No Paper Tigers
The U.S. government wants to know if bitcoin and other virtual currencies are a threat to national security
ON A MOUNTAINOUS stretch along the Orange River between South Africa and Namibia lies a small town called Orania, a homeland founded in the 1990s by white nationalists who introduced their own currency, the ora—probably the only tender in the world created exclusively for whites.
The ora, paper money pegged to the South African rand, is one of hundreds of alternative currencies issued for mainly political reasons, but many of the newer currencies are increasingly virtual—digital representations of money consisting of nothing more than computer code. Most prominent among them: bitcoin, which, like conventional currency, can be traded online, transferred, stored or exchanged for cash. But, unlike conventional currency, it lives primarily on the internet, secured by layers of computer code.
This suits bitcoin users just fine. They want a secure way to exchange money by laptop, mobile phone or email. Yet so do terrorists and criminals, whom the U.S. government worries might develop and deploy their own uncrackable virtual currencies. Newsweek has learned hundreds of experts inside the nation’s defense and intelligence agencies, as well as private-sector researchers in finance, technology and various think tanks across the country—some of them under contract with the U.S. government—are now investigating how virtual currencies could undermine America’s long-standing ability to disrupt the financial networks of its foes and even permanently upend parts of the global financial system.
“There is a real danger and a challenge here with respect to virtual currencies,” says Juan Zarate, a senior adviser at Washington think tank Center for Strategic and International Studies and on the board of advisers for San Francisco’s Coinbase, one of the most popular virtual currency exchanges in the world. “And it runs contrary to the very fundamentals of the transparency and accountability that we’ve tried to build for the last three decades to tackle terrorism, human trafficking, money-laundering and many other types of criminal activity.”
In 2003, Zarate led an elite team at the U.S. Department of the Treasury who engineered the model used today to target, block and freeze the finances of America’s enemies through their personal bank accounts—from Iranian money launderers to cronies of Russian President Vladimir Putin. This is how it works: Treasury’s Office of Terrorist Financing and Financial Crimes puts individuals and organizations on a blacklist, which is sent out to the world. Once on the blacklist, those targeted can no longer do business in U.S. dollars, which are involved in roughly 88 percent of the world’s foreign-exchange transactions, according to Switzerland’s Bank for International Settlements. In other words, they cannot bank at most financial institutions. BY LEAH MCGRATH GOODMAN @truth_eater
This ability to financially disrupt, disable and dismantle nefarious networks is crucial to U.S. national security, Treasury officials say. It has proven effective for more than a decade and is often preferable to deploying troops. “We have made it very difficult for members of the Islamic State to raise or move money around the world these days,” Zarate says. “Even Iran had a hard time finding safe havens.” In fact, years of financial pressure from the U.S. and its allies helped force Iran to negotiate with the White House and sign a landmark nuclear deal last year.
The biggest concern the U.S. has about virtual currencies, Zarate says, is that terrorists and other enemies might create one so powerful and so untrackable, they’ll no longer need the global banking system, which the U.S. uses to financially starve them. This has yet to happen, but America’s defense and intelligence agencies are already trying to figure out how they might infiltrate or block such a malicious financial network.
Joshua Baron, an academic cryptographer and mathematician for the Rand Corp., one of the think tanks working with the U.S. government, published the first major research paper examining these issues late last year. (The paper was put out by Rand National Defense Research Institute, a federally funded entity sponsored by the Office of the Secretary of Defense, the Joint Chiefs of Staff, the Unified Combatant Commands, the Navy, the Marine Corps and the defense intelligence community.) Baron found that America’s enemies appear to have far more access in recent years to the kinds of advanced technology and encryption tools that would allow them to potentially design a virtual currency that could circumnavigate the global financial system. “We are seeing a trend toward increasingly sophisticated cyberservices being put into the hands of unsophisticated players,” he says. And while this may be handy for privacy-savvy Americans, it can make it much harder for the government and law enforcement to fight terrorists and criminals, he says.
So, is there any evidence that America’s foes have tried to create one of these nightmare virtual currencies yet? “Not that we found,” says Baron, who plans to release further research on this subject in the coming months. “But we are looking at ways for the government to disrupt any new virtual currencies that might be designed and deployed by terrorists, non-state actors or insurgents for everyday use.”
Rand’s research into the dangers of virtual currencies is not meant as an attack on bitcoin, Baron said. He believes the currency’s publicly visible ledger of transactions is too transparent to attract terrorists, criminals or enemies of the state. “I do not see bitcoin as the go-to currency for terrorists,” he says. “As it stands, it does not offer enough anonymity.”
But that doesn’t mean terrorists don’t use it. In late August, Yaya Fanusie, a former counterterrorism analyst for the CIA, flagged the first verifiable instance of a terrorist organization
“WE HAVE MADE IT VERY DIFFICULT FOR MEMBERS OF THE ISLAMIC STATE TO RAISE OR MOVE MONEY AROUND THE WORLD.”
trying to raise funds through bitcoin. The Ibn Taymiyyah Media Center, an online jihadist propaganda organization based in the Gaza Strip, wasn’t raising very much money, notes Fanusie, now the director of analysis for the Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies. But, he adds, “this effort shows how terrorists are experimenting with new financial technology to expand funding.”
The implications of bitcoin and potentially more threatening copycat virtual currencies go well beyond terrorism. Bitcoin’s unique and widely accessible technology challenges the very bedrock of the global banking system. Blockchain, the digital record-keeping apparatus at the heart of the cryptocurrency, is used to generate, circulate and track bitcoins through computers within a global network that not only verify and record every transaction, but also check each other’s work. This decentralized way of doing business also can be used for countless other applications, prompting an estimated $1 billion of investments in the technology in 2016. Stock exchanges like Nasdaq and financial firms like Visa, for instance, are experimenting with Blockchain technology to replace slower, more expensive third-party record-keeping systems.
“With the introduction of Blockchain, a disruption of the global banking system is inevitable,” says Bala Venkataraman, global chief technology officer of banking and capital markets for Computer Sciences Corp., a digital information-technology company whose sister firm, CSRA Inc., runs the IT backbone of the National Security Agency (NSA).
Computer Sciences has hired hundreds of technologists and experts across the banking, insurance and health care sectors to examine how to “scale up” Blockchain technology for faster banking, trading, clearing and settlements, Bala says. “In a cryptocurrency world, you know who becomes the bank?” he asks. “You and I. You become not just the bank, but the central bank. And that can have enormous ramifications for things like sovereign authority. By 2040, I think we may be fully transitioned over to cryptocurrency. I don’t think anyone can stop it from happening.”
Meanwhile, CSRA, which also works closely the U.S. Department of Homeland Security, confirmed to Newsweek that it has been surveilling the progress of bitcoin since its early development for the U.S. government, but declined to comment further. (The NSA and DHS declined to comment as well.) A post on the website of Computer Sciences, which has some top brass that overlaps with CSRA, offers a glimpse of how the former views bitcoin. Noting that global digital payments outstripped paper-based payments for the first time in 2014, led in part by millennials and the increased use of virtual currencies, it refers to bitcoin as a revolutionary innovation that’s “breathtaking in its ambition,” and striking for its “attempt to overthrow a sovereign authority.”
For now, Treasury officials at the Office of Terrorist Financing and Financial Crimes and the Financial Crimes Enforcement Network say they are taking a do-no-harm approach to currencies like bitcoin by carefully regulating and monitoring them, but also allowing them to evolve. As one Treasury official notes, bitcoin has yet to reach the kind of scale that would remotely begin to rival the U.S. dollar. The busiest week on record for the cryptocurrency, which occurred late this year, the official said, came to $2 million, compared with $14 trillion of average daily U.S. dollar transactions.
Yet like Orania, bitcoin was created for political reasons—in this case, as a challenge to the global banking system. The virtual currency, launched at the height of the Great Recession, appeared with a newspaper headline carefully tucked into its genesis block, the currency’s cornerstone hunk of code. Taken from a January 2009 story in The Times of London, it reads: “Chancellor on brink of second bailout for banks.”
“WITH THE INTRODUCTION OF BLOCKCHAIN, A DISRUPTION OF THE GLOBAL BANKING SYSTEM IS INEVITABLE.”