What Do Blockchain and Cryptocurrency Have To Do With National Security?

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. 

Conclusion

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. 

The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.

The views expressed herein represent the opinions of the authors. They have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should not be construed as representing the position of the Association or any of its entities. Nothing contained in this publication is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This publication is intended for educational and informational purposes only.