The Foreign Service Journal, April 2023

28 APRIL 2023 | THE FOREIGN SERVICE JOURNAL Third, blockchain and digital currencies are not something to fear. Use leads to understanding, and we encourage individuals to “play” with the technology to understand its unique features and applications—doing so doesn’t require monetary investment. For example, creating a wallet, looking at a block explorer (an online record of blockchain transactions), and tracking the provenance of an NFT (a non-fungible token) can all be done without spend- ing a cent. Fourth, now is the time to get up to speed on the fundamentals. We have seen the devastating consequences of people waiting to see what happens; after-the-fact actions are too little, too late. If we are going to effectively balance consumer protection and innovation, education and comprehension are key. This space moves quickly (even as someone focused on this innovation, I find it can be hard to keep up with all the developments), but a little investment of time will go a long way. Education is also key to dif- ferentiating between hype and real value. Fifth, adoption of the technology varies greatly around the world, driven by different use cases and regulatory environments. Notably, there has been high uptake in emerging markets, places where people are living under authoritarian regimes, and coun- tries experiencing instability and hyperinflation. FSJ: What are the challenges of cryptocurrency adoption for U.S. national security? SW: Cryptocurrency’s emergence as a new way to transmit value over the internet adds a new dimension to the U.S. national security landscape. It can give everyday people a way to move and hold digital funds safely without a centralized intermediary; but it can also offer illicit actors a new way to transact for nefarious purposes, making it not unlike other transaction methods that have been co-opted by bad actors for decades. The permissionless nature of crypto systems can offer users the ability to transact pseudonymously. Thus, when Russian military intelligence officers aimed to disrupt the 2016 U.S. presidential election, in an attempt to shield their true identities, they used cryptocurrency to pay for the online tools, such as Virtual Private Networks (VPNs) and website domains, that they needed. How- ever, the publicly viewable ledger of blockchain transactions for major cryptocurrencies like Bitcoin and Ethereum gives national security investigators a trail of data to track and analyze at all times. In fact, it’s this transparent record that has enabled U.S. law enforcement and intelligence officials to uncover and disrupt illicit operations by many state and non-state threat actors. There is, in addition, a growing segment of tech firms special- izing in blockchain forensics that provide the U.S. government software to support that mission. They use public records to identify bad actors within the system. In February 2022, the Jus- tice Department said they “followed the money” via blockchain to retrieve $3.6 billion linked to the Bitfinex hack, the agency’s biggest financial seizure to date. Going back to 2020, analytics firm Elliptic saw that about $1 billion was moving out of a Bit- coin wallet. As a result, U.S. agencies tracked these illicit funds, helping to lead to the closure of the Silk Road case. Finally, the Department of Justice recovered the $2.3 million ransom paid by Colonial Pipeline in one month in 2021. This case points to the “underlying traceability of crypto, which can be used as a powerful tool and asset against criminals,” according to a risk management expert. At the end of the day, bad actors typically want to convert out of cryptocurrency and into fiat currency, or government-created currency. To do that, they have to go through a money services business that, according to global regulatory standards, is obli- gated to identify its customers and monitor for criminal transac- tions. These “off-ramps” into fiat are heavily monitored, as are the “on-ramps” by which users convert fiat into cryptocurrency. Both are where bad actors are deeply vulnerable. Cryptocurrencies and their underlying technology are spur- ring significant innovation globally. The U.S. urgently needs to understand this technology, harness its potential, and cultivate leading expertise onshore to keep pace with the quickly evolving global digital economy. Failure to do so would jeopardize the U.S. position in the highly competitive digital future. Lagging behind other nations in our understanding would pose the biggest threat to U.S. national security. FSJ: What is Web3, and what do diplomats need to understand about it? SW: Web3 is an industry term that represents the vision for a “decentralized” internet. Enabled by technical advancements in blockchain technology and crypto, it is a model for our online interactions that aims to shift power from centralized interme- diaries back to individuals. Its ambition is broad—using new Japan led the G20 countries in being the first to adopt stablecoin legislation in the summer of 2021.