Much has been said about the problematic implications of cybercurrencies like Bitcoin for contemporary security environments. After all, they provide unsupervised conduits for the cross-border circulation of money in ways that can conceal the identities of those responsible. Needless to say, such advantage can be useful for the various financial operations of malicious nonstate actors, such as transnational criminal organizations, terrorist networks, insurgent militias, hacktivists, and even separatist forces.
Unsurprisingly,
evidence confirms that the cryptocurrency ecosystem has attracted the
involvement of unsavory groups like ISIS, Hamas, Mexican drug cartels,
cybercrime syndicates, and professional money launderers. Plus, as the case of
the so-called ‘Silk Road’ illustrates, Bitcoin has become the coin of the realm
in the illicit markets which flourish in the deepest corners of the digital
lawless underworld known as the ‘dark web.’ Likewise, the esoteric realm of
cryptocurrencies is seemingly fertile for all sorts of criminal activities,
intrigues, fraudulent businesses, scandals, conspiracy theories, scams,
make-believe, and wild unconfirmed rumors. Arguably, this emerging microcosm
reflects some of the dark traits associated with human nature since the dawn of
time, including greed, the pursuit of power, and deception. However, the
instrumental implications of Bitcoin for the practice of statecraft have not
been fully understood in a comprehensive manner. Thus, this analysis seeks to
clarify in-depth the relevance of Bitcoin for national power and, specifically,
to determine how and why it can either strengthen or weaken it in today’s
increasingly complex strategic geopolitical realities and geoeconomic dynamics.
Background:
What is Bitcoin?
As the
first of its kind, the creation of Bitcoin (BTC) is a major evolutionary
turning point in the historical development of money. This cryptocurrency was
born in a period shaped by the changing Zeitgeist in the wake of the 2008
global systemic financial crisis, particularly growing public concern and
discontent over the implementation of unsound monetary policies (i.e. rampant
levels of quantitative easing), the oligopolistic structure of Western
financial systems, the questionable legitimacy of fiat money, deepening spirals
of debt, the reliability of the US dollar as a reserve currency, and the
unchecked market power of big banks. Its precedents include the development of
electronic payment systems, the proliferation of digital FinTech innovations,
and theoretical proposals to formulate virtual equivalents of cash that could
be used to carry out anonymous transactions. The invention of Bitcoin was
masterminded by someone called Satoshi Nakamoto. However, the consensus
indicates that said name is an alias adopted by an individual or a group that
wishes to remain anonymous for unclear reasons.
The
uniqueness of this cybercurrency is defined by several characteristics.
Bitcoin’s governance structure is stateless, unofficial, and decentralized. In
practical terms, that means that the BTC environment ‒ which encompasses an integrated
financial grid ‒ is not controlled by hierarchical governmental or corporate nerve
centers. Instead, the behavior of its organic ecosystem responds to the
authority of algorithmic programming. Therefore, unlike fiat money (issued by
governments and flowing through arteries owned by private baking entities),
nobody is in charge of Bitcoin. Hence, it purports to replace the
socio-economic need for mutual trust and faith in the money issued by central
banks with an impersonal mathematical accuracy that resembles the automatic
perpetual motion of a clockwork mechanism. The design of this singular
architecture is underwritten by a couple of ideological frameworks: 1)
libertarianism, a philosophical school of thought that seeks to diminish the
presence of the state in the sphere of economic matters as much as possible;
and 2) techno-utopianism, a movement which believes that high-tech can offer
functional solutions for every conceivable societal problem.
Moreover,
Bitcoin’s technical properties are also noteworthy. Access to its operational interfaces
(wallets) is protected by cryptographic keys and its technological engine is
the automatic bookkeeping system known as ‘blockchain,’ identified as one of
the chief drivers of the so-called “Fourth Industrial Revolution.” A blockchain
is a collective and self-sustaining digital systemic record that is
periodically updated in a way that makes it inalterable. In addition, as a
horizontal and leaderless domain, the Bitcoin community gathers its users and
holders through a peer-to-peer protocol. Furthermore, although it does not
provide full anonymity, BTC facilitates pseudonymous transactions. In other
words, people involved in BTC can ‒to a certain extent‒ hide their identities and protect
their personal privacy in a manner that would not be possible through the
services offered by conventional third-party platforms.
On the
other hand, the process through which new Bitcoin units are minted does not
involve either printing legal tender or fractional reserve banking. Known as
‘mining,’ it entails the performance of mathematical operations to solve
increasingly complex puzzles as a step that is necessary for the collective
validation of transactions (‘proof of work’). Once the equation has been
deciphered by one of the advanced computers connected to the Bitcoin network,
the winner is rewarded with new Bitcoins. The quest to harvest this incentive
is what keeps the whole thing going. In other words, BTC mining includes both
collaborative and competitive ingredients. Cryptocurrency mining requires
elements such as state-of-the-art hardware with powerful computational
capabilities and an abundant source of electricity. Accordingly, this
flourishing industry is intensive in terms of both technological resources and
energy. As some observers have noted, the artificial difficulty of the process
is supposed to mimic the hard effort that is needed to extract precious metals
such as gold and silver, both of which have acted as universal monetary
substances for centuries due to their natural scarcity, intrinsic value,
aesthetic beauty, and reputational prestige. Hence, it has been argued that BTC
embodies the conceptual model of ‘digital metallism.’
There
are unsettled debates in the rising intellectual and academic universe of
‘cryptonomics.’ Some analysts claim that, not unlike fiat money, Bitcoin has no
intrinsic worth. According to this interpretative perspective, Bitcoin acts a
lot like a virtual speculative asset whose value is determined by the behavior
of market forces and the accompanying expectations to make a quick profit. In
contrast, others believe that Bitcoin is tacitly backed by the work that is
needed to ensure its survival and its large consumption of energy, as well as
by the underlying support of material components which undergird its circuitry,
such as servers, internet infrastructure, specialized computers, chips,
graphics cards, power grids and so on. In other words, despite being a purely
virtual currency, the existence of BTC goes beyond the dimension of digital
code thanks to the various pillars which anchor it to physical reality.
On the
other hand, scholars like Saifadean Ammous and Niall Ferguson emphasize
Bitcoin’s peculiar traits and the potential shockwaves of this disruptive
FinTech invention. These thinkers argue that Bitcoin’s long-range significance
goes much further, as it heralds nothing less than a revolution that represents
a new ground-breaking chapter in the long-range historical trajectory of money,
after decades of constant debasement. This idea of Bitcoin as a visionary
innovation that will redefine the world’s monetary standards is seemingly
supported by the influence of this cybercurrency in the creation of a
constellation of hundreds of spin-offs and offshoots. Likewise, the
introduction of BTC was a pivotal breakthrough that prompted the subsequent
development of both ‘stablecoins’ launched by private companies and Central
Bank Digital Currencies (CBDCs).
Finally,
the Bitcoin universe is remarkably plural. It contains a heterogenous myriad of
inhabitants, participants and stakeholders. Some of its early adopters were
tech-savvy enthusiasts, libertarian activists, dissidents living under
political repression, outlaws, start-up innovators, speculative traders,
scholars, cryptographic experts, and cyber-anarchists, amongst others. However,
the circulation of BTC is no longer a marginal phenomenon confined to some
obscure niches reserved for an elite of intrepid merchants and enlightened
initiates who share some sort of arcane knowledge. By now, its projection has
become substantially wider as it has drawn the attention and active involvement
of corporate heavyweights, mainstream digital platforms, investment banks,
traditional financial firms, policymakers, regulatory authorities, law
enforcement, ordinary investors and even curious members of the general public.
In order to keep things in perspective, it is pertinent to highlight that
Bitcoin’s market cap is already superior to the GDP of countries like Chile,
Portugal and New Zealand.
Hypothetical
Possibilities
In
theory, the mere existence of a nonstate cybercurrency like Bitcoin challenges
one of the most emblematic hallmarks of the modern Westphalian conception of
national sovereignty: the monopoly of states as the only issuers of legal
tender within their territorial perimeter. However, this is not just a symbolic
attribution. Monetary policy is a tool that states use to direct the
performance of their economies, influence their international economic
exchanges, and manage their governmental expenses. Thus, the circulation of
decentralized unofficial cryptocurrencies can hypothetically jeopardize said
ability by displacing conventional currencies issued by central banks.
Furthermore, unlike hard currencies, BTC is not backed by the national strength
of any great power, or any other state for that matter.
Nevertheless,
those realities do not mean that Bitcoin is necessarily always detrimental for
national power or inconsequential for it. In fact ‒ Inspired by the analytical lens of
strategic foresight ‒ several potential opportunities to harness Bitcoin as an instrumental
tool of states to pursue their national interests have been identified. First,
special operations units and intelligence services can rely on Bitcoin’s
discreet financial channels as users in order to fund clandestine activities,
reward agents and informants, make purchases of illicit items in black markets,
carry out all sorts of undisclosed payments, and even bankroll agitation in
foreign countries as a way to instigate instability. Likewise, Bitcoin
represents a catalyst for the development of better capabilities in terms of
financial intelligence (FININT). Specifically, a better understanding of the
BTC operational environment would enhance the ability of intelligence agencies
and law enforcement to track transactions denominated in cryptocurrencies and
discover the real-life identities of the corresponding users. This upgrade
would increase the coercive power of states to disrupt the alternative
financial conduits employed by their enemies, including nonstate actors and
hostile states regarded as strategic competitors. In fact, such course of
action has even been endorsed by former high-ranking CIA officials.
On the
other hand, states can also engage the world of unofficial cryptocurrencies
like BTC in a beneficial way through the encouragement of mining as a
productive activity on a large scale. This undertaking can bring wealth,
bolster economic dynamism, and support technological development. Nevertheless,
the successful implementation of this option requires a systematic industrial
policy and economies of scale, as well as comparative advantages related to the
availability of affordable electricity and access to sophisticated equipment.
Moreover, due to the wild fluctuations of Bitcoin’s exchange rates, this
pursuit would face the typical challenges associated with the extraction of
commodities whose market prices are highly volatile. Yet, as long as favorable
circumstances prevail, this unconventional industry can represent an option
worth considering to increase prosperity when participation in more traditional
options is difficult or if there are obstacles which hamper the ability to make
profits through international economic exchanges.
Finally,
an even more counterintuitive possibility is the accumulation of BTC holdings
in order to diversify a country’s foreign exchange reserves. For example,
Indian analyst Ashwath Komath argues that said recommendation makes sense for
the national interests of states which seek to adopt a nonaligned foreign
policy orientation, a distinctive trait of Indian statecraft for decades.
Unlike assets denominated in fiat currencies, BTC cannot be frozen, sanctioned,
or confiscated in case conflict breaks out. Likewise, adding this cybercurrency
to a state’s coffers would also prevent overreliance on foreign financial
systems and strengthen Delhi’s position towards both the West and China, the
major players in the ongoing strategic competition to shape the architecture of
the global monetary order in the coming decades. Furthermore, a country like
India could be uniquely positioned to embrace Bitcoin as a secondary reserve
currency, especially considering its growing participation in the field of
high-tech innovations.
Nonetheless,
there are reasons why decentralized cryptocurrencies like Bitcoin could be
potentially harmful for national power. Since their value fluctuates so
drastically, they are vulnerable to speculative attacks, which could be
motivated by economic and political agendas. Furthermore, the incremental
progress of quantum computing can compromise their protective cryptographic
shields. Plus, if their internal circulation reaches substantial proportions,
then they can marginalize the national currency, which would entail the partial
degradation of monetary sovereignty. Furthermore, powerful rival states can
seek to establish a dominant high ground in the environment of a cybercurrency
with a considerable degree of international projection in a quest to harness
the resulting asymmetric leverage vis-à-vis other states whose position there
is comparatively weaker. Another detrimental consequence of embracing
decentralized virtual currencies is the exposure to the potential backlash of
the states which control the top reserve currencies. In other words, there is
no guarantee that Bitcoin and its derivatives will necessarily boost national
power. Thus, under certain conditions, relying on them can backfire.
Empirical
Examples
Aside
from exploratory forecasts, there are already several empirical examples which
demonstrate how states are adjusting in the monetary realm based on their
expectations about how said currencies might reinforce or damage national
power.
Perhaps
the most paradigmatic example is El Salvador. Back in 2021, this Central
American country became the first national state to formally accept BTC as
fully legal tender in an ambitious experimental attempt to merge its economy
with the ecosystem of such cybercurrency. The purpose of this fateful decision
responded to economic interests, such as the desire to upgrade the profile of
the Salvadorean economy, boost the flow of remittances from overseas, position
itself as regional hub for crypto mining as a source of wealth, and correct
financial imbalances. Nevertheless, this measure was not just about the pursuit
of prosperity. Considering the background of El Salvador as a peripheral
theatre for proxy wars during the late Cold War, BTC can ‒ as an asset that represents a
strategic vector ‒ help this small nation navigate independently under an intense
strategic competition between Washington and Beijing (a rivalry whose fallout
is felt in the sphere of money and finance) without having to take sides. The
recent decline of Bitcoin’s value raises reasonable doubts about the wisdom of
this decision, but only time will tell if the benefits outweigh the costs.
On the
other hand, it is known that entities affiliated with the US state establishment
‒ including the
foreign policy complex, intelligence agencies, and think tanks involved in
strategic studies ‒ are actively interested in surveillance of the Bitcoin ecosystem
because it can be exploited by nonstate and state actors regarded by the US as
enemies. For example, the revelations shared by whistle-blower Edward Snowden
indicate that the NSA has been intensively trying to find ways to uncover the
identities of users who belong to the BTC community through measures like
cyberespionage, technical interference, and even the design of misleading
crypto platforms that have no intention to protect the privacy of their
members. Years later, the current CIA Director William Burns openly admitted
(in the context of a public event) that the agency under his leadership is
running several projects focused on cybercurrencies, though no precise details
were disclosed.
Furthermore,
another case worth considering is the Russian Federation. This Eurasian state
was at first reluctant to embrace cryptocurrencies like Bitcoin but then it
reassessed its position after it realized that crypto represented certain
opportunities. Thereafter, Moscow has nourished the development of a domestic
industry involved in Bitcoin mining in the Russian Far East. It must be noted
that Siberia offers the comparative advantages to do so on a large scale,
including the availability of hydropower as a generous source of cheap
electricity, infrastructure that supports an optimal internet connectivity,
permissive regulatory frameworks, and a cold weather that mitigates the
excessive heat that is generated as a by-product of this activity. Moreover, the
imposition of Western sanctions after the takeover of Crimea has encouraged the
Kremlin to double down in this pursuit, as it generates wealth which does not
flow through financial arteries controlled by hostile states and furthers
technological progress. It is important to emphasize that, for Russia, access
to international finance and cutting-edge technologies is a national security
priority because, without those elements, the national power of the Russian
state would be substantially reduced in the near future. Perhaps not
surprisingly, after the 2022 invasion of Ukraine, Moscow has reportedly been
examining the pertinence of accepting payments denominated in cryptocurrency in
order to counter the ongoing efforts to restrict its exports of energy, including
both oil and natural gas.
In
contrast, the case of the China points in a very different direction.
Initially, the Middle Kingdom was one of the enthusiastic early adopters of
Bitcoin and similar cryptocurrencies. At some point, China was by far the
undisputed global leader of mining operations. Nevertheless, Beijing moved
towards a diametrically different position as it implemented a series of
increasingly draconian restrictions, including the shutdown of mainland
cryptocurrency exchanges, heavy-handed measures of technical interference, the
closure of BTC mining facilities and even mass arrests of Bitcoin users. It is
believed that this course of action responded to the need of preventing capital
flight and undermining an activity which could have posed meaningful challenges
for the energy security of the Chinese state. However, another possible
motivation was likely an interest in casting aside a potential source of
unwanted competition for the release of the e-CNY, the official currency
designed by the People’s Bank of China as a digital version of the national
legal tender. It is unknown if this was the plan all along, but it is
suggestive that the idea of aggrandizing the proportions of something in order
to get rid of it afterwards (the so-called ‘principle of reversal’) is
consistent with the prescriptions found in classical Chinese strategic
thinking.
Lessons
Learned
Far from
being neutral, Bitcoin entails significant ramifications for national power,
understood as the combined ability of states to further their interests through
their resources, assets, and capabilities. Just like any other invention, said
cybercurrency is an instrumental item that can be harnessed, leveraged,
exploited, and/or manipulated in the practice of statecraft. As such, it can
offer strategic, diplomatic, economic and technological benefits worth
harvesting. Nevertheless, though there is no single recipe to engage this
FinTech innovation, exploratory forecasts and the scrutiny of empirical
developments indicate that it can be employed as a tool to carry out black ops,
a catalyst for the optimization of financial intelligence, a facilitator of
industrial development, a source of national wealth, an alternative reserve
currency, and even an unconventional vector of grand strategy which can enable
the performance of balancing acts. Needless to say, such attributes make it
attractive under conditions of heightened geopolitical and geoeconomic
tensions. However, as double-edged sword, Bitcoin can also be detrimental for national
power in some circumstances. Paraphrasing a sharp observation made by Joseph de
la Vega about the contradictory nature of high finance in 17th century
Amsterdam in his legendary treatise “Confusion of Confusions,” the paradoxical
ambivalence of BTC is that can be both a treasure of usefulness for the
intrepid and ‒ at the same time‒ a treacherous road that leads to
the downfall of the unwise.
***The
views expressed in this article belong to the authors alone and do not
necessarily reflect those of Geopoliticalmonitor.com
*Article
was originally published on December 17, 2022.