As policymakers consider crypto, we must take the right lessons from previous instances of offshoring technology. Our national security is at stake.

Crypto is the technological innovation that will usher in the next generation of transformational change in the financial system. Major use bases abound: 

• Stablecoins allow for quicker and cheaper settlement times when making payments around the world

• Major banks like JPMorgan are using new decentralized protocols to more effectively execute traditional financial transactions 

• Decentralized ID can allow every person who uses the internet to more easily control their online identities, which are needed to interact with a range of online services

• UBS has started issuing digital bonds that settle instantly on the blockchain

• Broadridge now conducts $70 billion of repurchase agreements every day via blockchain technology

• Asset issuers are just beginning to scratch the surface when it comes to tokenizing real world assets

• But the blockchain isn’t just about finance. The U.S. military and national security personnel have been exploring blockchain uses in national security for many years: 

• In 2017, the Defense Advanced Projects Agency (DARPA) approved research into blockchain technology, with a primary focus on cybersecurity and data integrity and developing a secure messaging platform. 

• DARPA is also exploring a blockchain-protected supply chain to ensure the integrity and authenticity of components along the chain of custody, including funding companies like DUST Identity, which creates unique, unclonable digital identities to physical objects and is cost effective to use at scale. 

• The U.S. Air Force has not only provided funding for, but also has multiple contracts with SIMBA Chain using blockchain to manage cash flow and streamline operations. 

• The U.S. Navy has commissioned a blockchain system for tracking critical weapons. DARPA is in the process of assessing risks

  and vulnerabilities – but its many years of research indicate a recognition of the potential of blockchain to address key military issues including logistics planning, supply chain, secure messaging, and data security. 

While the use cases for crypto and blockchain are becoming more advanced and varied than they have ever been, the U.S’ regulatory approach to the technology is causing it to lag behind in adoption relative to other countries around the world. This is something that all policymakers who care about national security should pay attention to. As explained in last week’s series on crypto and national security, the U.S. has regularly leveraged technology to advance our national standing. But, at times, it has also dropped the ball and failed to embrace technologies that have become critical.  

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Semiconductors - a cautionary tale 

Chips are having their moment on the national and international stage – they have become important to everyday life, the strength of our economy, and the security of our country. Just last week, after projecting a stunning $11 billion revenue target for Q2 2023, chip maker Nvidia’s market valuation leapt more than 25% to $1 trillion. While this development represents a victory for the chip industry, the U.S. has struggled to maintain our leadership role in this sector.

In 1990, the U.S. controlled 37% of global semiconductor manufacturing capacity. But in the decade that followed, foreign governments took steps to actively promote and support chip production, while the U.S. government largely remained passive. As a result, the U.S. controls only 12% of today’s capacity, having ceded manufacturing to China, Taiwan, South Korea, and Japan, and resulting in a concerning dependence on overseas manufacturers. Today’s most advanced chips are largely made in Taiwan, exposing the US to substantial geopolitical risk. 

This reliance on other countries became especially apparent during the pandemic when global supply chains broke down and chips became scarce in the U.S., threatening a broad swath of industries including defense, network infrastructure, auto, and healthcare.

To address the national security concerns exposed by pandemic supply chain bottlenecks and China’s growing ambitions and control over the chip market, the U.S. passed the CHIPs Act last year to encourage homegrown innovation and put domestic producers on a fairer playing field. The bipartisan vote reflected a rare consensus in Washington that the U.S. could not fall further behind in such a critical industry. 

How crypto can close the gap in financial technology

Now we risk falling behind in financial services and payments. While the rest of the world has forged ahead with new innovations, we have stagnated. Mobile payment adoption is high in countries like China (40%) and Vietnam (33%). In the U.S., it’s 26%. Hangzhou-based Ant group boosts more users than its next four largest competitors, which include PayPal. 

To accelerate that growth and with the stated ambition to have the world’s most advanced blockchain technology by 2025, Beijing has launched the Blockchain based Service Network (BSN), one of the first government-maintained global blockchains.  Access to BSN is completely permissioned and transactions are not publicly viewable. The BSN is being pushed as a global commercial solution, and could create a non-transparent way for China to collect information on supply chain and logistics vendor participants - including those that supply the U.S. In 2021, China’s 14th Five-Year Plan demarcated, for the first time, blockchain as a future key accelerator for economic growth and development. As of 2022, China had nearly nine out of ten blockchain patents filed in the world, with Ant Group filing most of them.

The U.S. needs an integrated strategic approach to regain its financial technology leadership, and that must include crypto. 

The crypto industry is critical in its own right. At the most basic level, the cryptocurrency market itself – valued at more than $1 trillion and dominated by U.S. dollar denominated markets –  is too big for the U.S. to ignore. The need to ensure that critical on and off-ramps to the crypto economy operate under domestic rules and comply with U.S. national security controls is apparent. 

More broadly, while just over a decade old, blockchain technology is in the early stages of driving transformational changes across industries. Entire ecosystems of crypto innovation have sprouted around critical industries. Core to the blockchain’s appeal: being faster, cheaper, more private, and more accessible than the alternatives. It is being examined for use in defense supply chains where it can mitigate risks and vulnerabilities - for example by identifying counterfeit goods by using blockchain to trace and authenticate contractor components. The blockchain also has a role in addressing emerging issues in AI like misinformation and photorealistic imagery, where unique identifiers could be established and used to validate images that might otherwise pose risks to national security.

In the years and decades to come, applications like these could be transformational across industries critical to national security. But we are at risk of pushing the benefits and the control of the blockchain offshore if we fail to adopt clear rules and regulations. To secure the U.S. we must enact smart crypto policy that encourages and guides the industry.

This is part of an ongoing series about the intersection of crypto and national security. Read part I and part II here.