Is North Korea’s crypto-funded nuclear programme at risk following FTX collapse?

North Korea has for years relied on stolen cryptocurrency to fund its expanding nuclear arsenal
While it is difficult to tell how much it has lost following the crash of FTX, experts estimate Pyongyang’s crypto haul has lost 80-85 per cent of its value

James Jin Kang

Published: 7:00pm, 1 Dec 2022

Why you can trust SCMP

Since the world’s second-largest cryptocurrency exchange, FTX, declared bankruptcy this month, the flow-on effects have been felt far and wide.

But among the many victims are also some not-so-innocent parties. For North Korea, a country facing heavy sanctions, cryptocurrency theft has been a (relatively) simple way to fund the country’s expanding nuclear arsenal.

It is well documented that Kim Jong-un’s military operation hackers have been stealing cryptocurrency to support North Korea’s nuclear and missile programme for several years.

But with the general downturn in the cryptocurrency market, coupled with the recent FTX collapse and myriad other pitfalls, analysts estimate North Korea has probably lost most of its cryptocurrency haul.

Can we expect its development of nuclear weapons to come to a halt, or slow down? It seems unlikely.

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Terrifying moments for Japan train passengers as North Korea missile launch triggers alerts

What North Korea’s hackers have been up to

North Korea sponsors several hacker groups, including Lazarus Group (also called Guardian of Peace and Whois Team) and Advanced Persistent Threat 38 (APT38).

While nobody knows exactly how many North Korea-backed hackers there are, experts have estimated Kim Jong-un has between 6,000 and 7,000 working both inside and outside the country.

North Korea has invested in its national cybercrime arsenal for some 15 years. It is almost impossible for an organisation to defend itself against an army of this size and calibre once it comes charging.

In 2016, Lazarus hackers came close to stealing US$1 billion from Bangladesh’s national bank, but a typo in the computer code meant they ‘only’ got away with US$81 million.

North Korean hackers stole US$400 million in cryptocurrency

Since then, they have refined their methods. Lazarus has been accused of stealing well over US$1 billion more from cryptocurrency exchanges, including US$571 million between January 2017 and September 2018 and US$840 million in the first five months of 2022 alone.

According to Chainalysis, which aims to solve high-profile criminal cases involving digital assets, North Korean hackers have stolen about US$1 billion in cryptocurrency this year. A large chunk of this would have come from Lazarus’ massively lucrative heist against the NFT (non-fungible token) based online game Axie Infinity. In April, US authorities held the group responsible for stealing US$620 million in cryptocurrency from the game.

For context, it is estimated that North Korea only earned about US$142 million from trade exports in 2020.

North Korea’s leader Kim Jong-un poses with his daughter, presumed to be his second child Ju-ae, during a photo session at a weapons site. Photo: via EPA-EFE

Okay, so how much has it now lost?

It is difficult to say exactly how much cryptocurrency has been stolen (and used) by North Korean hackers, and therefore how much might remain.

In June, blockchain analyst Nick Carlsen, who used to be an analyst for the FBI, told Reuters that one of North Korea’s cryptocurrency caches had lost 80-85 per cent of its value in a number of weeks, falling to less than US$10 million.

Losses will have intensified following the FTX collapse. According to a Chainalysis report, in January North Korea held about US$170 million in stolen unlaundered cryptocurrency, taken from 49 hacks conducted from 2017 to 2021. The report also claims Ether was the most common cryptocurrency stolen by North Korea in 2021, making up 58 per cent of the total theft.

Ether’s value fell by more than 20 per cent following the FTX crash and remains low. It is reasonable to expect North Korea will wait before cashing out. When it does, experts looking on will be in a better place to figure out how much it has.

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North Korean missiles land in South Korean waters for first time

Why steal cryptocurrency to fund nuclear weapons tests?

The United States, South Korea and Japan have been warning North Korea against conducting a seventh nuclear test. But Kim Jong-un does not seem to be letting up. On Saturday, at the launch of North Korea’s largest ballistic missile yet, he told state media the “ultimate goal is to possess the world’s most powerful strategic force, the absolute force unprecedented in the century”.

International sanctions and border closures due to Covid-19 have made it difficult for North Korea to trade and generate funds through other means, which makes the cryptocurrency market an attractive target.

Cryptocurrency remains unregulated by most governments. At the same time, transactions can be made quickly and allow more anonymity than transactions made through traditional banking systems.

It is also easier to hack a cryptocurrency exchange than it is to hack a bank. The latter is almost always bolstered by advanced security barriers and sometimes require in-person appearances.

The launch of a new intercontinental ballistic missile (ICBM) in North Korea on November 18. Photo: AFP via KCNA

No more missile tests, for now?

The rapid drop in crypto’s value, compounded by the FTX crash, will have certainly left a dent in North Korea’s nuclear military expansion funds. Nonetheless, Kim Jong-un’s cybercriminal army is likely to find new sources of illicit income and will probably keep stealing cryptocurrency too.

North Korea has also had financial support from supporters in South Korea who follow the “Juche” ideology – the same Marxist-Leninist-adjacent political philosophy imposed in North Korea.

And, in April, American cryptocurrency expert Virgil Griffith pleaded guilty to helping North Korea evade US sanctions through using cryptocurrency.

Then there is China, a key player in deciding whether sanctions against North Korea will actually work. In May, China joined Russia in vetoing a draft proposal from the US to tighten sanctions against North Korea and continues to trade with Pyongyang.

As long as North Korea can glean financial benefit from China, and other avenues as mentioned above, it is unlikely to stop its plans.

James Jin Kang is Adjunct Lecturer, Computing and Security, at Edith Cowan University in Australia. This op-ed was first published on The Conversation.

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