top and are now petitioning their governmentfor a policy change can be forgiven for disliking this hypothetical plan.)
There are some issues with this theory.
The Chinese and South Korean governments have plenty of other reasons to limit crypto activity independent of any North Korean connection. Bitcoin mining is terrible for the environment because of the electricity that’s required. And neither government wants to sit by and watch people set their money on fire.
Then there is the question of timing. Back in September, both the Chinese and South Korean governments had banned initial coin offerings. Chinese regulators also went after the country’s Bitcoin exchanges in September. Bitcoin was worth less than $4,000 that month — up a lot from where it had been earlier in 2017 but still far below where it is now.
Despite these caveats, our theory could still turn out to be a partial explanation for what has been happening.
