The Ukrainian Government Wants to Stop Pro-Russian Rebels from Trading Bitcoin

After a revolution in Ukraine ousted its president and left the country in social and economic turmoil, it looked like Bitcoin was poised for ascendence. Now, the head of the Ukrainian government's security services wants to "block" Bitcoin, which the government claims is being used by pro-Russian rebels.

In an interview with local Ukrainian media, Valentyn Nalyvaichenko, head of the Security Service of Ukraine (SBU), said that pro-Russian separatists in the contested eastern regions of Donetsk and Luhansk are using Bitcoin to fund their operations.

"Therefore," Nalyvaichenko said (translated by Google), "another aspect of the joint work of the SBU and [State Committee for Financial Monitoring of Ukraine], too—Ministry of Internal Affairs, where necessary—[is] the blocking of accounts, cards, a variety of 'Bitcoin', etc., where the separatists are trying to throw money."

The Ukrainian government previously attempted to financially cripple separatists in the Donetsk and Luhansk regions—where fighting between pro-Russian rebels and Ukrainian forces has lasted months—by shutting down banking services and cutting off funding for all but the most essential of state services like schools and law enforcement.

Bitcoin, it appears, is one of the government's next targets in this campaign.

According to Arvind Narayanan, an assistant professor of computer science at Princeton University and cryptocurrency researcher, the decentralized nature of Bitcoin would make government attempts to shut down access to funds difficult, if not impossible.

"Bitcoin technology, like the internet itself, is a decentralized technology and anyone can download software that's widely available in order to interact with the system to send and receive Bitcoin," said Narayanan. "Trying to shut that down is, basically, trying to shut down internet access for someone. If you don't even have their identity, then that's going to be doubly hard to do. It's not very feasible."

Michael Chobanian, head of the Ukraine-based KUNA Bitcoin exchange, agreed. "You will have to turn off internet everywhere in the world and forever," he said. "It is unfortunate that someone has misled the head of SBU."

But there are ways around this issue, Narayanan said. The Ukrainian government could ask Bitcoin services that act as centralized online "wallets"—sort of like a bank account that sends and receives Bitcoin on users' behalf—to shut down accounts suspected of being used by separatists, for example.

"Many or most of these online services are subject to anti-money laundering regulations, and so generally the user identity is associated with accounts in these systems," Narayanan explained. "If you know who you want to block, and if you have legal authority over the sites these particular users are on—either because they're based in that country or are subject to that country's laws because they have a physical presence there—then you can go to them and ask to terminate those accounts or freeze their assets."

"But really, if someone wants to get around these restrictions and download the software to interact with the blockchain [a public ledger for Bitcoin trades] directly, there's not a lot you can do about that," he added.

The SBU did not respond to Motherboard's repeated requests for comment over email, and its representatives were unreachable by phone.

But what of the claim that pro-Russian Ukrainian separatists are using Bitcoin in the first place? "It is highly unlikely that so-called 'separatists' accept Bitcoin," Chobanian said, "nor that there is a local trader that can convert millions on the local market."

The real reason for the Ukrainian government's Bitcoin blocking threat, Chobanian argued, is that posturing regarding a crackdown on money laundering is required in order to continue receiving much-needed loans from the international community. If separatists are indeed funneling money into Bitcoin wallets, it's in the government's best interest to stop them.

According to Chobanian, Ukraine is attempting to comply with recommendations put in place by the Council of Europe anti-money-laundering group Moneyval, which provides the rubric the International Monetary Fund (IMF) uses to evaluate the nations it gives loans to. Recently, Ukraine received $17.5 billion in loans from the IMF, which could help pull the country back from the brink of total economic collapse.

In a statement announcing the granting of the loan, IMF Managing Director Christine Lagarde lauded Ukraine's attempts to crack down on corruption and money laundering. IMF representatives did not immediately respond to Motherboard's request for comment.

Ukraine's next in-country Moneyval assessment is scheduled for early 2016, according to a global assessment calendar from the international Financial Action Task Force on Money Laundering.

It's unclear whether Ukrainian security services are simply bluffing when it comes to blocking Bitcoin for pro-Russian rebels or not, but with billions in crucial aid potentially on the line, what happens next is anybody's guess.​