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North Korea appears to be funding itself with bitcoin, according to a recent report. Recorded Future, an intelligence research firm backed by Google Venture and In-Q-Tel (a venture capital firm funded by the CIA), reported that North Korea began "mining" bitcoin on May 17 and could be using the digital currency to generate income for the regime.
The United Nations Security Council on Monday unanimously approved new sanctions against North Korea, the harshest yet — capping North Korea's oil imports, banning textile exports, ending additional overseas labor contracts. Bitcoin "mining" could become a viable income source for this further-isolated nation that's craving nuclear weapons.
"We weren't able to determine the volumes, like how many bitcoin they can generate per certain time period. We could just see activity," said Priscilla Moriuchi, the director of strategic threat development at Recorded Future.
"First [hypothesis] is that the activity is sponsored by the state, as a way to generate funds for the regime," said Moriuchi. "The second hypothesis is that it's an individual user, among this small sliver of leaders and their families who have access to the internet."
"Mining" is a process of earning bitcoins. Miners use high-performance computers to solve complex mathematical problems and verify bitcoin transactions online. In return they are rewarded with bitcoins.
But who would be capable of pulling off such activity in the autocratic country? After all, most North Koreans have no access to the internet. Only a small minority of users — university students, scientists and select government officials — have access to Kwangmyong, a domestic intranet "that offers email and websites but is totally shut off from the rest of the world," according to a Slate article.
"Only the most senior leaders and ruling elite are granted access to worldwide internet directly," Moriuchi wrote in her report. North Korean elites access internet primarily through three IP ranges, one of which is assigned by China Netcom.
Bitcoin one-year price chart
Bitcoin has more than tripled in value this year to $3,800, and North Korea's neighbor and biggest trading partner, China, is also a major player in the bitcoin world. More than half the newly mined bitcoins come from mining pools in China.
Chinese companies such as Bitmain and Canaan also dominate the bitcoin-mining hardware games. Their ASIC miners — computer cards that mine bitcoin 50 times faster than traditional video graphics cards — have become the go-to mining tools for large-scale mining operations.
Jonathan Mohan, a blockchain consultant and the founder of Bitcoin NYC meetup, said, "It wouldn't surprise me if, perhaps, hypothetically, North Korea were to have pre-existing business relationships in China that wouldn't mind purchasing bitcoin from them, and then just disseminating it to the Chinese market as you would with any other bitcoin."
The Chinese general administration of customs did not respond to CNBC requests for comment.
In 2014, the U.S. Treasury Department addressed concerns about how digital currencies can be used by countries looking to evade sanctions: "If a sanctioned entity could use virtual currencies to transact anonymously, our sanctions would have a weaker bite."
A year before that, Treasury's Financial Crimes Enforcement Network (FinCEN) asked digital currencies exchanges — platforms for buying, selling and storing digital currencies — to register with FinCEN, and "report suspicious transactions to adequately guard against money laundering and terrorist financing abuse." Many digital currencies exchanges have since registered, including Coinbase, one of the major exchanges.
Coinbase does not operate in North Korea or other sanctioned countries and would not comment to CNBC on any North Korean bitcoin activity.
Any North Korean activity in bitcoin is likely a tiny fraction of global trade activity. The total trade volume of bitcoin was nearly $2 billion, according to CryptoCurrency Market Capitalizations. Also, Recorded Future's report is based on a limited dataset from April 1 to July 6, provided by its intelligence partner, Team Cymru (a nonprofit Internet security research group).
"It's possible they [North Korea] have been "mining" bitcoin for a while, but they stopped for a period of time. ... or maybe they are using infrastructure and computers in other places," said Moriuchi. "We happen to have the view to this one snapshot for this one period of time."
At first, Moriuchi and her team at Recorded Future were looking to develop some type of tools or warnings of North Korea's missile launches. They just happened to stumble across the bitcoin "mining" activity.
"One week, when I retrieved the data for the week of May 17, I noticed there was unusual amount of bitcoin activity that I have not seen before ... from nothing to hundreds of data points a day, clearly bitcoin mining. And it was ongoing, through the end of my dataset," said Moriuchi.
She also flagged the bitcoin "mining" as "suspect activity" in the report. "Bitcoin ['mining'] in itself is not criminal by any means; it's not a suspect activity. But the timing of that activity was an interesting correlation with the WannaCry [cyber]attack," said Moriuchi. The "mining" started five days after the cyberattack, which locked tens of thousands of computer and data files for ransom payments in bitcoin. The attack has also been attributed to North Korea by the U.S. National Security Agency.
North Korea is drenched in chronic economic problems, due to a one-sided focus on military spending and decades of economic sanctions from the international community. Under the U.N. sanctions imposed in August, China has banned imports on North Korea's iron, coal and seafood, which accounts for about 35 percent of North Korea's trading income. North Korea may be "mining" bitcoin as a way to get around the tighter sanctions.
It also helps that bitcoin is an open and decentralized network, making "mining" a legal and relatively easy activity for anyone who has access to the internet.
Ultimately, it's up to the international community and the bitcoin community to decide whether they're comfortable trading bitcoin with North Korea.
"People are still free to choose who they want to interact with, so if enough people choose to reject bitcoin that are associated with North Korea, then North Korea wouldn't be able to do anything with bitcoin," said Nchinda Nchinda, internal operations officer of MIT Bitcoin Club, a cryptocurrencies research organization run by Massachusetts Institute of Technology students.