A New Frontier

A New Frontier

Chinese Investment in Blockchain and How the United States Should Respond.
Samuel Zinkgraf

China is currently attempting to harness blockchain technology for economic and strategic purposes. Originally designed in 2008 to stabilize the cryptocurrency bitcoin, blockchain has been expanded to other applications. According to analysis by Jingdata, China has already poured $100 million USD into blockchain-related programs in January 2018 alone. [1] According to economic analysts on China State TV, they contend that the value of blockchain will be 10 times the value of the internet. [2] As China continues to harness this technology for economic and national security purposes, the United States should continue to stay abreast of developments to avoid being left behind.
Blockchain is a peer-to-peer network made up of “immutable digital ledger systems implemented in a distributed fashion.” [3] A technology that sits upon the existing infrastructure of the internet, the uses of blockchain go beyond bitcoin and include “personal identification, peer review, elections and other types of democratic decision-making and audit trails.” [4] There are five basic principles of blockchain technology explained in figure 1.
Blockchain technology eliminates the middle man, making transfers more secure. Companies create isolated networks with their own digital access keys. [5] Therefore, a hack on an isolated network will not bring the entire network down as with other major technologies in use today. One evidence of the security in blockchain is that the blockchain database is on the open internet and up to this point does not appear to have been penetrated by government, private sector, or criminal hackers. [6]

While more secure than previous technologies, blockchain is not impenetrable by those with nefarious intentions. A major fear with bitcoin and cryptocurrency in general is that electronic records can be altered, causing cryptocurrency to be transferred twice or not at all. However, this does not mean that blockchains are impenetrable. The focus of attackers will be on new records. According to Major Neil Barnas of the US Air Force, there are two main ways in which these attacks can occur. The attacks can theoretically create independent entries that would be recognized “by honest nodes.” [4] Another method of infiltration would be denial of service attacks. Barnas points out that these two possibilities are countered by three aspects of blockchain: network size, identity management, and access controls. [4] Taken together, these facts suggest that blockchain technology possesses security features that make it preferable to previous technologies.
The enhanced security provided by blockchain presents a challenge for law enforcement and the intelligence community as criminal enterprises begin integrating the technology into their operations. Criminal enterprises can utilize block chain to secure money transfers or aid money laundering efforts to protect and expand their profits. The applications to detect and counter money laundering within blockchain systems is not expected to be available for the next 10 years. [7]

Criminals are not the only actors looking at this new tool; China recently began a major round of investment focused on acquiring blockchain technology. The state-run Bank of China began heavy investment in blockchain technology in the amount of 483.7 billion yuan ($70.2 billion). [8] In addition, Nanjing City has begun a 1.5 billion dollar investment in blockchain technology. [9]

China is fast becoming the world blockchain leader through this investment and the creation of a regulatory framework which allows advancement to happen. A July 2018 article by the Brookings Institution asked the question, “Is China leading the blockchain innovation race?” [10] One of the problems facing China at the time was a lack of regulatory framework for blockchain. In October 2018, however, the Cyberspace Administration of China (CAC) recently released an initial draft of its proposed blockchain regulations. For China, these articles recognize the “national security and public interests” associated with the development of blockchain. [11] The articles cover publishing guidelines and require information be made available to the government. [12]

In 2018, China moved to ban bitcoin exchanges within the People’s Republic of China (PRC). In 2017, the Chinese government moved to ban all Initial Coin Offerings (ICOs). [13] China is targeting “all cryptocurrency trading with a ban on foreign exchanges.” [14] Much of this appears to be in response to the fears of bitcoin and other cryptocurrencies being used for “illicit purchases on the dark web, money laundering, and offshoring.” [15] The ban also consolidates PRC power over cryptocurrency in the country.
From an economic perspective, China appears to be planning for a future of cryptocurrency. According to a 2017 report from the Digital Currency Research Lab, it is “inevitable for the People’s Bank of China (PBOC) to launch its own cryptocurrency.” [16] This cryptocurrency could compete with Tether (USDT), another blockchain-based cryptocurrency while at the same time providing the PBOC with a stable means of revenue collection and transfer. [17]

From a security perspective, China is harnessing blockchain for both defensive and offensive capabilities. A Chinese cybersecurity expert writing in a newspaper client of the Liberation Army stated that the future of blockchain lies not only in the economic field but in the military field as well. [18] Some implications for the military and intelligence community if China embraces blockchain include the following possibilities. First, China could pay intelligence agents in a way that would be virtually untraceable. Second, state secrets could be protected from the prying eyes of the United States and other foreign powers through securing their communications and operational information. Third, blockchain authentication procedures would make it nearly impossible for a foreign power to conduct a campaign to spread disinformation. [19]

U.S. investors and certain government sectors have shown interest in blockchain technology. According to the United States Blockchain Technology Market forecast which projects through 2023, the U.S. is expected to hold about 40% of global blockchain investment. [20] In addition, the United States Postal Service, U.S. Food and Drug Administration, and U.S. Department of Transportation are all looking into blockchain technology to backup data. [20] At this point, these departments have only expressed interest and it is unclear if or when blockchain will be utilized.

Despite interest in blockchain, the United States government currently lacks a clear understanding of blockchain. Aside from a report by the US Department of Defense Advanced Research Projects Agency, within the military and intelligence community there seems to be low awareness of blockchain. “A very low percentage of people in the FBI are educated about this, or understand it, and they don’t have the resources because they’re too busy working on tracing other types of crimes.” Yaya Fanusie, a former economic and counterterror analyst for the CIA says that the government must raise its knowledge of blockchain. [21] The United States has the potential to harness blockchain as well, provided China does not leave the United States in the dust. In order “[t]o avoid missed opportunities and undesirable surprises, organizations should start investigating whether or not a blockchain can help them.” [3]

Because of the major push by the PRC to acquire blockchain technology, the United States should focus on: (1) Understanding what China intends to do with blockchain technology, (2) Staying abreast of updates in blockchain, (3) Harnessing blockchain for national security purposes, and (4) Partnering with industry to cooperate on issues of mutual importance.

  1. JRJ, “鲸准:2018中国区块链行业分析报 告,” February 5, 2018, http:// fund.jrj.com.cn/2018/02/05143724063144.s html
  2. Wolfie Zhao, “China State TV: Blockchain Is ’10 Times More Valuable Than the Internet’,” Coindesk, June 04, 2018, https:// www.coindesk.com/china-state-tvblockchain-is-10-times-more-valuable-thanthe-internet/
  3. Dylan Yaga, Peter Mell, Nik Roby, and Karen Scarfone, “Blockchain Technology Overview,” National Institute of Standards and Technology, January 2018, https:// csrc.nist.gov/CSRC/media/Publications/ nistir/8202/draft/documents/nistir8202draft.pdf
  4. “Blockchain News,” Cointelegraph, https://cointelegraph.com/tags/blockchain
  5. Anja Manuel and Leo Carter, “America Needs a Blockchain Strategy ASAP,” Foreign Policy, August 02, 2018, https:// foreignpolicy.com/2018/08/02/america
  6. Major Neil B. Barnas (USAF), “Blockchains in National Defense: Trustworthy Systems in a Trustless World,” Blue Horizons Fellowship Air University, June 2016, http://www.jcs.mil/Portals/36/ Documents/Doctrine/Education/ jpme_papers/barnas_n.pdf?ver=2017-1229-142140-393
  7. Marco Iansiti and Karim R. Lakhani, “The Truth About Blockchain,” Harvard Business Review, January-February 2017 Issue, https://hbr.org/2017/01/the-truth-aboutblockchain
  8. Max Yakubowski, “Bank of China CIO Says Bank to Increase Investments in Blockchain, Fintech,” Cointelegraph, August 09, 2018, https://cointelegraph.com/ news/bank-of-china-cio-says-bank-toincrease-investments-in-blockchain-fintech
  9. Georgi Georgiev, “China’s Nanjing City Launches $1.5 Billion Blockchain Investment Fund,” Bitcoinist, July 25, 2018, https://bitcoinist.com/chinas-nanjing-citylaunches-10-billion-yuan-1-5-billionblockchain-investment-fund/
  10. Kevin C. Desouza, Chen Ye, and Xiaofeng Wang, “Is China leading the blockchain innovation race?” Brookings, July 19, 2018, https://www.brookings.edu/ blog/techtank/2018/07/19/is-china-leadingthe-blockchain-innovation-race/
  11. National Internet Information Office, “Notice of the National Internet Information Office on the Public Consultation on the Regulations on the Management of Blockchain Information Services (Draft for Comment),” Cyberspace Administration of China, October 19, 2018, http:// www.cac.gov.cn/2018-10/19/ c_1123585598.htm
  12. Marvin Dumont, “New China Blockchain Rules: The Articles Explained,” Crypto Briefing, October 26, 2018, https:// cryptobriefing.com/china-blockchain-rulesexplained/
  13. Emilio Janus, “IC-NO! China Bursts Initial Coin Offering Bubble,” Bitcoinist, September 04, 2017, https://bitcoinist.com/ ic0-china-initial-coin-offering-bubble/
  14. Shobhit Seth, “Is Bitcoin Banned in China?” Investopedia, February 12, 2018, https://www.investopedia.com/news/bitcoin -banned-china/
  15. Commander Wilson VornDick, “Beyond Bitcoin: Could China Embrace Blockchain for Defense and Security Applications?” The Jamestown Foundation, February 13, 2018, https://jamestown.org/program/ beyond-bitcoin-china-embrace-blockchaindefense-security-applications/
  16. Dalmas Ngetich, “Forget Bitcoin, this is How China Plans to Dominate the $102 Trillion Blockchain Space,” Ethereum, October 03, 2018, https:// ethereumworldnews.com/china-dominate-blockchain/
  17. Investopedia, “Tether (USDT),” https:// www.investopedia.com/terms/t/tetherusdt.asp
  18. Tao Yanqi , “”Blockchain” may change the future battlefield public opinion environment,” China Military Network Defense Department Network, February 02, 2018, http://www.81.cn/jfjbmap/content/201802/02/content_198619.htm
  19. Jahara Matisek, “Is China Weaponizing Blockchain Technology for Gray Zone Warfare?” Global Security Review, September 28, 2018, https://globalsecurityreview.com/ china-weaponizing-blockchain-technologygray-zone-warfare/
  20. Laura Wood, “United States Blockchain Technology Market Report 2018 – Forecast to 2023 – ResearchAndMarkets.com,” Business Wire, July 25, 2018, https:// www.businesswire.com/news/ home/20180725005738/en/United-StatesBlockchain-Technology-Market-Report2018
  21. Casey Egan, “National Security Risks Seen in Emerging Blockchain Technology,” Roll Call, January 25, 2018, https:// www.rollcall.com/news/policy/nationalsecurity-risks-seen-emerging-blockchaintechnology

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