The White House reportedly will soon issue an executive order directing agencies across the federal government to conduct a risk analysis and, ultimately, a coordinated approach to digital assets as a matter of national security.
Adam Zarazinski is CEO of Inca Digital, a digital asset data and analytics provider for cryptocurrency exchanges, financial institutions and government agencies, including the Department of Defense. He is a Major in the U.S. Air Force Reserve.
Digital assets like bitcoin (BTC) do introduce risks for immediate U.S. national security objectives that require federal agency action and coordination, but there are deeper, more significant national security opportunities that should drive the U.S. to support the continued growth of the digital asset ecosystem. We managed to strike this balance with internet commerce in the 1990s, and doing so with digital assets should be no different this time around.
National security risks
Just like other technology, digital assets are used to traffic drugs and launder money. Digital asset markets contend with fake trading volumes, wash trading, and pump and dump schemes as they mature. Larger geopolitical forces are also at play: There is evidence that China manipulates the price of cryptocurrencies through its regulatory actions to gain a position of strength toward the implementation of the digital yuan as part of its Belt and Road Initiative.
North Korea steals cryptocurrency to fund its nuclear weapons program. The Putin Regime built Venezuela’s digital asset ecosystem as a test case to further their own goal of creating payment systems independent from Western financial infrastructure, and it will likely move beyond proof-of-concept in the long-term with U.S. sanctions coming online.
All of these pose risks to U.S. national security, and federal agencies need to have better tools to understand how digital assets operate and how to leverage their jurisdictional authority over digital asset markets globally.
National security opportunities
Digital assets also present an opportunity for national security. They can reduce the wealth gap by cutting global transaction costs. They allow people, globally and regardless of socioeconomic status, control over their own money. They can transform international aid and development, foster trade and drive a new sector of small businesses in the U.S. They can reduce fraud and inflationary instability in global markets. And they can revolutionize the global financial system and fostering digital asset innovation will increase U.S. competitiveness in this new era of great power competition.
Russia’s invasion of Ukraine is a microcosm of these challenges and opportunities. While Russian oligarchs and sanctioned companies might use cryptocurrency to move value globally, Ukrainians have raised millions in crypto to support the defense of their country, and everyday folks on both sides – Ukranians and Russians – are using crypto to soften the financial blowback of the war.
In short: It is in our national security interest to support the development of cryptocurrency.
The U.S. should foster responsible innovation and manage risk similar to how we have in the past. Twenty-five years ago, the Clinton administration built a policy framework for the internet much like the Biden administration will soon do for crypto. The Clinton administration set out a crisp articulation of an open-innovation, market-first vision for the early days of the internet. The policy introduced five principles for the internet that are remarkably relevant to crypto today:
- “Innovation … broader participation and lower prices will arise in a market-driven arena.” If the administration focuses on a market-driven approach, in particular where there are partnerships between the private sector and public sector to manage risk and share best practices, innovation will thrive, and lower prices with broader financial participation will result.
- Government should avoid undue restrictions. “Government attempts to regulate are likely to be outmoded by the time they are finally enacted.” Risks presented by digital asset services are simply new twists on the same risks presented by other financial services. Digital asset businesses should be subject to the same rules as financial service businesses in other asset classes. Same service, same rules, same legal framework – no more, no less.
- Where government involvement is needed, the aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment. While many cryptocurrency start-ups bristle at the thought of government regulation and may decry any attempt to regulate the space, even more want clear rules to access U.S. markets safely and compliantly. Contrasting regulations, particularly between federal and state law, need to be streamlined.
- “The genius and explosive success of the internet can be attributed in part to its decentralized nature and to its tradition of bottom-up governance. These same characteristics pose significant logistical and technological challenges to existing regulatory models, and governments should tailor their policies accordingly.” Decentralization and bottom-up governance are core tenets of crypto, and regulatory frameworks are now contending with complicated new digital assets and services, from decentralized exchanges to non-fungible tokens (NFT).
- Legal frameworks for e-commerce should be facilitated on a global basis. President Bill Clinton acknowledged that the internet is a global marketplace. Digital assets build on that theme by allowing individuals to transfer value globally in an instant.
These principles do not mean that federal agencies should not act to understand cryptocurrency, regulate the space and enforce laws. They should, and most of them already do. From the Securities and Exchange Commission to the Federal Bureau of Investigation to the Secret Service, they are all working to leverage their jurisdiction in the digital asset ecosystem and have key roles to play in protecting the integrity of U.S. financial infrastructure.
In 2018, I left the U.S. Air Force to start Inca Digital with the goal of bringing large financial institutions and government agencies into the crypto ecosystem. In addition to market surveillance, we collect intelligence on ransomware, hacker attacks and the distribution of blockchain nodes for banks and law enforcement agencies. We even work with the Department of Defense to track the use of cryptocurrencies in illicit supply chain activity and support counter-nuclear proliferation operations.
Ira Magaziner, a prime mover of U.S. internet policy, made an important remark when writing the Clinton policy: The internet “is also a force for the promotion of democracy, because dictatorship depends upon the control of the flow of information. The internet makes this control much more difficult in the short run and impossible in the long run.”
The Biden administration has a limited period of time, a unique opportunity to instantiate its core values of freedom and liberty in what will be a new global financial system. It will be playing into the hands of great power competitors like the People’s Republic of China and Vladimir Putin’s regime in Russia if digital asset innovation here is stifled. It is no secret that China has already incorporated digital assets into its economic and national security policy to increase their competitiveness, kicking off a “horse race” China believes it can win.
To maintain U.S. national security, and America’s place in the global economy, we should look to what is fundamental to America: an open society with bold thinkers and entrepreneurs pushing the limits of the system with responsible technological innovation. That is what we did at the dawn of the internet age, and that is what we should do here.