In the opening salvos of the Second World War, Allied powers implemented a naval blockade of Nazi Germany to choke off the flow of raw materials crucial to the Nazi war effort. German U-Boats attacked allied merchant ships and cargo haulers, most famously sinking the civilian liner the SS Athenia hours after a formal declaration of war by Great Britain. The intent of economic warfare is to break a nation’s will and ability to fight. Economic warfare is so intertwined with war in the modern world that it would be unthinkable to see a conflict between nation-states without some form of economic retaliation. As cryptocurrencies gain institutional adoption, the pressure points will be tested, and there will be no more strenuous a test than a conflict between nation-states.
For a cryptocurrency like Bitcoin, the concentration of 80% of mining pools in a single country (China) should be a paramount concern. “Four of the biggest Chinese mining pools possess more than the half of the global Bitcoin mining power.”
Let’s posit a hypothetical scenario:
North Korea, due to economic sanctions, turns to Bitcoin to fund the majority of its government operations. This may sound outlandish to some, but a Reuters article states that North Korea has, “generated an estimated $2 billion for its weapons of mass destruction programs using “widespread and increasingly sophisticated” cyberattacks to steal from banks and cryptocurrency exchanges, according to a confidential U.N. report…” A post by Fireye indicates:
“… given North Korea’s position as a pariah nation cut off from much of the global economy – as well as a nation that employs a government bureau to conduct illicit economic activity – this is not all that surprising. With North Korea’s tight control of its military and intelligence capabilities, it is likely that this activity was carried out to fund the state or personal coffers of Pyongyang’s elite, as international sanctions have constricted the Hermit Kingdom.
Now, we may be witnessing a second wave of this campaign: state-sponsored actors seeking to steal bitcoin and other virtual currencies as a means of evading sanctions and obtaining hard currencies to fund the regime.
Let’s imagine that North Korea runs afoul of China – that their relationship deteriorates, and Beijing grows anxious at the prospect of having a rogue nation at its borders with nuclear ambitions. Prior to a military strike, the Chinese state seizes control of the mining pools that operate within its borders and orders them to execute a double spend attack, which crashes the price of Bitcoin. Conventional strikes follow shortly after, and Pyongyang also finds itself unable to spend its BTC reserves for the duration of the attack. Any Bitcoin that North Korea possesses may be severely devalued by a decrease in price caused by a panic as the public becomes aware of a successful state-sponsored double spend attack. This would impact its ability to buy food, munitions, or raw materials to support a war effort.
As long as China maintains control of the mining pools, they’ll be able to block any transactions stemming from accounts that their intelligence services have identified as belonging to the North Korean regime. This kind of limited attack would also enable them to censor transactions belonging to an adversary nation-state without also crashing the price of the network.
Due to a volatile currency, a nation in Africa widely adopts Bitcoin. They are a significant trader of raw materials like cobalt, zinc, or copper ore to China. The United States offers the country a favourable trade agreement in an attempt to buy a large portion of their annual supply of raw materials, but the Chinese threaten to crash the value of Bitcoin with a double spend attack to dissuade them from doing so.
Bitcoin is not the only digital currency with national-adoption security issues. A recent Financial Post article details a Bank of Canada presentation that discusses the possibility of the replacement of traditional currency with a proprietary digital coin: “An internal Bank of Canada presentation, prepared for Governor Stephen Poloz and the bank’s board of directors, offers the most detailed public insight yet into the bank’s thinking on a proprietary digital coin. According to the presentation, the currency would be widely available. It would initially coexist with coins and paper money, eventually replacing them completely.”
Once paper currency and coins are replaced, the national digital currency could become the prime target in a future conflict with a belligerent nation-state. If a flaw is found that is as bad or worse than this bitcoin bug, it could allow an attacker to shut down Canada’s digital currency temporarily. What happens after depends on how bad the flaw is. What if the attack were so severe, that it took the network offline for over a week? What happens when a nation-state suddenly loses the ability to pay its soldiers, to purchase food and raw materials on the open market with its currency? What happens if no one can buy food? If stores cannot transact? If people cannot spend currency? What effect would this have on morale for a soldier fighting a war knowing his family might have trouble purchasing food? What if an adversary state could crash a national economy without a blockade, sanctions, or without even firing a shot?