Crypto has been the common currency for global espionage since the birth of Bitcoin. Bad actors are increasingly using digital assets to fund illegal activities. However, law enforcement is not taking the threat seriously enough.
Matthew Hedger, a former Central Intelligence Agency (CIA) officer and an expert on money laundering, insider risk and organized crime, told Beincrypto that state officials using crypto in global espionage are not new. Nevertheless, the US is already more than a decade behind its ability to identify, track and contain these cases.
Crypto’s secret global spying is on the rise
The use of cryptocurrency has always been linked to illegal activities. Its boundless nature and perceived instability have become an important tool for illicit schemes.
The rise in brightening cases that explicitly link cryptocurrency to bad actors only reinforces this troublesome reality.
In 2023, Polish authorities dismantled the Russian spyring of young, untrained agents employed online for obstruction of Ukrainian aid that received crypto payments.
By December 2024, UK destabilization had dismantled a multi-billion dollar Russian-linked money laundering network. Entities like Smart Group used Cash-to-Crypto swaps to fund espionage, avoid sanctions, and washed illegal proceeds worldwide.
Earlier this month, US prosecutors allegedly laundered more than $530 million in cryptocurrency to Russian National IURII Ggnin, funded the Russian intelligence agency and diverted it to sanctions.
Last week, Reuters released an investigation into Leikenpavan, a Canadian teenager who was arrested in Poland after spying on the Russian intelligence news and confessing that he received Bitcoin payments from his handler.
Cryptography is often seen as a tool for common criminals, but state actors have been using it since their inception.
Veteran’s perspective: Crypto as an established threat
Hedger, a former intelligence agent with 17 years’ experience in the CIA and National Security Agency (NSA) intelligence news community, has long argued that Crypto has been one, rather than becoming a new medium for global espionage.
“Maybe around 2013 (or 2014), it really took off for the intelligence reporting agency. All the big ones started using it heavily. So we think it’s 10 years. We haven’t seen it happening. We’re already there.”
Hedger’s conviction is facilitated by first-hand experience by using Bitcoin for intelligence reporting agencies and seeing how other parties use it for state-sponsored activities.
Given its inherent properties, cryptocurrencies fit almost naturally into these activities.
“It’s much better suited to the intelligence reporting agency than Fiat currency, primarily due to its ability to cross borders. If I spend more than $10,000 internationally through the airport, I risk being arrested.
Blockchain analysis has evolved significantly since the invention of Bitcoin, but it has not evolved so highly enough to easily decipher cases involving state-sponsored spying.
Is human Intel the key to breaking crypto spy cases?
In an analysis of various cases of global spy, Hedger highlighted the importance of the human element in dividing some of these cases.
In Pavan’s case, investigators had no starting point for blockchain analysis until Pavan flipped over himself.
“In many of these cases, it wasn’t like that when someone sat down and analyzed the blockchain and said, ‘Oh, there’s this malicious activity going on here.” “Like this kid, I said, “Hey, I’m turning myself, I’m talking to the police,” and pointed first towards the blockchain address,” Hedger said.
Only after Pavan pointed the investigators in the right direction would they find the $600 million umbrella wallet that had been paid for.
“But on the contrary, they still couldn’t attribute $600 million to the owners, so if someone pointed out and said, ‘That pot was involved in something bad’, I think it would work very well. But it’s very difficult to just look at the whole blockchain and say there’s something wrong over there,” Hedger added.
At the same time, certain details of the Pavan incident made Hedger more aware of some of the operational abilities of these Russian actors.
Russia’s calculated inattention
The Pavan case has undergone considerable scrutiny from security experts and analysts. Many characterized minor spy recruits, as untrained amateurs like Pavan, imply that Russia acted out of carelessness and despair.
For Hegger, using teenagers as spies was “immoral,” and details of the incident showed that Russia’s seemingly careless behavior was calculated and intelligent, contrary to popular belief.
Pavan received a very small bitcoin transfer via Telegram for his nutrition. They were particularly minimal considering they came from over $600 million.
Pavan was hired as a spy, but he was given surprisingly little security.
These details potentially show that the Russian intelligence agency knew that Pavan was not suitable for the job. After all, he turned himself under the influence of alcohol and in a vulnerable state of mind.
Because Pavan was an amateur, Russian intelligence did not waste the more refined tools of his toolbox.
“We know that Russians can wash the code correctly when they need it. The best techniques to protect someone are reserved for something invaluable and we trust that we won’t publish it in our playbook, Hedger told Beincrypto, saying, “And they paid him very low and they used the worst trade craft, so they thought it was likely that the information would come out. And they were right.”
The Pavan incident illuminated Russia’s calculated approach to seemingly careless spying, but also highlighted the harsh reality of global preparation.
To what extent is the US not being liquidated?
According to Hedger, the US is dramatically behind tackling the crypto spy threat.
“We’re 10-15 years after the game. We had to change 10 years ago, and now the issue is huge.
For him, the Iurii Gugnin case was the only US case in which investigators effectively and thoroughly combined with traditional financial research techniques to put together a $530 million spying scheme. That was an exception to the rules.
“Now I have friends in law enforcement. They say to you, ‘We only catch the stupid things’ and if it’s a clever person, that’s because there was leakage to the organization.
Several factors contribute to the US’ inability to keep up.
The need for new expertise
Hedges contain a huge knowledge gap between criminal washing machines and investigators who specialize in money laundering.
“If you take someone who is an anti-money laundering investigator, there’s no chance they’ll be able to wash their money on their own,” he told Beincrypto.
According to him, the only solution to this issue is to work with former moneylanders, who were run by law enforcement and intelligence agency using Crypto.
“There hasn’t been a complete change in the type of people that hire on the side of law enforcement.
These ideas are nothing new to law enforcement. They often used confidential informants to gain intelligence regarding other businesses, such as drugs, organized crime, and anti-terrorism.
However, this is not just an issue that American intelligence finger leadership must address to make up for lost time.
Underrated rog
Hedger criticizes the arrogance of law enforcement and their useless tendency to misunderstand those involved in money laundering as “silly.”
“When we classify the opposition as these unsleashed Neanderthals and underestimate them, of course we will not notice the most sophisticated movements they are making, as we create a cognitive blind spot,” he said.
After all, these are entities with abundant resources at will.
“They are billion-dollar organizations that can get the best help in the world to solve problems like big companies, and they certainly do that when it comes to cryptocurrency washing,” Hedger added.
He attributes part of this issue to the disconnection of information between intelligence reporting agencies and law enforcement agencies.
Intelligence Agency began tracking cryptocurrency just as early as the invention of Bitcoin in 2008, but law enforcement has recently begun to tie the two together.
“There are a lot of stove plumbing in the intelligence reporting community and law enforcement. We don’t talk very well to each other, and in many cases we don’t do very well. So, Intelligence reporting agencies started using this, but it wasn’t telling law enforcement what was going on.
Better communication between the different institutions fighting the same battle is important.
Will our efforts rise to that opportunity?
Since retiring from the CIA two years ago, Hedger has argued for changes in how American law enforcement handles crypto-related spy cases. He hasn’t seen the changes he needs yet.
“(It’s) in my opinion, I’m going to get a lot of cooperation that doesn’t exist at this point,” he concluded.
Escalating global tensions inevitably drives an increase in espionage. Importantly, the role of cryptocurrency in these activities remains a heterogeneous and growing factor.
This threat raises the key question of whether it proves appropriate to meet these increasingly increasing threats.
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