Bitcoin And Geopolitical Rivalry – Analysis
By Jose Miguel Alonso-Trabanco
Bitcoin, the flagship stateless cryptocurrency, is a double-edged sword that can either strengthen or harm national power. As financial warfare becomes increasingly complex, this decentralized cybercurrency is acting as a versatile strategic instrument of statecraft that can play various roles under confrontational geopolitical circumstances. This under-researched subject matter needs to be clarified because it entails meaningful implications for national security, strategic intelligence, foreign policy and grand strategy, but also for the domain of high finance.
In order to provide a sharper sense of situational awareness, the following article integrates strategic forecasts that attempt to predict the hypothetical usefulness of Bitcoin for conflicts with scrutiny of illustrative contemporary examples that point in a similar direction.
Analysis of Hypothetical Applications
BTC circuits as conduits to bypass sanctions
Bitcoin can offer a potential lifeline for states under sanctions that need to ensure the continuity of their international economic exchanges. Since the BTC grid cannot be controlled by the coercive or restrictive power of national states, its borderless circuitry provides secondary financial arteries worth harnessing to bypass sanctions that limit the ability to carry out cross-border transactions and transfer wealth through more conventional platforms ‒ anchored to major reserve currencies ‒ that enable international payments. An additional advantage of decentralized virtual currencies for sanctioned states is their discretion. They offer covert gateways to engage formal financial systems or even to avoid them altogether if necessary. In other words, it is difficult to determine if sanctions are being neutralized through cryptocurrencies like BTC.
Furthermore, despite their drawbacks ‒ including wildly volatile exchange rates ‒ nonstate cryptocurrencies like BTC are helpful to evade sanctions thanks to their growing transnational projection, their unsupervised channels, and their lack of centralized nerve centers that could be politically threatened, co-opted, or influenced. An academic essay written by US military officer Deane Konowicz for the US Naval War College identifies three strategies to use unofficial virtual currencies as asymmetric equalizers to diminish or overcome sanctions imposed by an enemy with superior financial firepower. Yet, the implementation of each comes with challenging caveats.
- The theft of wealth through acts of cybercrime against cryptocurrency exchanges or ransomware attacks to demand payments denominated in cryptocurrency. This approach requires sophisticated cyberwarfare know-how.
- Cryptocurrency mining on a large scale as an industrial activity which generates profits that do not flow through traditional financial networks. This pursuit demands investment, technological infrastructure, advanced hardware, vast amounts of energy, and technical expertise.
- The encouragement of the sanctioned state’s population and business community to freely carry out all sorts of transactions through cryptocurrencies. Said possibility comes with the risks of weakening the position of the country’s official currency and the prospect of widespread economic instability, a phenomenon that could lead in turn to political turmoil.
Some statesmen have also identified the potential usefulness of cryptocurrencies like Bitcoin to diminish the impact of sanctions through arteries that bypass the US dollar. For example, according to a report published by the Russian newspaper Kommersant, Sergei Glazyev ‒ one of the Kremlin’s chief geoeconomic masterminds ‒ argues that the Russian Federation has an “objective need” to rely on unofficial cryptocurrencies to circumvent Western sanctions. Nevertheless, BTC is no “silver bullet” that can completely defuse enemy sanctions. Its limitations are also being acknowledged. In a 2021 interview with CNBC, Russian President Vladimir Putin admitted that Bitcoin is a valid means of payment, but he also mentioned that, even though Russia has been seeking alternatives to the dollar in international economic exchanges as a result of its weaponization by Washington, it was still too soon to anchor the exports of Russian energy and commodities to such cryptocurrency.
Yet, as a result of the Western backlash against the Russian invasion of Ukraine, Moscow is seemingly reassessing its position and deliberating about the eventual pertinence of embracing BTC in several sectors to carry out international transactions that deflect American and European sanctions. In this context, Moscow is reportedly considering the possibility of accepting Bitcoin as payment for its energy exports. Since crypto-assets cannot be frozen or seized, they represent potentially attractive financial vehicles for states that seek to contest the interests of Western powers. According to the New York Times, in order to gather stockpiles of unofficial cryptocurrencies to carry out undetected international transactions, the Russians could even engage in ransomware cyberattacks and develop technical tools designed to mask the involvement of Russian entities in said transactions throughout blockchain-based financial environments.
These possibilities indicate that Bitcoin and similar cryptocurrencies can hypothetically operate as protective shields for states under sanctions. As such, they pose game-changing challenges for the effective implementation of sanctions as a tool of diplomatic coercion by the US and its allies, especially considering that such measures have become an increasingly common staple of Western foreign policy. Nevertheless, some analysts believe that measures like better regulations, collaborative information-sharing partnerships between governmental agencies and private entities, international cooperation, and increased oversight can prevent the evasion of sanctions through Bitcoin and similar cryptocurrencies.
BTC as a potential asset to hedge the financial risk of geopolitical tensions
Bitcoin has been identified as an unconventional asset that could be helpful to hedge financial risks in case of conflicts or heightened geopolitical tensions. Some scholars hold that BTC can operate as some sort of “digital gold” because it represents a potential safe haven that provides shelter from exposure to rising systemic geopolitical tensions. In fact, the value of Bitcoin seems to be positively influenced by the incidence of phenomena which trigger a perception of geopolitical turmoil, such as Brexit, the rivalry between Iran and the US in the Middle East, and the so-called “trade war” between Washington and Beijing. These attributes make BTC attractive for national states, private companies and individuals.
An important advantage of Bitcoin as an alternative asset is its high resilience from both volatile market fluctuations and potentially hostile manipulations not motivated by economic interests. Plus, the horizontal Bitcoin system cannot be destroyed. As the American financier James Rickards explains, even though some of its material or digital nodes can be attacked, the dispersed structure of BTC organic networks contains no center of gravity. BTC also lacks centralized systemic records kept in physical servers which could be hit. The ability of the Bitcoin environment to withstand the impact of disruptions from external sources was demonstrated when China followed a heavy-handed approach towards said cybercurrency. Even though the ‘Middle Kingdom’ managed to evict Bitcoin from Chinese soil, the whole BTC ecosystem was not undermined, and China-based mining operations simply relocated to other countries with more flexible frameworks.
However, a nuanced perspective shows that, despite its advantages, Bitcoin is far from being a suitable replacement for hard assets with intrinsic worth like precious metals. As Refk Selmi and other researchers point out, there are major differences that need to be highlighted: 1) Bitcoin’s markets are smaller and less structured; 2) its supply is artificially limited by design; 3) the volatility of this cryptocurrency makes it convenient for short-term speculative purposes rather than as a long-term store of value; 4) whereas BTC is a nascent monetary item, the traditional role of gold as stable store of value is supported by the weight of history since the dawn of civilization; 5) Bitcoin’s legal status is unclear in many jurisdictions.
Potential weaponization of BTC
Bitcoin can also hypothetically act as a weaponized instrument that can be wielded in the practice of statecraft. Ironically, its anti-state properties mean that it can be employed by states against their rivals in offensive acts of hybrid warfare. As an article in the Small Wars Journal argues, The BTC landscape offers 1) asymmetric advantages to instigate monetary disruption in small nations with weak currencies, 2) covert channels to fund terrorist, insurgent, separatist, guerrilla or dissident groups whose militant activities fuel destabilization behind enemy lines and 3) subtle gateways to increase the resonance of psychological warfare, “soft power,” and propagandistic influence through the undisclosed purchase of an active presence in the overlapping platforms that undergird the transnational info-sphere. Potentially, BTC can even be engaged to hit heavier targets. Interestingly, Silicon Valley entrepreneur Peter Thiel, himself a strong supporter of BTC, has expressed his concerns about the potential weaponization of Bitcoin by Beijing against the US: “I do wonder whether at this point [if] Bitcoin should also be thought [of] in part of as a Chinese financial weapon against the US where it threatens fiat money, but it especially threatens the US dollar.” Paradoxically, the fact that China despises Bitcoin at home does not mean that it cannot be useful abroad as a spearhead against major strategic competitors.
Analysis of Empirical Realities
Involvement of BTC in predatory acts of cyber-financial warfare committed by North Korea
BTC offers opportunities to engage in unconventional forms of economic predation. According to a report prepared by a panel of experts for the UN Security Council (2019), the North Korean military intelligence agency, the Reconnaissance General Bureau, has been responsible for acts of cyber financial warfare and cybercrime ‒including malware and ransomware attacks against foreign corporate targets in South Korea and elsewhere ‒ involving Bitcoin and other decentralized cryptocurrencies. Said source claims that Pyongyang’s presence in the cryptocurrency ecosystem also includes mining. It is estimated that the profits made by North Korea through these measures were worth $2 billion over a couple of years. The official report indicates that the resulting stolen wealth can then be used to undertake unsupervised international transactions, evade sanctions, and fund North Korean military expenditures, including its nuclear weapons programme. The American blockchain research firm Chainanalysis calculates that, in 2022 alone, North Korean entities stole $1.7 billion worth of cryptocurrencies through hacking. This aggressive behavior shows the problematic overtones of state-sponsored criminal activities related to crypto assets.
Bitcoin is more than a weapon for North Korean statecraft. It also helps Pyongyang compensate its lack of access to mainstream international financial channels and provides money to purchase food. According to a work of investigative journalism, North Korean policymakers regard cryptocurrency as a vital gateway to enhance the country’s financial infrastructure and, despite Bitcoin’s libertarian theoretical underpinnings, its adoption by this communist state is compatible with the strong emphasis of Juche ideology on the pursuit of self-sufficiency. Yet, tricky measures are needed to maximize its usefulness. As a report published by the National Committee on North Korea explains, the volatility of Bitcoin and similar cryptocurrencies makes them unsuitable as permanent vehicles for international payments. Some North Korean partners might accept Bitcoin, but it would make more sense to exchange cryptocurrency for conventional hard cash ‒ whose liquidity is much higher ‒ first and then use it to pay for goods and services later.
BTC donations to bankroll the military defense of Ukraine
Bitcoin can be used to bolster the military defense of a state in conventional conflicts. In the Ukraine War, it has been used by Kiev to prepare for the clash and to mitigate its consequences. Thanks to crowdfunding campaigns organized by both the Ukrainian government and private networks of volunteers through virtual platforms, Ukraine received donations denominated in cryptocurrency from foreign supporters. This digital war chest was helpful to increase Kiev’s pool of resources before and during the 2022 Russian invasion. According to open sources, said funds were invested in the purchase of military equipment, unmanned aerial vehicles, medical supplies, and even facial recognition software to identify Russian soldiers, spies, and mercenaries.
Although Kiev has received far larger sums of money through more traditional financial systems, the BTC grid turned out to be convenient channel for the direct reception of donations from overseas because it does not require the permission of institutional facilitators or intermediaries. Hence, this flow of money completely bypasses the formal paperwork and ‒ perhaps more importantly ‒ the restrictions of conventional financial channels that prevent remittances whose purpose is to fund military activities. Ironically, the specialized consulting firm Elliptic Intel notes that this course of action was inspired by the preceding crypto-asset fundraising undertaken for years by pro-Russian separatist militias in the Donbass.
This reality indicates that cryptocurrency has become not only a mainstream financial phenomenon, but also an instrumental digital asset in contemporary conventional warfighting. Considering that both Moscow and Kiev are actively resorting to decentralized cybercurrencies to gain an upper hand in this ongoing conflict, an article published by the Washington Post metaphorically described such confrontation as the world’s first “crypto war.” Yet, it is still unknown if cryptocurrencies will represent a game-changer that can decisively alter the facts on the ground in favor of either side.
In order to increase its war chest of crypto-assets, the Ukrainian government even courted the participation of large private cryptocurrency trading platforms, including FTX, Kuna, and Everstake. This involvement generated unexpected externalities. Specifically, the revelations that have uncovered the fraudulent criminal behavior of private cryptocurrency exchange FTX under the leadership of Sam Bankman-Fried ‒ involving cyclical transfers of wealth as a scheme that was facilitated by powerful political and corporate connections ‒ demonstrates that that these initiatives can also offer opportunities that encourage acts of corruption. The resulting fallout is problematic because it harms the public legitimacy of the crowdfunding efforts due to the fear of misappropriation of funds and also because at least some of the money sent by donors might not have reached its intended destination.
In the context of the Ukraine War, BTC has not just been used to optimize the defensive capabilities of Kiev’s military forces in the operational theatres of engagement. The cryptocurrency has also helped civilians caught in the crossfire. As a response to the destruction of infrastructure, Ukraine’s worsening macroeconomic trouble, the intermittent occupation of large urban areas by Russian forces, the exodus of millions of refugees, and the unreliability or unavailability of traditional financial services under such chaotic conditions, Ukrainian citizens are turning to BTC as a non-traditional monetary item to carry out safe and quick transactions whose purpose is to cover essential needs.
Iranian engagement in the BTC ecosystem to deflect the impact of sanctions
The Islamic Republic of Iran has harnessed the Bitcoin landscape in an effort to deflect Western sanctions through unorthodox measures. According to the consulting firm Elliptic ‒ involved in the scrutiny of blockchain analytics ‒ Teheran is encouraging BTC mining in order to use the resulting profits to pay for imports, overcoming the coercive restrictions that limit its ability to participate in economic exchanges carried out through ordinary platforms. Since the process involves the ‘alchemical’ transformation of energy into cryptocurrency ‒ a borderless monetary asset that circulates in an almost unrestricted way ‒ on an industrial scale, it offers the Iranian state an opportunity to monetize its energy resources (oil and natural gas), an important advantage for an economy deprived of hard cash and access to conventional financial services in international capital markets. Furthermore, Teheran is engaged in negotiations with other states ‒ including Austria, Bosnia-Herzegovina, England, France, Germany, Russia, South Africa, Switzerland ‒ over the development of collaborative frameworks for the use of cryptocurrencies in cross-border financial transactions. Therefore, for Iran, Bitcoin represents a backdoor to access the world economy. As such, it bolsters its counter-hegemonic policy of “economic resistance.”
Nevertheless, Iran’s position towards stateless cryptocurrencies has zigzagged as the balance between costs and benefits has changed. Iranian authorities reversed their permissiveness towards Bitcoin mining due to rising electricity consumption, shortages of natural gas supplies as a result of the sanctions, Bitcoin’s falling value, and the incidence of droughts which have diminished the operational capacity to generate hydropower. Tehran even launched a clampdown due to concerns over the prospect that widespread BTC mining could overload the country’s power grid and provoke blackouts, a problem which could unleash socio-political unrest. Yet, there are signs which indicate that Tehran is revisiting its position once more. In August 2022, the Iranian Ministry of Industry, Mining, and Trade announced on social media that the Middle Eastern country had completed its first import order denominated in an unnamed stateless cryptocurrency, a transaction worth $10 million, adding that more operations like this will continue in Iran’s international economic exchanges. Although still worried about the problematic consequences of mining for energy security, Iran has released hardware for BTC mining that had been previously seized.
Both strategic forecast and analytical assessments reveal that, in the strategic chessboards of 21st century “connectivity wars,” the leading cryptocurrency can be wielded as a high-tech financial sword or shield by innovative practitioners of economic statecraft. Some predictions have already come true. Others anticipate conceivable possibilities that might come to fruition in the near future. In turn, reality itself has brought some unexpected, but not surprising, developments that had not been foreseen. The unchartered waters of the cryptocurrency ecosystem might bring even more exotic applications of Bitcoin and similar virtual currencies for economic warfare worth exploring that have not been identified yet.
The increasing weaponization of Bitcoin in conventional and unconventional battlefields is consistent with the transformational character of “hybrid warfare.” A century ago, the historiographical German thinker Oswald Spengler explained that rather than an item that flows from one hand to another in economic exchanges, money is ‒ for modern Faustian civilizations that favor the march of technological development, the pursuit of worldly power and economic dynamism in the quest for wealth ‒ also an organic impersonal lifeform whose strength can be harnessed to project political force. The ongoing and eventual involvement of Bitcoin in several expressions of conflict shows that such an axiom is certainly valid in the digital age of FinTech.
*This article was published by Geopolitical Monitor.com