President Nicolás Maduro of Venezuela and President Vladimir Putin discussed bilateral relations and measures to stabilize oil market, Beijing, September 3, 2015 (President of Russia Web site)
Evasive Maneuvers How Malign Actors Leverage Cryptocurrency
By Sara Dudley, Travis Pond, Ryan Roseberry, and Shawn Carden
All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.
—John Adams, letter to Thomas Jefferson, August 25, 1787
he U.S. National Defense Strat- creative solutions. The emergence of egy outlines a fundamental cryptocurrencies represents a novel competition between free and frontier that diminishes U.S. compara- Colonel Sara Dudley, USA, is assigned to Joint T Special Operations Command. Lieutenant Colonel open societies and revisionist powers tive advantage in mapping funding to Travis Pond, USAF, is the Program Acquisition and rogue regimes. These powers threat networks worldwide. By disrupt- Evaluator at the Department of Defense Office of and regimes frequently act below the ing the visibility and control present the Inspector General. Colonel Ryan Roseberry, USA, is an Intelligence Officer assigned to George threshold of war, enabled by recent within the traditional centralized C. Marshall Center. Colonel Shawn Carden, USA, technological advances. Effective international banking system, the use is the Director of Future Operations at U.S. Army responses to these advances demand of cryptocurrencies negates the ability Cyber Command G35.
58 Features / How Malign Actors Leverage Cryptocurrency JFQ 92, 1st Quarter 2019 for U.S. personnel to monitor and leader, Bitcoin, in 2009.2 All other avail- corruption pertaining to monetary restrict funding sources. The ability able cryptocurrency outside of Bitcoin transactions because the ledger is public to follow the money is at risk based on bears the generic label of “altcoin,” that and exists in multiple duplicate copies.3 peer-to-peer exchange of encrypted is, an alternative to Bitcoin, but operates The secure, encrypted, transparent, currencies. To probe this vulnerability, on similar open-source code. Crucially, and distributed copies of the block- explanations of blockchain technologies these currencies disrupt standard banking chain underlying cryptocurrency offer and cryptocurrencies show how adver- systems by introducing a means to es- a dramatically new model for financial saries use the technology to circumvent tablish peer-to-peer transactions without transactions. financial market control and sanction centralized ledger controls. While the international financial com- protocols. The U.S. Government will Traditionally, a ledger system that munity certainly has shown both intrigue need to act to mitigate the current risk resided in one location stored the total and aversion to the potential disruptions in poorly governed cryptocurrency of debits or credits transferred between in world monetary markets, distributed market places. individuals exchanging currency. While ledger technology also introduces chal- handwritten log books have given way to lenges pertaining to national security. The Explaining Cryptocurrency digital recordkeeping, middlemen (finan- presence of various middlemen, such as The global economic system has ben- cial institutions) maintain these databases financial institutions, afforded govern- efited substantially from the establish- in central locations for easy tracking. ments the ability to track and trace malign ment of the free market system since However, this traditional method of activity through the traditional financial the end of World War II. In 1944, the currency exchange is vulnerable to cyber system ledgers. With cryptocurrencies, Bretton Woods Agreement established hacking as well as software and hardware reputable banks no longer validate an the U.S. dollar (USD) as the world’s malfunctions. The blockchain application individual’s credentials and record his in- reserve currency, providing stability and addresses this vulnerability by generating formation with each transaction. Rather, liquidity that enabled significant growth a ledger of transactions verified, vali- anonymity in cryptocurrencies protects in international trade. At that time, the dated, and stored by a widely distributed point-to-point transactions captured USD was backed by U.S. gold reserves, network of autonomous peer computer between digitized wallets and encryp- which were the largest in the world.1 systems (called mining computers). tion keys. This change in the traditional In 1971, President Richard Nixon Various mining computers participate process for managing financial transac- eliminated the exchangeability of USD in these blockchains by confirming the tions undermines regulatory anti–money for gold, but the strength of the U.S. transaction records between participant laundering efforts performed by financial economy and the norms of international ledgers, and in doing so generate their institutions, which are intended to thwart trade created over the previous 20-plus own profit. A computing source compiles players attempting to skirt sanctions and years allowed the USD to retain its and produces the next block of trans- finance terror groups. While perhaps status as the world’s reserve currency. actions and mines (or gains) a digital not immediately obvious to the casual The market confidence in the U.S. currency token as reward for the effort observer, nonstate actor use and increas- economy, along with centralized gov- of solving algorithms. Following the ing state actor pursuit of cryptocurrencies ernmental monetary policy, continue addition of a verified block (combined extend the competitive space into the in- to support the valuation of the USD individual transactions), all computers ternational financial domain and spotlight internationally. Decentralized crypto- across the network store the updated cryptocurrency as a national security issue currencies threaten to undermine the database on the distributed blockchain that should concern the Department dominance of the USD due to the ways ledger. of Defense (DOD) and Intelligence in which they can subvert the global The open (public) blockchain led- Community.4 financial system. ger effectively resides on thousands of The rapid growth of weakly regu- A digital or virtual currency maintains computers participating in the minute- lated financial and technology markets three basic pieces: an encryption used to by-minute validation of the blockchain creates vulnerabilities for safeguarding secure each coin, a mathematical proof- itself. In effect, the distributed blockchain the international financial system from of-work used to validate each coin’s stores and verifies the ledger and, in malign actors. Hence, the nexus of crime, legitimacy, and a blockchain (database) doing so, eliminates excess transaction corruption, and terrorism finds refuge in that records transactions. The blockchain fees and other negative externalities as- these emergent financial systems.5 Aside records a transaction history and posts it sociated with single-ledger repositories, from the benefits of cryptocurrencies, to a distributed ledger that creates data for example, the middleman, hacking, which include providing an attractive integrity and visibility to all participants. and corruption. Championed by a re- means for malign actors to conceal il- The desire to use this technology to sup- cent World Economic Forum report, licit funding and business, and to earn port a completely free market system, not blockchain technology allows for broader currency by mining, the technology at- tethered to any state managed currency, transparency and integrity in society, tributes alone attract malfeasance. While drove the establishment of the segment including the fight against bribery and the distributed blockchain ledger remains
JFQ 92, 1st Quarter 2019 Dudley et al. 59 tic effect that allows rogue actors to cooperate in a secondary value transfer market impervious to the established world economic order. In doing so, cryptocurrencies present a viable means to unseat the USD as the recognized global reserve currency. Upsetting the World Financial System and Unseating the USD as World Currency. While the USD has remained the dominant reserve currency follow- ing Bretton Woods, two nations have challenged the USD’s dominance. In 2009, China and Russia called for the International Monetary Fund (IMF) to develop a new global currency, arguing that inflation and deficit spending in the United States would devalue reserves held in USD.6 Today, the USD is still the most widely held reserve currency, and nearly two-thirds of all international trade is done in USD. Conducting trade in USD requires the use of the U.S. banking Mining kit based on golden nonce chip, May 20, 2015 (Alexandr Gromov) system to support the transactions, and all those transactions are subject to U.S. laws resistant to cyber criminals, the storage integrity of financial exchange. The ano- intended to protect international financial of the digital coins (that is, private key nymity of use, low barriers to entry, and markets from bad actors. National secu- encryptions) remains a system weakness. weak regulation and limited legal jurisdic- rity legislation that impacts the financial While pointed out earlier that tradi- tion in the cryptocurrency marketplace system includes anti–money laundering, tional ledger systems are vulnerable, theft represent an opportune platform for countering the financing of terror, sanc- of cryptocurrencies requires less hacking illicit actors. The initial forays of criminal, tions, the Foreign Corrupt Practices Act, skill than penetrating the centralized corrupt, and terror networks into the and the USAPATRIOT Act. ledger systems, which banks have hard- cryptocurrency markets foreshadow the The United States gains economic ened. Secure digital storage of the private future challenges of starving large-scale, and diplomatic advantages through the and public key information associated bad actors of funding. strength of the U.S. financial markets with cryptocurrency exists outside the in conjunction with the heavy use of blockchain within individual computers, Expanding the the USD in world market trade. As a exchange markets, and businesses estab- Competitive Space result, the United States can sustain lished to provide offline, or cold-storage. Cryptocurrency transactions expand large budget deficits, enforce sanctions, Similar to a brokerage house converting the international financial competitive and dictate terms in international trade. shares of a company into cash for a seller, space by creating an alternative to a From a strategic standpoint, competitors cryptocurrency exchanges support the fiat-based monetary system that skirts benefit by reducing U.S. dominance in transition of the digital currency back into international financial mechanisms world currency markets and international a fiat currency like the USD. Theft of the set to detect and intercept suspicious trade. Andrei Kostin, the head of Russia’s encryption keys for a coin gives a criminal activities. Digital currencies also thwart second largest bank, VTB, indicated that carte blanche to spend it without the U.S. Government sanctions policies, Russia intends to find alternatives to the need for identification. Due to the need which rely on their effectiveness for USD, suggesting, “This whip that the to secure the encryption keys from theft tracking sales and trade conducted in Americans use in the form of the dollar by hackers, some exchanges and separate USD. Outside of digital banking tools would then, to a great extent, not have businesses now exist to safeguard the en- designed to disrupt rogue parties from such a serious impact on the global finan- cryption keys offline in the equivalent of receiving money, cryptocurrencies also cial system.”7 Many rogue nations that digital safe deposit boxes. The introduc- negate military capabilities that are able desire to move money for malign intent tion of these cryptocurrency technologies to destroy physical cash stockpiles or echo Kostin. disrupts not only financial markets but target enemy financiers. The two effects Cryptocurrencies offer such an option also efforts to monitor and maintain the of cryptocurrencies create a synergis- for rogue actors: a new option for those
60 Features / How Malign Actors Leverage Cryptocurrency JFQ 92, 1st Quarter 2019 desiring alternatives to the USD and the Crimea and chemical agent use, contin- known as the Iranian nuclear deal, and affiliated banking and trade regulations. ues to adjust and develop means to evade threatened additional sanctions, the value Referred to as a “money-laundering sanctions. At the 2017 St. Petersburg of the Iranian rial plunged to record lows revolution” by a hacker and suspected International Economic Forum, against the USD, crippling Iran’s econ- terrorist’s defense lawyer in New York President Vladimir Putin “announced omy.18 Mohammad Reza Pourebrahimi, City, nonstate actors reveal the benefits of that Russia was considering launching its head of the economic committee in Iran’s functioning within the weakly regulated own ‘digital ruble’ and praised the pos- parliament, stated that he has already space of digital currency markets not tied sibilities of virtual currencies.”12 Russian “obliged the Central Bank of Iran to to the USD.8 Cryptocurrencies fueled officials further suggested extending a su- start developing proposals for the use of illegal trade by criminal organizations on pranational cryptocurrency for the BRIC cryptocurrency.”19 He added that Iran the “Silk Road,” the online equivalent nations (that is, Brazil, Russia, India, and has been in talks with Russia to establish a of a black market Amazon.9 While not China) as an alternative to the current cryptocurrency system to exchange goods widely adopted, jihadist networks have U.S.-dominated economic system.13 A between the two countries.20 Short of a raised funds through cryptocurrencies on BRIC digital trading block would offer national cryptocurrency, major Iranian Internet-based, crowdsource platforms. not only an alternative currency but also hotels recently announced they would These platforms empower them to evade the anonymity of financial transactions begin to accept cryptocurrencies such as the international banking system stop- among the member nations—a model Bitcoin, Ethereum, and Bitcoin Cash, to gaps, which were instituted to hinder that rogue nations might establish to encourage tourism and avoid U.S. sanc- money laundering and prevent terror circumvent Western sanctions. Although tions.21 The general discussion on the funding.10 Russia has yet to develop its own digital effects on the Iranian economy should With the technology and expertise ruble, Moscow is reportedly behind not distract from the U.S. resolution to at hand, a future digital economy is be- Venezuela’s new cryptocurrency with the aggressively seek sanctions enforcement. coming a potential threat to the USD. purpose of helping an ally while using the As outlined by General Joseph Votel, the The use of cryptocurrencies to evade experience as an experiment for future commander of U.S. Central Command, traditional bad-actor countermeasures cryptocurrencies.14 in a threat statement delivered to the in the world financial system, and avoid Venezuela’s new national cryptocur- House Armed Services Committee in the regulatory requirements of using the rency, the petro (petromoneda), is pegged February of this year, “Iran remains the USD entirely, exposes burgeoning weak- to the value of oil. On the first day of major threat to U.S. interests and part- ness in U.S. dominance of funding. The its presale it raised over $735 million, nerships in the Central Region through simultaneous migration from the USD, with hopes of achieving $6 billion.15 support for numerous proxies, including and the loss of the ability to control sanc- As noted by the Brookings Institution, Lebanese Hizballah operating in mul- tions, would dilute a primary economic “Foreign investors exclusively funded tiple countries, hardline Iranian-backed tool that the United States uses to curb the presale; this rapid influx of capital Shia Militia Groups in Iraq and Syria, confrontational behaviors, promote re- could not have occurred by conventional and Iranian support-enabled Houthis in gime change, and limit access to products means as Venezuela is subject to inter- Yemen.”22 affiliated with national security. national sanctions.”16 Through the use North Korea began using cryptocur- Avoiding Sanctions. Rogue regimes of cryptocurrency, Venezuela effectively rencies to skirt U.S. sanctions in May and revisionist powers are also aggres- circumvented sanctions and accumu- 2017.23 While not pursuing its own sively seeking digital currency to erode lated foreign currency without meeting cryptocurrency, North Korea benefits the power of U.S. sanctions. Russia, Western demands or addressing the un- by earning or stealing cryptocurrencies, Venezuela, Iran, and North Korea are derlying weakness of its national economy which it then uses to purchase items re- actively exploring ways to implement na- to attract traditional foreign direct invest- quired to support the regime. According tional cryptocurrencies to circumvent the ment. Furthermore, Venezuela may have to Recorded Future, a digital intelligence dollar and evade global oversight of fi- brought short-term economic liquidity to firm, North Korea has earned $15 to nancial transactions. The common theory a country suffering from hyperinflation $200 million in USD-equivalent value is that the anonymity of cryptocurrencies and a contracting economy producing (value range dependent on fluctuating will undermine U.S. hegemony by de- 40 percent less that it did 5 years ago.17 If prices) through legal cryptocurrency min- grading its ability to control the flow of the petro succeeds, its digital model may ing operations.24 Steven Kim, a visiting financial transactions in and out of sanc- serve as the example for other nations to research fellow at the Jeju Peace Institute tioned countries.11 Direct cryptocurrency follow. in South Korea, acknowledged that “cryp- payments allow sanctioned countries to Much like Venezuela, crypto technol- tocurrency is the ideal form of money for bypass financial controls established to ogy may provide Iran a lifeline to counter North Korea because it can be moved enforce sanctions. existing sanctions in the short term. After quickly and anonymously across borders Russia, due to economic pressures the United States pulled out of the Joint and can be used to buy goods and services applied to punish it for its actions in Comprehensive Plan of Action, better online or converted to hard currency.”25
JFQ 92, 1st Quarter 2019 Dudley et al. 61 cryptocurrency could potentially weaken U.S. dominance in the global market, and significantly buttress Chinese Grand Strategy. Combining Generates National Security Threats. A breakdown in in- ternational financial market transactions in USD and in the applications of inter- national sanctions combine to generate a noteworthy national security threat. At the moment, malign actors hiding illegal transactions in cryptocurrency markets, or renegade companies skirting sanctions to generate short-term profit, represent a general nuisance to the overall maintenance of the international financial system. However, if rogue state actors co- operate to establish their own secondary market system of cryptocurrency transac- tions to trade among themselves, the Bitcoin transaction with screenshots verifying amount and destination address, and physically effectiveness of using the global financial confirming transaction, December 16, 2017 (FlippyFlink) system to thwart these regimes would be significantly challenged.35 North Korea’s illegal hacking activi- China’s leadership has routinely stated its Unless rogue states coordinate to ties are also of concern. North Korea has desire to unseat the USD as the world’s support all import and export transac- been accused of employing more than global currency.29 Michael Collins, the tions inside a single cryptocurrency, 7,000 hackers around the world focused deputy assistant director of the Central they would still need to convert open on stealing cryptocurrencies, which Intelligence Agency’s East Asia Mission market cryptocurrencies to fiat currency. has yielded tens of millions of dollars.26 Center, warned that “Beijing does not Currently, the cryptocurrency space Given the extensive “maximum pressure” want to go to war with the United displays wild fluctuations in value and campaign undertaken by the Trump States but is attempting to undermine demonstrates the instability of speculative administration to limit North Korea’s Washington’s global position by using investments and early market normaliza- continued pursuit of weapons of mass all avenues available.”30 One of China’s tion. Since the value of each competing destruction, its legal and illegal use of primary avenues is the domination of cryptocurrency remains purely based on the unregulated cryptocurrency markets global trade through its “One Belt, One investor confidence, currency prices tend undermines these international efforts. Road” economic initiative, which in- to increase and decrease rapidly. Rogue Suggested by a former U.S. National cludes the cyber realm.31 Thus far, China nations releasing national digital cur- Security Agency agent, “these coins are has indicated that it may develop its own rency tied to underlying assets presents being turned into something—currency state-backed form of digital currency but a contemporary equivalent to the gold or physical goods—supporting North has been less supportive of decentralized standard. If developed, trust among Korea’s nuclear and ballistic missile pro- initiatives, such as Bitcoin.32 rogue actors in other digital marketplaces gram.”27 Like Venezuela and Iran, North China’s intent to create a new world could allow for the free flow of illicit Korea has demonstrated another method order by becoming a socialist superpower trade and funding among participant by which cryptocurrencies can undermine by 2050 includes an interest in cryptocur- nations. Disconcertingly similar to the sanctions. rencies. Previously observed is China’s Cold War model, one could imagine this Although not under economic sanc- reluctance to pursue IMF approval of the type of alternative market system lead- tions, Chinese participation in the realm renminbi as a world reserve currency; ing to independent states choosing to of cryptocurrency should signal another Chinese banks fear that decentralized dig- operate in one or multiple marketplaces. competitive space that China views strate- ital exchanges would directly conflict with This type of parallel digital market system gically. Maintaining control over its own China’s financial stability and control.33 challenges both nonkinetic (financial currency, eroding the prevalence of the Regardless, China understands the power markets) and kinetic (DOD) means by USD, and diminishing the strength of of the blockchain and, as of January which the United States might disrupt Western financial institutions all support 2018, has invested over 100 million illicit actor funding. the Chinese Grand Strategy released by dollars in research toward its applica- As of July 28, 2018, open market the 19th Party Congress.28 In recent years, tion.34 A globally accepted China-backed cryptocurrencies represent under 1
62 Features / How Malign Actors Leverage Cryptocurrency JFQ 92, 1st Quarter 2019 percent of currency assets internationally, in current digital currency regulations the United States the ability to define hence they do not represent an immedi- inform the way ahead. the rules, regulations, and international ate financial market threat. However, this Blockchain. As described in the oversite required to ensure the integrity growing revolution in the establishment new Joint Publication 3-12, Cyberspace of transitioning from a fiat to a cryptocur- of cryptocurrencies harkens back to Operations, the attributes of the cryp- rency landscape. A crypto-USD, backed concepts introduced by Frederick Hayek tocurrency blockchain afford a position by the U.S. central bank, would enable in his 1976 essay, “Denationalisation of marked advantage, representing key the United States to offer higher levels of Money.” Hayek proposed the need terrain in cyberspace.36 Application of of security regarding the cryptocurrency, to remove the central bank monopoly defensive practices involves understand- complementing the benefits of openness over issuance of currency, which is the ing the ledger systems in cryptocurrency generated with blockchain technology. organizing principle of current cryptocur- blockchains to detect pathways of bad The United States must reinvent guide- rencies. While the USD emerged as the actors and the establishment of a system lines in this cyberspace domain that aid stable world currency of choice, the func- to alert other legal actors, replicating the retention of a comparative advantage tioning of U.S. Federal Reserve monetary the function of the current international in the economic and financial elements of policy as the de facto World Bank leaves banking system. Using offensive measures national power. many countries dissatisfied. requires seizing or destroying the cryp- If rogue states coordinated their efforts tocurrency of these actors in cyberspace, As the Department of Defense boldly to counter this actuality with support of such as asset seizure or DOD kinetic marches toward innovative solutions a supranational cryptocurrency standard strikes. Ultimately, DOD in particular to combat revisionist states and rogue for trade and exchange, this technology must learn from the ways in which non- regimes, the area of cryptocurrencies could present a significant challenge to state actors use cryptocurrencies in order demands attention. With national security one of the primary tools used by the U.S. to properly prepare to counter their inevi- implications, the way ahead offers the Government and the international com- table use by other U.S. competitors. potential integration of DOD cyberspace munity to counter continuously evolving National Cryptocurrency. Rogue operations into the whole-of-government gray area threats and activities of rogue na- nations establishing an adaptive parallel response. Significant defensive and offen- tions and violent extremist organizations. digital currency world marketplace directly sive cyberspace capabilities exist should The current instability in cryptocurrency challenge U.S. national security. The the U.S. Government remain ahead of marketplaces presents a window of op- U.S. Government should consider the the momentum building within this portunity for the United States to prepare benefits of first-mover advantage to miti- new financial space. The retention of the for the revolution in international financial gate this potential. Establishing a stable U.S. comparative economic and financial payment systems. USD form of cryptocurrency, backed by advantage should remain paramount to the fiat USD, would serve to retain U.S. dominate the cryptocurrency space. JFQ The Way Ahead command of world financial markets by Advances in digital technologies and allowing the near seamless conversion global connectivity benefit more than of this cryptocurrency back to fiat USD. Notes just bad actors in the financial land- Seizing this initiative would maximize the 1 scape. Indeed, the United States par- benefits of distributed ledger technologies Richard Best, “How the U.S. Dollar Be- came the World’s Reserve Currency,” Investo- ticipates (and thrives) in the cryptocur- and negate benefits of bad actors establish- pedia.com, September 23, 2016, available at rency market. Well-established financial ing parallel systems. Doing so would allow JFQ 92, 1st Quarter 2019 Dudley et al. 63 intel-agencies-and-law-enforcement/>. 2018, available at 64 Features / How Malign Actors Leverage Cryptocurrency JFQ 92, 1st Quarter 2019