Cryptocurrency based on blockchain technology has emerged and exploded in the past ten years. This article has two limited objectives: to provide a basic explanation of the blockchain technology that underlies cryptocurrency and to present situations in which cryptocurrency has already demonstrated its consequences for national security.
Blockchain and Cryptocurrency
In Blockchain Facts: What Is It, How It Works, and How It Can Be Used, Investopedia (Sep. 27, 2022), Adam Hayes gives an admirably succinct explanation of blockchain technology.
A blockchain [is a database that] stores information electronically in digital format…. A blockchain collects information together in groups, known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain….
[A] blockchain, as its name implies, structures its data into chunks (blocks) that are strung together. This data structure inherently makes an irreversible timeline of data …. Each block in the chain is given an exact timestamp when it is added to the chain….
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. In this way, a blockchain is the foundation for immutable ledgers, or records of transactions that cannot be altered, deleted, or destroyed. This is why blockchains are also known as distributed ledger technology (DLT).
As a distributed ledger technology, a blockchain is a shared set of records that tracks and validates the origin and ownership of assets, intellectual property, or other things of value. Blockchain technology enables participants to add data to—but not delete data from—the shared ledger and to see the entire database of records. A blockchain-based ledger is new and powerful because the records it contains can be made fully public, immutable, and auditable. No one person or organization controls the ledger or the data; every participant can make transactions, record them on the add-only ledger, and verify them. Participants do so using blockchain software and acting as a node in a network protocol. The technology is secured by “block cryptography” that ensures no participant can change or delete a prior transaction on the blockchain.
Blockchain technology as a concept dates back to 1991, but its first real-world application was presented in the 2008 white paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” written under the pseudonym of Satoshi Nakamoto. Hayes, supra. The paper describes how chained “blocks” of transactions can be used in a “consensus protocol” to validate information on a transaction ledger without the need for a centralized administrator of the ledger. Applying this concept, the Bitcoin blockchain is completely decentralized and secured by a “proof of work” protocol that relies on economic incentives and game theory to ensure that dishonest or defective node operators do not fraudulently or inadvertently corrupt the Bitcoin ledger. The thing of value that is the subject of the transactions recorded on the ledger are “Bitcoins”; thus, the world’s first cryptocurrency, existing only on the Internet and not issued or administered by any government, was born.
In the decade-plus since the Bitcoin white paper was published, there have been many developments in the design of consensus protocols for decentralized ledgers. In this article, we use the term “blockchain” to encompass not only the original Bitcoin blockchain design but also other types of decentralized ledgers that are cryptographically secured. Some of these non-Bitcoin blockchains are permission-less and open to anyone who wants to participate. Others are private (“enterprise blockchains”) or only open to users who meet certain criteria or agree to certain terms of service.
The different types of blockchains offer different technical features and capabilities, including transaction speed, through-put volume, security, and immutability. But they are not problem-free. The fact remains that recordkeeping is often best managed by a trusted intermediary with a centralized ledger. Centralized recordkeeping is inherently simpler and usually more efficient, even if more expensive. Blockchain technology offers an alternative where there is no trusted intermediary or there is a need for more “secure” recordkeeping. Particularly with regard to cryptocurrency, blockchain technology provides the opportunity for participants to conduct global transactions in an accepted form of money without having to depend on or be subject to governmental authorities. For these participants, the benefits of cryptocurrency outweigh the costs, not least of which is the massive amount of computing power and energy required to sustain the blockchain.
Cryptocurrency and National Security
As often happens with new technologies, criminal actors were early adopters of blockchain technology in the form of cryptocurrency. The speed, pseudonymity, and largely unregulated nature of Bitcoin make it useful for a variety of illicit purposes, including terrorism, theft, scams, money laundering, and darknet markets. Chainalysis, The 2021 Crypto Crime Report (Feb. 16, 2021). See, e.g., Press Release, U.S. Dep’t of Just., U.S. Att’y’s Office, Southern District of New York, Ross Ulbricht, A/K/A “Dread Pirate Roberts,” Sentenced In Manhattan Federal Court To Life In Prison (May 29, 2015). In October 2020, the U.S. Department of Justice released the Attorney General’s Cyber Digital Task Force Report, which established a framework for addressing law enforcement challenges in connection with blockchain technology. U.S. Dep’t of Just., Report of the Attorney General’s Cyber Digital Task Force: Cryptocurrency Enforcement Framework (Oct. 2020). By 2021, worldwide struggles with ransomware attacks catapulted into public view the use of cryptocurrency to facilitate cybercrime and sparked international action. See, e.g., Institute for Security+Technology, Ransomware Task Force, Combating Ransomware, A Comprehensive Framework for Action: Key Recommendations from the Ransomware Task Force (Apr. 2021). Disrupting the payment distribution system that supports these crimes makes them less profitable. The security community has therefore focused on improving the technical means and legal processes that affect the cryptocurrency infrastructure. Because that infrastructure crosses borders, a global strategy is required. “We must mitigate the illicit finance and national security risks posed by misuse of digital assets…. We must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.” Executive Order on Ensuring Responsible Development of Digital Assets, Secs. 2, 8 (Mar. 9, 2022). Furthermore, cryptocurrency has security implications beyond the actions of individual “private” criminals.
In February 2022, Russia again invaded Ukraine and events that followed illustrate the national-security implications of cryptocurrency and blockchain technology. On the one hand, cryptocurrency offers a potentially significant, inexpensive, and quick way to support Ukraine and its defense and to provide humanitarian relief to its people. On the other hand, cryptocurrency is a means for sanctioned entities and individuals to evade sanctions and thus diminish the effectiveness of sanctions.
In September 2021, Ukraine passed a law legalizing the use of cryptocurrency in Ukraine. Daryna Antoniuk, Parliament passes law to legalize cryptocurrency in Ukraine, Kyiv Post, Sep. 8, 2021. With that groundwork laid, close to $100 million in cryptocurrency was donated to support Ukraine within two weeks of Russia’s invasion. 60% of the money was received by KUNA, a Ukrainian cryptocurrency exchange. Amitoj Singh, Ukraine Has Received Close to $100M in Crypto Donations, CoinDesk, Mar. 9, 2022. The founder of the KUNA exchange, Michael Chobanian, testified before the Senate Committee on Banking, House, and Urban Affairs that it took about 10 minutes for KUNA to set up the online donation fund, the Ukrainian government was able to use donated funds almost immediately, and humanitarian supplies funded by the donations were being delivered the next day. By contrast, KUNA estimated it would have taken 10 days to receive and be able to use foreign funds sent through traditional financial channels. Understanding the Role of Digital Assets in Illicit Finance: Hearing Before the Comm. on Banking, Housing, and Urban Affairs, 117th Cong. (Mar. 17, 2022). With the traditional Ukrainian banking infrastructure under threat by Russia, financial support to Ukraine in the form of cryptocurrency is not just faster, more accessible, and less expensive, it is also more secure. Short of Russia shutting down the internet in Ukraine, it is much more difficult for Russia to block cryptocurrency donations than it would be to block or even just surveil monetary donations sent through traditional banking systems.
On the flip side of the national-security coin, cryptocurrencies offer a method to evade the economic sanctions imposed on Russia and its supporters by the United States and other countries. Those sanctions are among the strongest ever imposed by the international community and include sanctions on many of Russia’s leading banks and companies as well as a substantial number of Russian oligarchs and other individuals closely associated with Russian President Vladimir Putin and the Russian government. As the Treasury Department’s 2021 Sanctions Review noted, “[T]echnological innovations such as digital currencies, alternative payment platforms, and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions.” U.S. Dep’t of Treasury, The Treasury 2021 Sanctions Review (Oct. 2021), at 2. U.S. cryptocurrency exchanges are required to screen for and block any persons, transactions, or property subject to sanctions. European Union countries and many other jurisdictions have similar requirements with respect to sanctions imposed under their respective laws. These requirements make it harder, but not impossible, for a determined, sophisticated actor, such as an agent of the Russian government, to conduct transactions with cryptocurrencies in violation of economic sanctions. One specific possibility to evade sanctions lies with the cryptocurrency exchanges outside of the United States and the European Union that do not have strong compliance policies and practices. Opening an account on these exchanges is not difficult, nor is engaging in transactions that would otherwise be deemed suspicious because of size or pattern. The number of cryptocurrency exchanges with weak or non-existent compliance systems, known as decentralized exchanges or DEXs, has decreased in recent years, but they still exist and engage in daily trading volumes that can reach $2 billion per day. Additional cryptocurrency tools include privacy coins (cryptocurrencies that conceal users’ wallet addresses), mixers and tumblers (services that pool tainted cryptocurrencies and then redistribute them in a non-traceable way), and kill chains (dividing funds into clean wallets to avoid detection by forensic algorithms). These tools currently work with small amounts of cryptocurrency and are not designed for large amounts. Nonetheless, their availability and use make clear that, in the future, they may well amount to a national-security threat, even if they do not now.
Cryptocurrencies also help and hinder the Russian economy and ordinary Russians. Any Russian seeking to protect their personal financial situation can use cryptocurrency as a readily available hedge against the devaluation of the Russian ruble. Cryptocurrencies as a financial safe haven from the risk of a devalued ruble also help the Russian government by softening the impact of sanctions on ordinary Russians and thus the Russian economy. Less economic pain might make Russians less inclined to take the risk of opposing President Putin or the invasion of Ukraine. Notably, the potential of cryptocurrencies to lessen the effect of sanctions on Russia prompted Congress to draft the Digital Asset Sanctions Compliance Enhancement Act of 2022, S. 3867, 117th Cong. (2022), which would provide the Treasury Department stronger authority to prohibit digital asset trading platforms from transacting with cryptocurrency addresses associated with Russia, even without a link to a sanctioned person or entity. The Act would also require the Treasury Department to monitor sanctions evasion and to identify digital asset trading platforms that pose a high risk of facilitating sanctions evasion or other illicit activities.
As with sanctions imposed on Russia for its 2022 invasion of and continuing war on Ukraine, cryptocurrency can help and harm in the fight against public corruption. The United States Strategy for Countering Corruption (Dec. 2021) describes public corruption as “a fundamental threat to the rule of law,” one that “hollows out institutions, corrodes public trust, and fuels popular cynicism toward effective, accountable governance.” Id. at 4. While public corruption has been a priority of U.S. law enforcement, President Joe Biden made the fight against [public] corruption a “core national security interest of the United States.” Id. See also Microsoft, Revealing the Hidden Structure of Corruption (Dec. 9, 2021). Blockchain technology and cryptocurrencies can be used to prevent, detect, investigate, and disrupt public corruption and ultimately prosecute corrupt public officials. But the same tools can also be used by those officials to facilitate bribery, theft of public funds, and laundering of criminal proceeds.
“Follow the money” is a mantra of all financial investigations, but it is especially critical when the prosecution must prove in a politically charged criminal case that a payment to a public official was made specifically in exchange for an official act or that public funds were improperly diverted for a public official’s benefit. One way blockchain technology can help is by using an immutable blockchain to record all public procurements on a ledger that is available and transparent to oversight authorities, the media, and the public generally. Thus, blockchain could make the auditing of public accounts easier, faster, and more accessible to a broad universe of monitors. At the same time, the nearly instant and borderless transaction of cryptocurrency makes it simpler for a corrupt official to take, move, and launder money and hide it in a secure online location, all before a financial investigator can even detect the crime.
Over the last ten years, the law has been evolving to regulate digital assets, including cryptocurrencies, as a commodity. See Commodity Futures Trading Commission (CFTC), Digital Assets; LabCFTC, Digital Assets Primer, Dec. 2020. See also Testimony of Rostin Behnam, Examining Digital Assets: Risks, Regulation, and Innovation: Hearing Before the S. Comm. on Agriculture, Nutrition, and Forestry, 117th Cong. (Feb. 9, 2022). There have also been efforts to regulate cryptocurrencies as a security. See 15 U.S.C. §§ 77b, 78c. See, e.g., Blockchain Credit Partners, Securities Act Release No. 10961, Exchange Act Release No. 92588 (Aug. 6, 2021) (finding that “digital tokens” were “offered and sold as investment contracts” and thus were “securities” subject to the jurisdiction of the Securities and Exchange Commission). Of course, there remains plenty of room to continue to build the legal and regulatory framework, including updating laws such as the Bank Secrecy Act, 31 U.S.C. § 5311, which regulates aspects of cryptocurrency but was drafted years before its development and proliferation. Undoubtedly, the United States and other countries invested in protecting and growing their national economies will do the work and continue to develop blockchain technology and cryptocurrency structures not only to advance their economic interests but also to defend their national security.
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