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Is Bitcoin a National Security Risk?

The Biden Administration is set to release an Execute Order (EO) articulating national security concerns associated with Bitcoin and other cryptocurrencies.  The EO will likely have two key elements that include an actionable component requiring agencies to take direct action and a directional component tasking certain agencies with evaluating key concerns and reporting back their findings and associated recommendations for remediation.

The cryptocurrency environment has been fast-moving and volatile resulting in concerns around consumer risk and fraud and the aggregate of these risks could impact economic and national security, but it is also likely the EO will address a broader spectrum of concerns.

How might Bitcoin be framed as a national security risk?  As national security technologists, here is our take on where the government is likely concerned.

Impact to U.S. dollar as global reserve currency 

The economic benefits of the U.S. dollar serving as a global reserve currency could be diminished with widespread adoption of Bitcoin as a store and exchange of value.  Several nation states have or are looking to recognize Bitcoin as a currency or as legal tender and several U.S. state initiatives are also underway.  

The secondary challenge here for the U.S. government is ensuring that any inevitable movement to a new reserve currency model is tied directly to the U.S. innovation ecosystem.  The catch-22 here being that any efforts to thwart innovation in this space could create durable national security risks in the future if the U.S. loses innovation advantage by driving key projects to external domiciles or ceding control of critical infrastructure to foreign governments.

Lack of tracking granularity as wealth moves

The U.S. government relies on tight controls tracking the movement of money to ensure that proper taxation occurs and to prevent funds from being used for illicit activities.  While blockchains provide public observable record of cryptocurrency movement, the destination endpoint can be unknown, obfuscated, or co-mingled with other transactions, or even moved across chains.  

The government will likely look to put increasing pressure on firms serving as originators in cryptocurrency transactions to identify the receiving party or trigger suspicious activity reports or taxable events if that endpoint is not appropriately associated with a legal entity. This could be increasingly troublesome for cold storage wallet transactions executed by individuals looking for more direct control over the keys.

Use in ransomware and consumer fraud

Cryptocurrencies have facilitated a rampant increase in ransomware targeting consumers and organizations which has already triggered government initiatives to try and reduce this risk  Additionally, the Web3 ecosystem has moved at an unprecedented pace creating a significant gap between existing regulatory and protection frameworks and value flowing into emergent blockchain ecosystems. We’ve tracked over $60b USD in value lost in our Crypto Incident Database and new cases are reported almost every day.

Lack of fiduciary/legal liability for DAO/DAC

Similar to concerns over asset movement for tracking and taxation purposes, the U.S. government will likely eventually express concerns over accountability and legal liability for Digital Autonomous Organizations/Corporation structures.  These structures allow for codified contracts and autonomous operation on modern blockchains.  The inability to identify a viable legal individual or entity to hold accountable for these DAO/DACs will cause considerable consternation.

Conclusion – overregulation could be the greatest national security risk

The government has frequently exhibited inefficient tendencies in regulating disruptive technologies and the exponential growth expected in the Web3 domain will further exacerbate things.  

However, it is critical to consider that an approach that disrupts innovation could create an even greater long-term national security risk than those articulated in the forthcoming Executive Order or expressed through other regulatory entities. Given the established pace of innovation, the increasing value being created, and the anticipated disruption to a wide variety of business domains expected, an environment in which regulatory arbitrage becomes the de-facto determinant of jurisdiction, could result in the U.S. being disadvantaged in the long-term.  We must work to manage risk appropriately while not stifling innovation.

Cryptocurrency Incident Database

 

OODA network members can also access these additional resources on Web3 including insights into how to reduce risk and inform business strategies. Research and reporting of interest includes:

What CEOs Need To Know About Bitcoin: Including potential new business models to consider  A Cambrian Explosion in innovation in Bitcoin related products and services is underway. Here is what the business leader should know about this revolutionary transformation of the global financial sector.

The Cryptocurrency Incident Database OODA analysts track every major cybersecurity incident and seek insights into root causes that can inform defenses.

Reducing Risk To Cryptocurrency Projects by Red Teaming We provide insights on prioritizing defenses of cryptocurrency projects based on our years of experience in red teaming.

The Past Present and Future of DeFi  Here we capture insights from two of our most popular OODAcasts on the cryptocurrency revolution, one with crypto pioneer Bradley Rotter and one with author of “The Infinite Machine” Camila Russo.

Bitcoin and Ethereum and the Metaverse  Jahon Jamali is one of the great explainers of the nature of the crypto revolution and provides insights here into the nature of the coming changes.

What Will The Federal Government Do In Response To The Rise of Cryptocurrencies? All businesses and citizens should understand the importance of improving policy in this domain, but we also need to be cautious about over regulating or passing foolish rules that do more harm than good.

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Matt Devost

Matt Devost

Matthew G. Devost is the CEO & Co-Founder of OODA LLC. Matt is a technologist, entrepreneur, and international security expert specializing in counterterrorism, critical infrastructure protection, intelligence, risk management and cyber-security issues. Matt co-founded the cyber security consultancy FusionX from 2010-2017. Matt was President & CEO of the Terrorism Research Center/Total Intel from 1996-2009. For a full bio, please see www.devost.net