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U.S. national security at risk if we fail to embrace crypto

Tl;dr: History is full of examples of the U.S. leveraging technology to support our national security―and prevent tech from being used against us. Today, we’re at a critical crossroad; the government can choose either to implement forward-looking crypto regulation or to hand over the benefits of leadership in this sector to other countries, including our adversaries.

By Coinbase Institute

Policy

, May 30, 2023

, 10min read time

Coinbase Institute

At a first glance, it might be difficult to see the connection between blockchain technology and national security. But throughout American history, decisions about whether and how to embrace new technologies, even those that first appeared to have few direct applications to defense, have profoundly impacted our security and our leadership in the world. Let’s take a look at a few examples.

Autos: Coming together for the greater good

Through the Roaring Twenties, U.S. companies built manufacturing capacity designed to make newly affordable consumer and industrial goods like cars, home appliances and mass-produced clothing. Despite the lingering Great Depression, the U.S. produced more than 3 million automobiles in 1941, the year it entered the war after the Pearl Harbor attack. While Detroit would make only 139 cars during the entire duration of the war, its factories never went quiet.

After Pearl Harbor, the Roosevelt administration created the War Production Board, which oversaw the retooling of the manufacturing sector for wartime. President Franklin D. Roosevelt understood that victory in war started long before the battlefield, stating that “powerful enemies must be out-fought and out-produced.” U.S. companies produced heavy equipment like tanks, guns and airplanes, but also smaller goods like bullets, uniforms and even specialized candy bars. By the end of the war, half of the world’s industrial production was in the U.S.

The speed with which Americans switched to a wartime footing is a testament to their resolve, but their grit alone isn’t what allowed the U.S. to win World War II. The U.S. won because it was able to leverage the world’s greatest manufacturing infrastructure, consisting of factories, skilled workers and a supply chain capable of moving both raw materials and finished goods. 

Sputnik: Entering the race late and managing to win

Just years after World War II, the United States and the Soviet Union quickly became embroiled in a decades-long struggle for power. All types of technology―even those without direct military applications―immediately became a critical battleground for this conflict. And while both countries recognized the importance of control in the skies and space, the Soviets’ beach ball-sized Sputnik satellite made it to orbit first. 

The Soviets would not have the final word, however, because this initial defeat spurred the U.S. to action. Determined to avoid a recurrence of the Sputnik embarrassment, the U.S. founded DARPA, the Defense Advanced Research Projects Agency, an agency designed to channel the best of the private sector, government agencies and academia to ensure that America developed and mastered next-generation technologies and their defensive applications. The project was an immediate success; in the same year it was founded, DARPA launched the world’s first communications satellite

Of course, the U.S. won the Cold War―and the entire world has benefited from technologies DARPA helped to develop, like the internet, automated voice recognition and GPS, not to mention the early roots of NASA. Today, DARPA is doing pioneering work in the rapidly emerging field of artificial intelligence. This example of the U.S. coming to dominate several fields that have come to define security in the twenty-first century, despite being an early laggard, shows what is possible when the government harnesses American ingenuity and efficiency of its private sector. 

Semiconductors: Catching up

California-based Intel launched the first commercially viable microprocessor in 1971, igniting the personal computer revolution and everything that came after it, from gaming to the Internet and blockchain. While the U.S. invented microprocessors, it ceded its leadership position in their manufacture early on; as global demand for chips increased rapidly starting in the 1980s, and other countries joined the fray. In 1990, the U.S. made 37% of the world’s semiconductors, a figure that has since declined to 12%.

By 2020, Taiwan commanded a plurality of the world’s chip manufacturing capacity (22%), followed by South Korea (21%), Japan (15%) and China (15%). This means that the vast majority of the production of this essential good is centralized in one part of the world―one that is susceptible to natural disasters and, increasingly, to geopolitical risk.

Moreover, the U.S. also lost its edge in producing the cutting-edge chips necessary for the most critical next-generation applications; following well-publicized struggles to manufacture 7-nanometer chips, Intel is now left to catch up to foreign competitors, which have moved on to 2 nm and 3 nm development. China is also a hub for illicit and counterfeit chip manufacturing; these illicit chips have already penetrated our global supply chain. In a report from last year, the European Union's law enforcement agency Europol highlighted the dangers of counterfeit semiconductors to critical infrastructure as well as people's private devices. "Disruptions in supply chains and the possible introduction of counterfeit components has the potential to cause serious failures in critical infrastructures. Semiconductors are an integral part of critical systems used in the healthcare sector, transport, defense, and trade. The risk of privately used electronic devices being affected is also high. Additionally, counterfeit electronic devices may also feature malware and other harmful software, adding the risk of data theft."Given their importance to both daily life and military technologies, an inability to manufacture advanced chips could be a tremendous vulnerability to the U.S.―and the ability to cut off our supply could provide others with leverage over us. Our adversaries, including China, understand this. 

Following an extended period of indecisiveness, a determined and united U.S. took action in 2022. With White House and broad bipartisan Congressional support, the CHIPS Act―which provides $52 billion to fund advanced semiconductor development and manufacturing in the U.S. along with nearly $100 billion for research over five years―was enacted. 

Given the expense and complexity of rebuilding the U.S. as a global center for microchip manufacturing, it will take years to know how successful this effort will be. But early results are promising, with Micron, Qualcomm and GlobalFoundries committing to new investments in domestic chip manufacturing. 

What’s next?

Blockchain and crypto are the next must-have technology for the U.S., our allies and our adversaries alike. Its potential utility, spanning big data, financial transactions and supply chains, makes it a promising commercial opportunity as well as a target for cyberattacks. To keep the most advanced crypto technology on our shores, the U.S. needs to leapfrog other countries in building a crypto ecosystem. 

We have the drive and know-how to do so, but we lack the political leadership that has historically helped the U.S. to maintain its predominance. We don’t need subsidies or investments from the government, but we do need access to the foundational legal and regulatory infrastructure that provides crypto investors with access to the predictability and certainty of the U.S. courts and legal system. 

It’s difficult to convince the crypto ecosystem to stay in the U.S. when there are plenty of jurisdictions―​including the European Union, Brazil, Australia, and many others―that are implementing favorable regulatory regimes for it. The prospect of falling behind in this critical field should concern everybody who wants to secure American security and leadership, but the passage of the CHIPS Act demonstrates that even in divided times, the American people can still come together to invest in our national security―a promising sign indeed.

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

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