(Photo by Flickr user fdecomite, used under a Creative Commons license)
When former CIA analyst Andrew Bustamante was asked to identify what he thought was the most formidable threat to U.S. national security, the reply was swift and sure: blockchain technology.
Indeed, the popularity of Bitcoin and other cryptocurrencies has focused attention on blockchain technology and the potential threats it poses to national security. That fear gained traction two years ago when a member of ISIS was reputed to have sent Bitcoin to fellow members across Indonesia to circumvent the formal financial system.
Those features of cryptocurrencies which enable such groups to conduct swift transactions outside the watchful eye of government might seem appealing to rogue organizations and states. But one expert advises regulators to appreciate the risk but hold off on pressing the panic button.
“I would say that the scope of the threat is often exaggerated,” said Yaya J. Fanusie, senior fellow at the Foundation for Defense of Democracies’ Center of Economic and Financial Power, who recently gave a talk on cybersecurity and cryptocurrency at the University of Delaware. “That doesn’t mean that cryptocurrencies aren’t being used for illicit activities — they are. But the scope is sometimes exaggerated. We’re really talking about a small market because most of the world is operating on regular fiat currencies” (aka government-backed tender).
Fanusie believes that too heavy-handed an approach might stifle an otherwise valuable technology. Bitcoin is the most popular and first-ever digital currency: It was created in 2009 as an open-source software by the pseudonym Satoshi Nakamoto.
Bitcoin is a decentralized peer-to-peer version of electronic cash that allows payments to be sent directly from one party to another bypassing a traditional financial institution. Although there are more than a thousand cryptocurrencies, Bitcoin is the most popular and the closest to a state-minted currency.
Fanusie, who also sits on the advisory board of The First State Fintech Lab, notes that Bitcoin offers some unique possibilities. Since Bitcoin works under the blockchain technology, transactions are easier and cheaper than with regular currencies. There aren’t any fees or middlemen to deal with. Moreover, since Bitcoin is not a creation of any governmental authority, it is devoid of any political influence.
Bitcoin transactions are also discrete: Transactions are never associated with a user’s personal identity and cannot be traced back to them. It is this pseudonymous method of payment that makes Bitcoin so attractive to cybercriminals. Security experts fear that terrorist groups will use cryptocurrencies to raise funds.
Even here, though, Fanusie says threat level at this point in time is low.
“It’s mitigated a bit because you have to eventually come into regular money and when you do that, that’s when law enforcement and regulatory agencies can identify you,” he said. “The other part that mitigates that is that most cryptocurrencies like Bitcoin are traceable. When transactions occur, there’s a record, there’s something for investigators to look at.”
Fanusie stressed that the U.S. must shake off its fear regarding cryptocurrency technology and gain an expertise that will allow it to take the lead. He noted that Iran and Russia are already making changing to their banking sectors to use cryptocurrencies and blockchain technology to circumvent sanctions.
“In the short term I don’t think that’s a big threat, but over time if the U.S. stays behind and does not track and follow this technology and develop it and influence it, then maybe Russia or China will create a system that’s outside our global banking system,” he said.
Fanusie said he is encouraged by the government’s response so far: In 2013, the enforcement arm of the U.S. Department of the Treasury required cryptocurrency businesses to register just like any other financial institution.
“That was actually pioneering in 2013,” he said. “I think that has put the cryptocurrency business sectors farther ahead in terms of policing illicit activity.”
Education is key so that legislators and regulators can come up with a digital currency strategy, Fanusie said.
“I think we are in a very formative period for this technology and it’s going to take a little bit more time to figure out what we need to implement — what new structures we need to create,” he said. “I think that will happen over time.”-30-
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