Source: Reuters.
The crypto industry has had quite a reckoning in recent months. Two of the industry’s largest crypto exchanges, Coinbase and Binance, are facing serious charges of regulatory violations. Young crypto moguls Justin Sun and Do Kwon have been charged with fraud. And, of course, two three-letter acronyms have become synonymous with the worst of crypto corruption: FTX and SBF. The U.S. government is also studying crypto’s potential national security threats. The Treasury Department released a report this month detailing how cybercriminals, ransomware hackers, and rogue states like North Korea have used decentralized financial markets—known as DeFi— to move money around to fund illicit activity or evade sanctions. The Pentagon’s Defense Advanced Research Projects Agency is currently conducting a year-long study on crypto and national security.
But as U.S. authorities are learning how to address crypto’s potential dangers, other countries are staying bullish on crypto. El Salvador is still experimenting with Bitcoin as a legal tender, although much of the Salvadoran public does not use it. The Caribbean island Dominica joined forces with Justin Sun to roll out a “digital citizenship” program for mainly Chinese crypto investors. Switzerland continues to attract crypto enthusiasts to Crypto Valley, Japan, Singapore, and South Korea lead Asian countries in crypto-supportive regulations, and South Africa declared crypto assets a financial product. Understandably, countries seek to be first-movers on crypto to streamline financial transactions, make payment ledgers that are transparent and immutable, lower costs of transactions, and enable greater access for unbanked and underbanked populations. But being first in crypto should not come at the expense of getting it right.
An over-reliance on crypto poses very real dangers to a country’s economy, energy, and national security. If a country’s central bank holds too much of one cryptocurrency and the market suddenly tanks, it could potentially wipe out a country’s coffers and its people’s savings. Bitcoin, which uses “Proof-of-Work” (PoW) mining to validate blockchain transactions, requires enormous amounts of electricity—sometimes as much as entire cities and millions of households—potentially causing pollution and exhausting precious energy resources that could have gone towards bringing light or broadband to rural populations. And as mentioned, transnational criminal organizations and rogue states are already using crypto to launder money and evade sanctions.
Additionally, some so-called crypto “consultants” helping countries roll out their programs could be con artists. Justin Sun, for instance, persuaded the Grenadian government to appoint him the country’s ambassador to the World Trade Organization, even though he already had an unscrupulous business background for years. The Bahamas prime minister once welcomed Sam Bankman-Fried and FTX with open arms and generous regulatory latitude. A short time later, Bankman-Fried became an international pariah, allegedly even paying USD $40 million in bribes to Chinese officials.
One country that seems to be getting crypto right is Estonia. One of the first European countries to embrace fintech since 2008, Estonia initially allowed people worldwide to effortlessly open thousands of cryptocurrency businesses without actually having a physical presence in the nation. However, Estonia’s lenient crypto regulation and minimal oversight weakened its ability to crack down on financial crimes, money laundering, and terrorist financing. Prioritizing quality over quantity, Estonian authorities adopted the EU’s 5th Anti-Money Laundering Directive and Counter Terrorist Finance legislation, which deterred nefarious actors while still encouraging crypto public/private partnerships. Now, 160 crypto businesses continue operating in Estonia. Not all of the businesses that disappeared were shady—some were casualties of the “Crypto Winter” storm—but the remaining crypto companies indicate that the government has successfully conducted crypto quality control.
Now is the time for countries to adopt similar common-sense safeguards like Estonia as they continue developing their crypto markets. First, country leaders should consider putting a moratorium on any nationwide crypto initiatives before their governments can implement proper regulations. Relatedly, various AI and industry experts wrote a letter suggesting to put a pause on ChatGPT and other generative AI so that companies and governments can set the right safeguards in place—crypto experts should consider doing the same.
Second, countries involved in crypto should work together to set international standards for the industry and share best regulatory practices. The recent Treasury Department report is a good start—requiring crypto companies to follow the same anti-money laundering rules as banks and other financial institutions and boosting government oversight. One such standard that must be put in place is the international standardization of categorizing cryptocurrencies. The U.S. Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) are both trying to figure out whether certain cryptocurrencies should be considered securities or commodities based on the Howey test. Regardless of what they settle on, both regulatory bodies should hold regular meetings with their international counterparts as their thinking evolves on this issue. International organizations like the WTO and World Bank could also facilitate such convenings.
Third, countries should encourage crypto enthusiasts within their borders to trade and invest in cryptocurrencies that use “Proof-of-Stake” (PoS) consensus protocols. Whereas PoW miners use lots of electricity to validate transactions on the Bitcoin blockchain, PoS requires only a few people to validate transaction blocks—saving a lot more energy in the process.
Fourth, countries should include national security and law enforcement experts as well as crypto sleuths to help build out their crypto programs. Blockchain analysis firms like Chainalysis, Elliptic, and CipherTrace have helped U.S. law enforcement agencies shut down a child pornography ring, disrupt funding for North Korea and terrorists, and even retrieved $3.6 billion from a New York couple accused of money laundering. These companies can also help foreign law enforcement agencies investigate crypto crimes.
Lastly, governments must perform more thorough background checks on the so-called crypto consultants who offer to help set up national crypto initiatives. They should be especially wary of the young overnight billionaires who call themselves “crypto experts,” “crypto diplomats,” or “His Excellency” with too much swagger. The Pandora’s Box of crypto cannot go back into the proverbial box. But countries can hit pause now, rethink their strategies and initiatives, and ensure that they are considering all aspects of crypto—the good, the bad, and the ugly.
Mike Asencio serves as program director at Florida International University’s Jack D. Gordon Institute for Public Policy, with a focus on cybersecurity and cyber infrastructure resiliency. Overseeing a statewide professional education program funded by Cyber Florida, his dedication to emerging technologies is actively shaping the future of cybersecurity public policy.
Leland Lazarus is associate director for national security at Florida International University’s Jack Gordon Institute of Public Policy and a nonresident fellow at the Atlantic Council’s Global China Hub. He formerly served as special assistant and speechwriter to the commander of US Southern Command and as a U.S. State Department foreign service officer in China and the Caribbean.
