In May 2013, Liberty Reserve, a centralized digital currency service that allowed users to register and transfer money to other users with only a name, e-mail address, and birth date, was shut down by United States federal prosecutors under the Patriot Act after an investigation by authorities across 17 countries. On January 2016, the central figure, Arthur Budovsky pleaded guilty to one count of conspiring to commit money laundering and on May 6, 2016, Budovsky was sentenced to 20 years of prison. The site had over a million users when it was shut down by the United States government and US legalites argued that due to lax security, alleged criminal activity largely went undetected, which ultimately led to them seizing the service.
Bitcoin was the central currency on Silk Road, the infamous and anonymous marketplace that was only accessible over the TOR anonymous browsing network on the deep web, and which was closed by the FBI in October 2013. Silk Road was a haven for drug sales, hitment, dodgy porn and other illegal goods.
This prompted US Senator Charles Schumer to call for the site to be shut down, explicitly linking it to bitcoin, which he called a “surrogate currency” and then the US DEA seized bitcoins from a US resident for purchasing a controlled substance in June 2013.
In August 2013, 22 bitcoin companies involved in bitcoin were subpoenaed by the state of New York, a US judge ruled that bitcoin is a form of money; and the Bitcoin Foundation received a cease and desist letter from the state of California.
Spin three years into the future and turn to a recent article in Newsweek, Leah McGrath Goodman reports that hundreds of experts inside the nation’s defense and intelligence agencies, as well as private-sector researchers in finance, technology and various think tanks across the country—some of them under contract with the U.S. government—are now investigating how virtual currencies could undermine America’s long-standing ability to disrupt the financial networks of its foes and even permanently upend parts of the global financial system.
“There is a real danger and a challenge here with respect to virtual currencies,” says Juan Zarate, a senior adviser at Washington think tank Center for Strategic and International Studies and on the board of advisers for San Francisco’s Coinbase, one of the most popular virtual currency exchanges in the world. “And it runs contrary to the very fundamentals of the transparency and accountability that we’ve tried to build for the last three decades to tackle terrorism, human trafficking, money-laundering and many other types of criminal activity.”
In 2003, Zarate led an elite team at the U.S. Department of the Treasury who engineered the model used today to target, block and freeze the finances of America’s enemies through their personal bank accounts—from Iranian money launderers to cronies of Russian President Vladimir Putin. This is how it works: Treasury’s Office of Terrorist Financing and Financial Crimes puts individuals and organizations on a blacklist, which is sent out to the world. Once on the blacklist, those targeted can no longer do business in U.S. dollars, which are involved in roughly 88 percent of the world’s foreign-exchange transactions, according to Switzerland’s Bank for International Settlements. In other words, they cannot bank at most financial institutions.
This ability to financially disrupt, disable and dismantle nefarious networks, is crucial to U.S. national security, Treasury officials say. It has proven effective for more than a decade and is often strongly preferable to deploying troops. “We have made it very difficult for members of the Islamic State to raise or move money around the world these days,” Zarate says. “Even Iran had a hard time finding safe havens.” In fact, years of financial pressure from the U.S. and its allies helped force Iran to negotiate with the White House and sign a landmark nuclear deal last year.
The biggest concern the U.S. has about virtual currencies, Zarate says, is that terrorists and other enemies might create one so powerful and so untrackable, that they’ll no longer need the global banking system, which the U.S. uses to financially starve them. This has yet to happen, but America’s defense and intelligence agencies are already trying to figure out how they might infiltrate or block such a malicious financial network.
Computer Sciences has hired hundreds of technologists and experts across the banking, insurance and health care sectors to examine how to “scale up” Blockchain technology for faster banking, trading, clearing and settlements. With all the trepidation bitcoin has brought, it's underlying framework, the Blockchain, has begun to spread like wildfire as more and more imagineers, developers, scientists, cryptographers, mathematicians etc. begin to build new concepts around the decentralisation of trust itself, which Satoshi Nakamoti, the founder of bitcoin revolutionised.
The more projects built on top of cryptocurrencies such as bitcoin and ethereum, the more complicated it will become for any authorities to take them down. If that's even possible.
Bala Venkataraman, global chief technology officer of banking and capital markets for Computer Sciences Corp., a digital information-technology company whose sister firm, CSRA Inc., runs the IT backbone of the National Security Agency (NSA) comments:
“In a cryptocurrency world, you know who becomes the bank?” he asks. “You and I. You become not just the bank, but the central bank. And that can have enormous ramifications for things like sovereign authority. By 2040, I think we may be fully transitioned over to cryptocurrency. I don’t think anyone can stop it from happening.”
“With the introduction of Blockchain, a disruption of the global banking system is inevitable,” he added in the article.
No one can stop it from happening? No one except the Americans perhaps – and very likely under the banner of Homeland Security and the Patriot Act.
One significant terrorist act on US soil, alleged or proven to be funded by Bitcoin or another cryptocurrency is very likely all it will take.
Benjamin Franklin once wrote:
“Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.”
With it's 12 billion dollar market cap, bitcoin is nowhere near a trade threat to the U.S. dollar with its busiest week near a tiny $2 million, compared with the massive $14 trillion of average daily U.S. dollar transactions.
But it does pose a bigger threat – and that's it's threat to sovereign authority – or the power power of the state to regulate the monetary system and as such, the value and credibility of a sovereign currency are intrinsically linked with the ability of the state to support that currency, on which the the legal concept of money is also based on.