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National security risks seen in emerging blockchain technology

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January 27, 2018

The expanding popularity of Bitcoin and other cryptocurrencies has brought the emerging blockchain technology to the forefront, and with its rise comes a range of national security concerns for the United States, experts on the new technology say.

In fact, these experts say that it is time for regulators and lawmakers to increase their understanding of the technology, its uses, its potential misuses and to decide how various congressional committees and Cabinet departments will take jurisdiction regarding blockchain.

Blockchain is a decentralized computer-ledger technology that allows for the digital recording and distribution of transactions by a network of users. No centralized authority governs or regulates the transactions — it is “run” only by those who use it. It is increasingly being explored by banks and financial services companies, foreign governments and technology startups to sidestep regulations or a middleman. But it also could be exploited by terrorist or criminal organizations.

“A very low percentage of people in the FBI are educated about this, or understand it, and they don’t have the resources because they’re too busy working on tracing other types of crimes,” said Jamie Elizabeth Smith, global chief communications officer at The BitFury Group, a full-service blockchain company, before a panel at the Foundation for Defense of Democracies on January 16. The panel met to discuss the technology and its emerging national security risks.

“I think regulators — particularly in the United States — need to also allocate funds for additional resources so that people can get up to speed quickly,” added Smith, who is also the CEO of the Global Blockchain Business Council.

As for the role Congress and the federal government can play to address these concerns?

Yaya Fanusie, director of analysis for the foundation’s Center on Sanctions and Illicit Finance, and a former economic and counterterrorism analyst for the Central Intelligence Agency, said the first thing regulators need to do is to raise their understanding of these issues.

The idea of government task forces examining blockchain technology was floated by multiple members of the foundation panel, but Smith made clear that lawmakers need to understand that addressing security concerns will not be a quick fix.

“It really is incumbent upon leaders of the Hill to understand that they cannot do this in one or two committees alone,” Smith said.

She added that the jurisdiction on these issues has to spread across multiple congressional committees, because blockchain touches on so many different topics. “Otherwise, you’re going to have what happened with cybersecurity,” she said. “They just fought about who was in charge, for like, years.”

In 2017, a bipartisan congressional blockchain caucus was formed with the intention of engaging and educating policymakers about regulatory approaches to, and ways to encourage, the technology.

Rep. David Schweikert, R-Ariz., co-chair of the caucus with Rep. Jared Polis, D-Colo., could not be reached for comment.

As blockchain technology has gained traction, new national security issues have arisen. One of the most obvious areas of concern is the use of autonomous digital currencies by terrorists or criminal syndicates for activities such as money laundering. But experts are also concerned about the ways that nation states are using the technology to resist and potentially get around international economic sanctions.

“This is where you see — whether it’s Venezuela creating their own new currency, whether it’s Russia really investing in blockchain systems — (that) they want these systems to replace the U.S. banking system or the global system,” said Fanusie of the Center on Sanctions. “There’s a strategic intent there, where the aim is — not to evade sanctions tomorrow — but to create a system so that when there are sanctions … that the actors who are designated (as targets) are resistant to it.”

Fanusie did clarify, however, that this is a “horizon” issue that is some time in the future, and that setting up blockchain technology is much easier said than done.

He also said that the technology presents an opportunity for investigating illicit activity by presenting raw intelligence that wasn’t there previously since blockchain technology is open and maintains a record of every transaction.

“What’s now happening is that anti-money laundering does not have to be something that’s just within the realm of compliance officers and law enforcement,” he said. “Now you have an opportunity where anyone can see this raw intelligence. … Just the fact that this data exists provides an opportunity for investigation, for law enforcement; it’s an investigator’s dream to see this.”

Experts on the panel also warned that terrorist groups are experimenting with using the technology to do internal transactions and to raise funds. Fanusie says the groups haven’t had as much success as they would like because it’s difficult to get people to set up and adopt cryptocurrencies like Bitcoin as a fundraising mechanism.

Another blockchain executive who sat on the panel, Kiran Raj, said that U.S. lawmakers should feel incentivized to attract and keep blockchain companies in America not just for economic reasons, but also for national security purposes as well.

The United States can become the hub for this technology, it can set standards and keep it out of the hands of criminals and terrorists, said Raj, who is the Chief Strategy Officer at Bittrex, a digital currency exchange. He formerly served as senior counsel at the Justice Department, where he worked on cybersecurity policy.

“The more companies we have in the United States, who want to do the right thing, and want to follow the rules, the better we’ll all be because you can identify the people who are doing it wrong, and root out the bad actors.”


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