To evaluate risks to public safety and law enforcement posed by the rise of digital assets, the U.S. military innovation division is starting a sweeping review of cryptocurrencies.
Motivation for Pentagon Efforts
The crypto industry has created a minefield of scams and thefts that federal regulators are being challenged to step up their efforts to regulate cryptocurrency, as its proponents have promised, the Treasury Department said in a new report.
Consumer research contends that cryptocurrency poses a financial risk to low-income persons seduced by the promise of easy money. Data from the Federal Trade Commission (FTC) shows a reported $1.6 billion lost in crypto-related scams and thefts in 2021. This amount only includes those reported to the Federal Bureau of Investigation (FBI), and the actual number is likely higher.
Defense Research Project
The year-long crypto threat assessment will be run by the Defense Advanced Research Projects Agency, also known as DARPA, which hired Inca Digital to regulate crypto-related trade. In part to assist law enforcement in clamping down on the illicit use of digital assets, the company will provide tools that give the Pentagon a detailed insight into the inner workings of crypto marketplaces.
Adam Zarazinski, CEO of Inca Digital, stated that the company’s work with DARPA will be “quite wide-ranging.” The project’s objectives include assisting the government in comprehending how cash enters and exits blockchain systems to identifying cryptocurrency-based scams from legitimate cryptocurrency activities.
According to Mark Flood, a program manager with the organization, “the program underway entails mapping out the cryptocurrency ecosystem in some detail.” In addition to battling illicit finance, the agency wants to use the data to gain insights into the factors influencing traditional financial markets, where precise information is more difficult to obtain.
The agreement is the most recent example of how federal agencies are stepping up their efforts to stop terrorists, rogue governments, and other criminal elements from utilizing cryptocurrencies to finance their activities.
Sanctions Against Software
Last month, the Treasury Department imposed its first-ever sanctions against software code. To target Tornado Cash, a service that assisted North Korean hackers.
Meanwhile, the Justice Department revealed plans for launching a network of 150 prosecutors around the country to coordinate investigations and charges relating to cryptocurrencies.
Flood pointed out several reasons for government concern. Notably, hackers working for the North Korean government have committed digital heists and stolen billions of dollars for the country’s weapons development. Before the Russian invasion of Ukraine, the Ukrainian government also alleged that Russia targeted its financial sector.
Hurdles in Regulating Crypto
Governments have had a tough time regulating cryptocurrencies despite their best efforts. The business has developed into a shadow financial system that highly skilled criminals have found several possibilities to exploit because there are no legal constraints.
As said by Mark Flood, “We need to accept the possibility that in the future, financial warfare will play a role. Anything we can do to strengthen and safeguard the financial systems of the United States and our allies is good.”
“There’s a lot of concern about crypto frauds right now,” claims Zarazinski. He claims that “those behind the schemes are often well-organized, international criminal networks, either actively aided by rival governments or given implicit approval to carry out these operations, and billions of dollars are being stolen from Americans and Europeans.”
This project represents DARPA’s second foray into blockchain technology. The government discovered that blockchains typically had flaws that invalidate their claims of security in a report published in June after hiring cybersecurity firm Trail of Bits. Flood made it clear that the organization’s most recent effort is not meant to follow individual cryptocurrency users. He stated: “DARPA doesn’t carry out any surveillance. We are careful to avoid using any data that could be used as personally identifiable information.”