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Is cryptocurrency really a security threat to the US?

  • April 22, 2022
  • 5 min read
Is cryptocurrency really a security threat to the US?

Maybe one day, but not for the reasons that you think.

A few weeks ago President Biden signed an executive order directing federal agencies to implement a strategy for policies and regulations on digital assets ‘like crypto’. Setting aside the amusing implication that digital assets might include other things ‘not like crypto’ – American Airlines loyalty points perhaps? An interesting point is the language of Biden’s original statement preceding the order that crypto might pose a security threat to the US.

Of course, we’re all used to the established rhetoric that crypto is a tool for criminals and terrorists, and we should all stick to old fashioned banking, because as we know, real banks don’t launder money at all. As my girl Tay Tay says, ‘haters gonna hate’. But a security threat to the US?

In fact Biden was correct because of two magic tricks performed only by the US dollar. Magic tricks because the general public is largely misdirected, and very few people outside of the banking industry know how the tricks work.

Now, before I go any further let me emphasise that I am not about to tell you that Biden’s order will be effective. Or even that mitigating the ‘security threat’ is a good idea. I’m sure it’s obvious to anyone reading this column that I’m all in on crypto. But understanding why cryptocurrency is a security threat is both interesting and instructive, especially in the context of the current effort to control Russia through sanctions.

Magic trick number one Did you know that no banks outside the US can hold US dollars?

‘WTAF!’ I hear you splutter, ‘…but my UK bank has given me a US dollar account!’ Actually, what is presented to you by your bank as a US dollar account, secretly mirrors another account with another bank inside the US, where your dollars are actually held. Your UK bank has what’s known as a ‘correspondent banking relationship’ with that US bank, which is about as private as it sounds. Of course, every US dollar bank deposit is held by a correspondent bank account that’s under US jurisdiction.

Which brings us to the second magic trick…

Magic trick number two Have you ever heard of SWIFT? Well, okay, you probably have because of the recent news stories about Russia being denied access to the SWIFT network, but had you heard of it before?

SWIFT is an electronic system used by banks to send money to each other. It’s not the only one – Euros, for example, can be sent over something called SEPA – but SWIFT is the only one that banks are able to use to send and receive US dollars internationally.

Now the SWIFT network may be Belgian, but many in the industry believe that the database has been ‘available’ to the US security services for a long time. Which means that the US has access to a complete database of all US dollar banking transactions: literally all of them!

Now put the two magic tricks together and you have a system capable of detecting suspicious US dollar transactions anywhere in the world and freezing the accounts. This combination – the correspondent banking system and the SWIFT network – is how the US successfully implements sanctions. Without those sanctions there  would only be empty threats and the sanctioned entities would be able to continue to use dollars anyway. For what it’s worth this is also why sanctions don’t really work in other currencies.

Which brings us to cryptocurrency. In terms of crypto, the US has none of the control it enjoys over the dollar. It can’t trace suspicious transactions, it can’t trace ownership, and it can’t freeze wallets. If the world was using crypto instead of the dollar it would be impossible to levy sanctions.

So what’s the solution? Well somebody in the US seems to think it’s a bright idea for that nation to create and issue its own cryptocurrency, presumably where ownership was registered and everything was as controllable as it is with the dollar. This is a very naïve, and a somewhat imprudent idea, and reminds me of the attempt by the Clinton administration to force the world to adopt a US government encryption algorithm caller ‘Clipper’, so that they could break it if they needed to. In any case, the horse has been cast, the die has bolted, and crypto is flying out of Pandora’s box like an unstoppable mixed metaphor.

So again, what’s the solution? Well let’s start by acknowledging that technology always wins. The internet lets terrorists communicate over secure email, and smartphones allow criminals to talk over encrypted lines, which are very hard, if not impossible, for security services to eavesdrop on. Yet, the security issues that these technologies introduce are managed and somehow the world survives, and not through an attempt to regulate the internet or the ability to compromise secure messaging apps.

At the time of writing, crypto represents a very minor security threat, because it can’t be used as an alternative funding source for a sanctioned nation. The ‘threat’ Biden was invoking was in the future, not the present. However, when crypto acquires enough adoption actually to be a material threat, then the world will need to have already adapted. If it hasn’t then there will be no financial response possible next time a rogue nation invades an allied state.

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