OODA Loop – Is Bitcoin a National Security Risk?

The Biden administration is set to issue an Execution Order (EO) articulating national security concerns associated with Bitcoin and other cryptocurrencies. The EO will likely have two key elements, including an actionable element requiring agencies to take direct action and a directional element directing certain agencies to assess key concerns and report their findings and associated recommendations for corrective action.

The cryptocurrency environment has evolved rapidly and has been volatile, which has raised concerns about consumer risk and fraud and all of these risks could impact economic and national security, but it is also likely that the EO will respond to a wider range of concerns.

How could Bitcoin be portrayed as a national security risk? As national security technologists, here is our take on likely government concerns.

Impact on the US Dollar as the World’s Reserve Currency

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

The secondary challenge here for the US government is to ensure that any inevitable movement towards a new model of reserve currency is directly linked to the US innovation ecosystem. Pitfall 22 here being that any effort to thwart innovation in this space could create lasting national security risks in the future if the United States loses the innovation advantage driving key projects to external domiciles or ceding control of critical infrastructure to foreign governments.

Lack of tracking granularity as wealth scales

The US government relies on strict controls to track the movement of money to ensure proper taxation and to prevent funds from being used for illicit activities. While blockchains provide a public observable record of cryptocurrency movement, the destination endpoint may be unknown, obscured or mixed with other transactions, or even moved across chains.

The government will likely seek increasing pressure on companies serving as initiators in cryptocurrency transactions to identify the receiving party or trigger suspicious activity reports or taxable events if this endpoint is not properly associated. to a legal entity. This could be increasingly troublesome for cold storage wallet transactions performed by people 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 to reduce this risk. Additionally, the Web3 ecosystem has evolved at an unprecedented rate, creating a significant gap between existing regulatory and protective frameworks and the value flowing into emerging countries. blockchain ecosystems. We have tracked over $60 billion in impairment in our crypto incidents database and new cases are being reported almost daily.

Absence of fiduciary/legal responsibility for DAO/DAC

Similar to concerns about movement of assets for tracking and taxation purposes, the US government will likely eventually raise concerns about the liability and legal liability of digital autonomous organization/corporate structures. These structures enable codified contracts and autonomous operation on modern blockchains. Failure to identify a viable individual or legal entity to hold accountable for these DAOs/DACs will cause considerable consternation.

Conclusion – over-regulation could be the biggest national security risk

The government has frequently shown ineffective trends in regulating disruptive technologies and the expected exponential growth in the Web3 domain will make matters even worse.

However, it is essential to consider that an approach that disrupts innovation could create an even greater long-term national security risk than those set forth in the next executive order or expressed by other regulatory entities. Given the established pace of innovation, increasing value creation, and expected disruption of a wide variety of business domains, an environment in which regulatory arbitrage becomes the de facto determinant of competence could have the effect of placing the United States at a disadvantage in the market. long term. We must strive to manage risk appropriately without stifling innovation.

Cryptocurrency Incident Database

Martin E. Berry