Do you know where your tax dollars are going?
US Government-Funded RAND Research Examines Strategies for Disrupting Digital CurrencyWhat do you do when your country is barreling towards twenty trillion dollars worth of debt, while facing abysmal workforce participation rates at home and massive foreign policy challenges abroad? Well, if you’re the US government, there’s really only one sensible option: you fund a research project to have RAND examine different ways to disrupt digital currencies.
Yes, that’s right: the federally-funded RAND National Defense Research Institute’s International Security and Defense Policy Center was asked by the Office of the US Secretary of Defense to examine the national security implications presented by digital currency implementation, as well as possible options the United States could use to disrupt such currencies should the nation determine that they somehow pose a national security risk.
The report manages to be both thought-provoking and chilling, and offers a wonderful opportunity for interested readers to sneak a peek behind the curtain at the types of concerns their tax dollars help to address.
Although I do object to taxpayer money being used to fund NGO research projects, the report itself was very interesting. They are clearly lacking in some areas of expertise, but overall it was very informative and provided a fair overview of the industry.
Here is a quick point form overview of the report:- Main targets: Services such as exchanges, wallets, and cell phone apps used for transactions.
- Attacks on centralized services (pools / web wallets) likely to be DDOS.
- Attacks on entire currency likely to be 51% attack or software corruption.
- Virtual currencies have no intrinsic value (DNotes value will primarily come from the business and services underlying the currency).
- The most effective forms of money were developed from objects that were otherwise quite useless such as paper or binary code.
- Commodity based currencies maintain stable volume over time, however are vulnerable to short term value fluctuations that are beyond the control of authorities. This is because they are based on supply and demand of the commodity.
- Commodity based currencies are difficult to transfer over long distances.
- Fiat currency value is dependent on users trust in the central authority, and are difficult to transfer over long distances (but easier than commodity based currencies).
- Virtual currencies act as a store of value, unit of account, and medium of exchange within their community of interest.
- Virtual currencies are easily transferrable and do not need to transit through borders as currency, reducing cross border transaction costs.
- Types of coins:
1) Pure Altcoins - Modified Bitcoin to create new blockchain based currencies.
2) Anonymous Coins - Used additional cryptographic techniques to provide greater anonymity than Bitcoin.
3) Appcoins - Use blockchains for other purposes - They may also be used as currencies or for financial transactions.
- Centralized architectures require a central server that ensures security. The drawbacks to this is a single point of failure, and the requirement of trust in the central authority.
- Decentralized authority mechanisms work on consensus of many users, therefore even if some users are malicious, they cannot impede correct behavior.
- Semi -centralized virtual currencies (such as Ripple), distribute authority among restricted set of participants.
- There is no evedence that organized criminal groups have developed and deployed virtual currencies, but there is some evidence that some have exploited Bitcoin for illegitimate transactions.
- One of the most common criminal uses for virtual currency is ransomware. Another is the purchase of illicit goods online.
- There is little evidence that terrorists are using virtual currency on a meaningful scale. This could change if they feel there is more to gain (politically, economically, or operationally) by moving toward increased virtual currency usage.
- Sovereign currencies are being deployed to replace existing currencies for reasons such as rampant inflation (with or without government approval).
- Controlling their own currency, non-state groups such as insurgents may be able to increase their political and economic leverage in contested territories.
- Given the large tech infrastructure requirements , virtual currencies have not been used as the medium of choice for insurgents involved in civil conflicts.
- Non-State currencies emerge when State currencies do not meet group needs.
- Consumers in emerging markets are using Bitcoin to hedge their volatile currencies.
- Central banks and governments in developed countries have assessed the monetary control risk posed by virtual currencies circulating in their areas of resposibilty to be low.
- The two conditions under which virtual currencies are likely to gain traction are:
1) The central authority does not provide a stable macroeconomic environment, and as a result the territorial fiat currency is non-existant or its value becomes unstable.
2) Since most community currencies are geographically constrained, virtual currencies may play an important role in building and maintaining communities.
- Most local communities that have adopted community currencies have done so within the structure of a well developed financial system.
- Insurgent groups with contested territorial control over a region have three options when adopting a currency:
1) Adopt commodity based currency in which the currency in circulation is the commodity itself.
2) Adopt another country's currency. This ranges from circulating pre-existing currency in the local economy to minting a new currency that is backed with reserves of another country's currency.
3) Adopt its own currency that may not nessarily be backed by a commodity or by stocks of a reserve currency. The benefit to this option is the new group requires smaller reserves to roll out their new currency. A fixed exchange rate may help combat volatility, however unless the market believes the currency value is inaccurate, or the group has insufficient reserves to defend their exchange rate peg, the group may be unable to defend the currency's value.
- There are three reasons why separatist groups are not expected to establish virtual currencies:
1) Insurgent organizations lack skills to deploy virtual currencies.
2) Monetary rules underlying virtual currencies need to be specific and maintained.
3) User's trust in new currencies tends to be low. Users need time to become familiar with the system, the stability, and ease of use.
- Low initial penetration of virtual currencies in day to day economic life will increase users suspicion. This suspician will erode as they become more familiar with virtual currencies.
- In the near term paper currencies will be far more acceptable and inherently more trustworthy even though they are less resilient to physical attack and require greater infrastructure.
- An insurgent group is more likely to choose paper currency over a virtual currency today.
I've decided to omit the development and deployment of a virtual currency, as DNotes has been a model in this regard. However my takeaway is the importance of wisely incentivizing mining. Too drastic of a block reward reduction without increased adoption, could leave miners operating at a loss.
I've also omitted the vulnerabilities section as it's a lot of theoretical what ifs and hearsay that smaller VC's and centralized services (exchanges, pools, web and mobile wallets) are more susceptible to. If zero day vulnerabilities of Bitcoin were known, it's likely that Bitcoin would be long gone by now. Sophisticated attackers may take advantage of careless VC users by undermining their software and/or hardware. If enough users are compromised, the VC may be as well.-Bitcoin is anonymous in the sense that every transaction and every account balance is known to anyone with an internet connection; the unknown information is who owns each account (something that can be revealed through user transactions).
-Decentralized VC's such as Bitcoin have provided a resilient means to store and update data in a highly distributed fashion that's hard to corrupt.
-The time required to distribute and agree upon the data is a limiting factor.
-A central challenge in adopting blockchain technology to other non-financial applications will be how to incentivize the security of a decentralized system.
-While blockchain applications may be useful for national security, they would be particularly beneficial for adversaries who would have access to far more resilient services than they would otherwise considering their limited skill set.
-Increased awareness of blockchain technology has increased awareness of sophisticated cryptographic techniques for distributed consensus and computation, which can be used by less sophisticated developers to enable greater security.
-Increased mining based VC use may increase the amount of hardware available capable of breaking cryptographic security.
-The development of a VC by a non-state actor is most feasible when supported by a nation state with advanced cyber expertise. The nation state could enable the non-state actor to overcome the considerable hurdles associated with developing a VC.
