Argument

America Needs a Blockchain Strategy ASAP

The technology behind cryptocurrency can keep the United States safe—but only if the country takes advantage of its head start.

Giant letters, reading the word "blockchain" are displayed at the blockchain centre, which aims at boosting start-ups, on February 7, 2018 in Lithuania's capital Vilnius.
(PETRAS MALUKAS/AFP/Getty Images)
Giant letters, reading the word "blockchain" are displayed at the blockchain centre, which aims at boosting start-ups, on February 7, 2018 in Lithuania's capital Vilnius. (PETRAS MALUKAS/AFP/Getty Images)

The news is rife with wild promises made by blockchain advocates and the exaggerated suspicions of its opponents. By enabling the creation of cryptocurrencies such as bitcoin, ether, and XRP, blockchains have made some people fabulously wealthy while also, at times, facilitating fraud and money laundering. Although the technology is still in its early stages, we can attest—not least, because one of us serves on the board of a financial technology company that developed one of these cryptocurrencies—that it has enormous potential.

But so far, little has been written about the blockchain’s potential uses in the national security space, where blockchain technology could be enormously useful. If mishandled, however, it could also pose dangers. To maximize the former and mitigate the latter, it would be wise for the United States to take advantage of its early technological lead before competitors inevitably catch up. Fortunately, there are myriad ways it could do so.

First, a brief introduction to the basic technology: The blockchain is a decentralized ledger distributed across a network of computers, or nodes, that records transactions in real time. It adds new and unique “blocks” to a “chain” after the transactions are verified through consensus across the network. In simple terms, if Bob pays Jen, each computer in the network will receive a detailed record of the transaction, with sensitive information encrypted, and will then verify that Bob has sufficient funds and hasn’t already spent them elsewhere. After being confirmed, the transaction is permanently added to a block of other verified transactions and attached to the end of the chain, making it unalterable, easy to trace, and exceedingly difficult to forge.

The blockchain is sometimes described as a “trustless” system. It eliminates the need for banks or other middlemen, because every node verifies and re-enforces each transaction, logging a history that is both public and immutable. It cuts costs for users and, in some cases, increases speed and efficiency. Although many blockchains (such as bitcoin and ethereum) currently can only process a fraction of the number of transactions per second that major credit card companies can, there are efforts underway in the industry to speed up the process. 

Blockchains could revolutionize sectors including financial services, health care, data storage, and corporate supply chain management. They also have important applications for national security.

Blockchains, for instance, could change supply chain management for defense contracting. One of the Defense Department’s chief concerns regarding new defense systems is that the components are manufactured all over the world, so it is possible that suppliers close to a foreign government could install undetectable backdoors for spying. Faulty microchips or skulking spyware are real risks in today’s opaque global supply chains. The blockchain’s accurate and detailed ledger could reduce these risks by tracking what each subcontractor supplies and ensuring that each component is traceable. For example, if a microchip is produced in China for a plane’s onboard computer, a Defense Department auditor could see who made it, when it was installed, and how it was modified. Each action would be added to the blockchain, providing a detailed, unalterable contract history.

Blockchains could also securely manage the identification of contractors and government employees. Anyone who has applied for a security clearance knows how cumbersome and paper-based the process is. With the blockchain, personal information gathered during a security screening could be verified, disaggregated, and encrypted, the inserted into a blockchain, after which the original data could be erased from all individual servers. Individuals would have greater control over who can access what aspects of their personal information by attaching permissions to specific elements of their encrypted digital ID. For example, an individual might allow a potential employer access to specific Social Security information, while providing only a driver’s license number to another. Because comprehensive personal data would no longer be stored in one central server, hacks like the one into the U.S. Office of Personnel Management in 2015 could become a thing of the past, and the blockchain would minimize the risks of identity theft and manipulation.

The government could also use blockchains to secure interagency communications and improve digital record-keeping. Rather than storing key information in a single agency’s archives, the blockchain would provide a decentralized database that many agencies could access. For example, in a multi-agency law enforcement sting, an FBI investigator could add new evidence to a joint blockchain, which is time-stamped, digitally signed, and instantaneously shared across all permissioned entities. Someone like leaker Chelsea Manning could easily have been prevented from gaining access to every State Department cable, because she clearly had no “need to know.” The blockchain eliminates the need to secure permission each time one agency requires access to data and makes transparent who accessed what.

In cybersecurity, the distributed and immutable nature of the blockchain would allow for rapid recognition of hacks and timely responses. Because each block in a chain is encrypted with its own unique identifier (or “hash”) along with that of the previous block, it is impossible to manipulate any one block without changing each subsequent block in the chain. To do this would require massive computing power and would be immediately evident to each node in the system. It is therefore much easier to detect an attack and quickly identify how data is being manipulated.

There are, of course, some obstacles and potential downsides to the use of blockchains in the world of national security. Even more than with other groundbreaking technologies, blockchains are still an internationally ungoverned space. Where academic researchers largely from the United States dominated the early days of the internet, blockchains are truly cross-border, with millions around the world participating. Fraudulent initial coin offerings and other get rich quick schemes have already created confusion and could even hamper further innovation.

While the blockchain is encrypted, it is vulnerable where it meets the real world, and human error can occur. A blockchain ledger is still only as safe as the hardware security modules protecting its digital access keys. Hacks of cryptocurrency exchanges have become common, and up to one-third of all bitcoins are thought to be missing. A hack on a single node will not compromise a widely distributed system, but if the network is concentrated within a few large mining operations, another ethereum heist could occur. To strengthen network security and be deployable at scale—as in the case of a government agency—industry leaders should coordinate and develop a more comprehensive blockchain security architecture. Adding to the confusion, the largest blockchains can be very slow and insecure, so companies are creating increasing numbers of private blockchains. This leads to a proliferation of isolated networks and incompatible technologies.

The U.S. government does not need to wait for these uncertainties to be resolved to make blockchain a useful tool for national security. Although the government would stifle innovation if it rushed to regulate quality standards for blockchains, but it would be wise to help the best technologies win by investing in them and encouraging defense contractors to build on the most stable, secure, and speedy platforms. The government can also discourage contractors from building on inefficient and less secure “proof of work” blockchains that use vast amounts of energy and have negative impacts on the environment.

The government should also promote active competition and emphasize the public use aspects of blockchain through small investments and grants. DARPA has already begun contracting start-ups to research the applicability of blockchain technology for secure weapons data storage and encrypted communications. DIUx, the Pentagon’s tech incubator, and the CIA-founded In-Q-Tel should follow suit. Promising programs have also begun at the state level. For example, Delaware contracted start-ups to develop a blockchain for contracts and securely storing archival records. These partnerships help distribute the cost of research and development, and they strengthen ties between federal agencies and Silicon Valley’s best and brightest. They also help build the public’s trust in the blockchain.

In addition, the government can coax the industry to adopt quality standards and best practices. A federal “regulatory sandbox” would allow companies to test their technologies in a controlled setting while government regulators ascertain a proper regulatory framework. Canada launched such a sandbox in 2017, which provided limited-time registrations for blockchain companies while ensuring consumer privacy and other protections.

If the United States stalls too long, rival governments that invest heavily in blockchain research and development may co-opt the industry and set their own standards. Lichtenstein and Malta are early movers in establishing legal frameworks for blockchain. In July, Malta passed three laws that established internal governance requirements and certification procedures to better protect both consumers and businesses. While no one is concerned about Malta and Lichtenstein, it would be unhelpful if China, Russia, or other governments antagonistic to the United States determined the standards in this critical new technology. That’s why U.S. businesses and lawmakers must work quickly to maintain a leading role in blockchain technology.

Anja Manuel is a Co-Counder and Partner in RiceHadleyGates LLC, a Lecturer at Stanford University, and, separately, serves on the board of Ripple.
Leo Carter is a Research Associate at RiceHadleyGates LLC.

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