Unlocking the Potential of Blockchain and Digital Assets for Enhanced U.S. National Security

As experts in national security, our primary focus is on assessing risks and ensuring safety. With combined experience spanning decades and multiple roles within the U.S. government, including the FBI, CIA, U.S. Secret Service, and the Departments of Justice and Treasury, we have developed a deep understanding of the complex issues at play. Our backgrounds include establishing the first unit dedicated to investigating illicit finance involving digital assets, holding high-level positions at the CIA's Center for Cyber Intelligence, and dismantling transnational organized crime groups. The U.S. has historically maintained its national security edge by embracing and developing new technologies. In collaboration with the Blockchain Innovation Project, we aim to share our insights on how the strategic implementation of blockchain technology can support U.S. national security. Given the relatively early stage of blockchain's integration into mainstream use, policymakers and the public often face misinformation about the technology, which can stem from a lack of understanding or deliberate attempts to skew the narrative with incomplete facts or misguided analysis. At its core, blockchain technology utilizes cryptography and, like other technologies, is neutral in its application. Both fiat and digital currencies can be used for legitimate and illicit activities. The strategic national security interests of the United States require policymakers to focus on the structure of the market. Many policy approaches to markets and the role of blockchains within them are overly broad, attempting to address multiple issues simultaneously, such as market integrity and systemic risk mitigation. These broad approaches are further complicated by the ongoing lack of understanding about blockchain technology, cryptocurrency, and tokenomics. We firmly believe that if the United States proactively establishes a framework for this technology to thrive domestically, policymakers will quickly realize that blockchain and digital assets can serve as tools of strength and democratization, rather than being solely exploited by criminals and rogue international actors. Moreover, the strength of the U.S. dollar is a powerful tool in the U.S. soft-power arsenal. Creating a regulatory framework that allows access to regulated, fully-backed U.S. dollar-based stablecoins issued by the private sector is not only an opportunity for economic growth but also a means to channel a significant portion of the global economy into the U.S. regulatory system, thereby increasing the country's monetary and regulatory tools. It is crucial to acknowledge that the rest of the world, including both adversaries and allies, is advancing with the development and adoption of digital assets in their financial systems. Some are doing so at an accelerated pace, while many U.S. banks rely on outdated software platforms. The European Central Bank President, Christine Lagarde, has expressed the vision for a digital euro as a digital form of cash for all digital payments. Meaningful regulatory frameworks, many of which protect national security, have been established in over 20 countries in 2023. Conversely, hostile nations continue to exploit regulatory gaps and capitalize on the vulnerabilities created by patchwork rules and absent market structures. As highlighted by the CFTC Technology Advisory Committee, this can lead to a dilution of the nation's influence and its position as a provider of the global reserve and transaction currency, weakening the ability to combat illicit financial activity. With regulatory certainty, the national security benefits of digital assets and blockchain technology will expand exponentially. These benefits include enhancing efforts to counter adversarial influences, more effectively monitoring international trade requirements, and enforcing sanctions. Specifically, the use of blockchains and tokenization processes significantly improves the traceability of supply chains, ensuring that critical resources are free from malign influence. This capability is vital not only for economic security but also for safeguarding technology and defense capabilities from foreign exploitation. By design, cryptocurrency transactions are immutably recorded on a public ledger, providing identification and tracing opportunities for investigators and intelligence agencies that do not exist with traditional financial transactions. This capability extends beyond the individuals directly involved in the transfer of assets, facilitating the disruption or judicial action against entire criminal networks, including supply chains, money mules, affiliates, infrastructure service providers, money launderers, and on-ramps and off-ramps to fiat currency. A common misconception is that blockchain transactions are anonymous. While they can be pseudonymous, they are not entirely anonymous, as transactions are recorded on a public ledger that can be analyzed to reveal patterns and links to individuals or entities. Fortunately, the transparent nature of blockchain provides law enforcement with tracking and tracing capabilities to identify the flow of illicit transactions that were previously unavailable in traditional financial crimes. Unlike cash transactions, which leave little trace, blockchain transactions allow for the tracking of assets across networks. By analyzing transaction patterns and employing forensic blockchain analysis, authorities can trace illicit activities in ways that are not possible with traditional, cash-based methods. This capability is transforming approaches to combating financial crime and holding bad actors accountable. Finally, digital assets offer additional advantages over cash in terms of freezing or seizing assets. In the last year alone, billions of dollars' worth of cryptocurrency associated with thefts, hacks, and money laundering have been blocked or frozen following due process of law. Many cryptocurrency issuers support government authorities by collaborating with hundreds of law enforcement and regulatory agencies, including the U.S. Department of Justice, U.S. Secret Service, and the FBI. The United States has a responsibility to remain at the forefront of technological advancement and uphold strong national security. By collaborating to develop a clear market structure and regulatory framework for blockchain and digital assets, leaders will help fuel progress that will protect U.S. citizens and the economy, both at home and abroad, for decades to come.