What billionaires, dictators and criminals have in common

Facebook CEO Mark Zuckerberg. Photo / AP

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What do murderous communist dictators, social media billionaires, sundry scammers and ransomware criminals have in common? They're mad keen on cryptocurrencies.

Facebook might have grand plans to create a global cryptocurrency for legal use, but virtual money has so far facilitated mainly crime and sanctions busting.

You could argue that that happens with fiat money too, and you'd be right. Seeing Westpac across the ditch getting slammed for millions of infractions of anti-money laundering regulations in November is a case in point.

Nevertheless, everyday legal uses of cryptocurrency are still rare. The day when it's possible to buy an iceblock at the dairy for 0.000276765 Bitcoin is not yet here.

Even in the rare case when a cryptocurrency is officially backed, like with Venezuela's Petro, people don't want to use it. Only around 400 Venezuelan businesses accept Petro, and the country's government is trying to encourage citizens to use the cryptocurrency by giving them US$30 worth for Christmas.

Using Petro means registering with the government for an app with a digital wallet; let's just say that Venezuelans don't quite trust its president Maduro, the government and military enough to do that.

In New Zealand, IRD gave the all-clear last year for salaries and wages to be paid in cryptocurrencies, as long as they're taxed when changed into NZ dollars. It's not clear how the inevitable losses and gains in value would be treated, if your monthly nominal salary of $5,000 doubles or halves the day you change the Bitcoin or Ethereum into dairy-accepted money, as open cryptocurrencies' exchange rates see-saw insanely.

One reason cryptocurrencies fluctuate so madly in value is that they're used to pay for crime, or used in scams.

Bitcoin dropped by roughly a quarter back in 2013 when Russ Ulbricht who ran online drugs, guns and hitmen for hire marketplace Silk Road was arrested.

In 2019, a giant Chinese cryptocurrency-based Ponzi scheme, PlusToken, unravelled. It was shut down in June last year with six of the scammers arrested in Vanuatu.

Some of the PlusToken scammers are still on the run, and tried to cash out the more than US$2 billion worth of cryptocurrency they had filched. The cash-outs were done through a convoluted chain of systems set up to obfuscate movements between cryptocurrency addresses.

Cryptocurrencies continue to capture international interest. Photo / Getty Images

Somewhere in the region of US$185 million was cashed out by the PlusToken scammers, and those "whales" or large transactions saw Bitcoin drop from around US$10,000 to US$8,000.

Closer to home, there's the ongoing saga of the failed Cryptopia currency exchange. In January last year, Cryptopia was hacked and US$16 million might have been taken.
This included funds denominated in the popular Ethereum coin, as well as CENNZ tokens issued by local blockchain company Centrality.

Apparently, some 48 million CENNZ tokens disappeared; each of these is valued at US$0.0929 as of writing (CENNZ saw a dramatic jump in value in October) which makes a total of just over US$4.4 million.

A security company named Peckshield traced the movements of some of the cryptocurrency taken by the hackers from Cryptopia in May.

The hackers obfuscated the movement of the Ethereum between addresses but Peckshield's trace went to Singapore-based exchange Huobi, which said it had frozen the funds transferred by the hackers.

Normally cryptocurrency trades would be recorded and verified in the immutable blockchain database with linked and cryptographically verified records. Not so at Cryptopia where trades were recorded in an internal ledger and not entered into the blockchain.

One of the addresses in the transactions trace appears to have almost US$2.9 million worth of Ethereum stored. Unfortunately, Peckshield did not respond to emails asking for an update on the transfers but maybe Grant Thornton will have some news as to the location of the funds later this year when the liquidation of Cryptopia is finalised.

Interestingly, Huobi also uses an internal ledger instead of recording transactions on the blockchain and the exchange was involved with the PlusToken cash-outs.

While it has recovered some money from the remnants of Cryptopia, Grant Thornton ran into a wall trying to figure out who owns the crypto funds stored in the exchange. It found that the cryptocurrency assets of over 920,000 active Cryptopia customers were pooled into the same coin wallets.

"Customers did not have individual wallets and it is impossible to determine individual ownership using just the keys in the wallets," the liquidators wrote.

Nicolas Maduro, president of Venezuela, announces the introduction of a blockchain of the crypto currency Petro at a press conference. Photo / Getty Images

Grant Thornton also found 29 Cryptopia accounts with an internet protocol (IP) address in North Korea. Of these, 28 were verified by Cryptopia, but that was simply a look up of their addresses on Google Maps.

Given the strict anti-money laundering and know your customer obligations nowadays, Grant Thornton quite reasonably expects that some Cryptopia customers won't put in claims as this would require them to waive their anonymity.

Crime, hacks, slow and pricey transactions, wild value fluctuations and lack of usability notwithstanding, cryptocurrencies won't go away.

Nation states are becoming seduced by the notion of strictly controlled and centrally managed cryptocurrencies via permissioned blockchains that only the authorities can see in full.

DCEP (Digital Currency Electronic Payment) has been in the works for a few years now, and China is meant to go live in 2020, pegged at equal rate to the Renminbi.

To prepare for DCEP, China has a new passphrase management law kicking in this month.
This separates them into core, common and commercial passphrases; the former two will be strictly regulated by the Chinese authorities, with the latter category being developed by private industry.

A centralised password management system for a communist party-controlled cryptocurrency that allows for accurate tracking and recording of individuals and organisations' transactions.

Bank accounts? DCEP users don't need bank accounts - just digital wallets on networked, touch-and-pay enabled smartphones.

In theory, DCEP could do away with money laundering and corruption while providing transparency and accountability. In practice, it means minting a Dystopia Coin that shifts even more power and control to Chinese authorities who get full view of people's financial lives.

And that's a rich irony only virtual money, originally thought up as a libertarian device to avoid putting your trust in state authorities and everyone else, can buy.