Bitcoin is being monitored by an increasingly wary US government

Bitcoin is being monitored by a US government concerned that terrorists could develop a similar virtual currency. Leah McGrath Goodman looks at the factors that could hamper the US’s ability to disrupt its enemies’ financial networks

Leah McGrath Goodman
Thursday 29 December 2016 21:00
Bitcoin itself is thought not to offer enough anonymity to be of interest to terrorists, but the US is looking closely at how something similar cold enable terrorists to circumvent the global banking system
Bitcoin itself is thought not to offer enough anonymity to be of interest to terrorists, but the US is looking closely at how something similar cold enable terrorists to circumvent the global banking system

​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. The most prominent among them is 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 well. They want a secure way to exchange money by laptop, mobile phone or email. But so do terrorists and criminals, and the US government is worried that they might develop and deploy their own uncrackable virtual currencies. Hundreds of experts inside the nation’s defence 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 government – are 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 the Centre for Strategic and International Studies, who is also on the board of advisers for San Francisco’s Coinbase, one of the most popular virtual currency exchanges. “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 a team at the US Treasury who engineered the model now used to target, block and freeze the finances of America’s enemies through their personal bank accounts – from Iranian money launderers to cronies of Vladimir Putin. This is how it works: the Treasury’s Office of Terrorist Financing and Financial Crimes puts individuals and organisations on a blacklist, which is distributed around the world. Once on the blacklist, those targeted can no longer do business in US dollars, which are involved in roughly 88 per cent 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.

This ability to financially disrupt, disable and dismantle nefarious networks, is crucial to US national security, Treasury officials say. It has proven effective for more than a decade and is often strongly 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 US and its allies helped force Iran to negotiate with the White House and sign a landmark nuclear deal last year.

The biggest concern the US has about virtual currencies, Zarate says, is that terrorists and other enemies might create one so powerful and so untrackable, that they’ll no longer need the global banking system, which the US uses to financially starve them. This has yet to happen, but America’s defence and intelligence agencies are already trying to figure out how they might infiltrate or block such a malicious financial network.

Bitcoin is currently the most prominent digital currency

Joshua Baron, an academic cryptographer and mathematician for the Rand Corporation, one of the think tanks working with the US government, published the first major research paper examining these issues late last year. Baron found that America’s enemies appear to have had 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 cyber services 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 enemies have tried to create one of these nightmare virtual currencies yet? “Not that we found,” says Baron, who plans to release further research on the subject. “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 organisation trying to raise funds through bitcoin. The Ibn Taymiyyah Media Centre, an online jihadi propaganda organisation based in the Gaza Strip, wasn’t raising very much money, noted Fanusie, now the director of analysis for the Centre on Sanctions and Illicit Finance at the Foundation for Defence of Democracies. But, he adds, “this effort shows how terrorists are experimenting with new financial technology to expand funding.”

A post on the website of Computer Sciences, a digital information-technology company, notes 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, and 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 regulating and monitoring them, but also allowing them to evolve. As one Treasury official noted, bitcoin has yet to reach the kind of scale that would remotely begin to rival the dollar. The busiest week on record for the cryptocurrency, which occurred late in 2016, the official said, came to $2m (£1.6m), compared with $14 trillion of average daily dollar transactions.

Yet like Orania, bitcoin was created for political reasons — in this case, as a challenge to the global banking system.

The implications of bitcoin and potentially more threatening copycat virtual currencies go well beyond terrorism. Bitcoin’s unique and widely accessible technology challenges the 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 decentralised way of doing business also can be used for countless other applications, prompting an estimated $1bn (£8.1bn) of investments in the technology in 2016. Stock exchanges like the 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 for Computer Sciences. “In a cryptocurrency world, you know who becomes the bank? 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.”

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