As the Australian foreign and defense ministers and the US secretaries of state and defense prepare for their annual AUSMIN consultations, next week ASPI will publish a series of articles exploring the policy context and recommending Australia’s priorities in the talks. This is an edited excerpt from the technology chapter of the collection, which proposes five key science and technology areas to enhance US-Australia cooperation that present significant national security and defense risks to both countries.
Science and technology cooperation between the US and Australia has never been better. With the signing of CHIPS and the Science Act in August 2022, the U.S. government walks the talk, pouring massive amounts of money into countering the rise of China, both a technological competitor of the U.S. and an adversary seeking to disrupt infrastructure and technology. Develop global technology standards for domestic interests.
The US is eager to maintain its leadership, but its heavy reliance on semiconductors made in North Asia has been laid bare during the Covid-19 pandemic. Supply chain delays have had a significant impact on most sectors of the economy, a challenge that a strong U.S. tech sector alone cannot meet.
The timing of the bill and its large financial investment are particularly noteworthy as U.S. attention has been divided between what could be a protracted Russian war in Ukraine, increased cyber activity and missile tests from North Korea, and seeking to deter a nuclear-armed Iran. . Policymakers in the US and Australia have a lot on their plate, but some of the options for addressing these issues and mitigating risks may lie in entirely new territory. As the US and its allies seek to avoid direct military and potential nuclear conflict, there are certainly important lessons to be learned here, and advanced technologies offer some much-needed alternatives in their arsenals.
Australia is a valuable ally of the US in secure technology supply chains. We are a nation of thinkers and innovators who share the same democratic principles, and we have long been a trusted defense partner, delivering unique capabilities and services through the Five Eyes partnership. Australia also possesses the raw materials and rare earth minerals needed to support technological development in a range of sectors including semiconductors; however, this needs to be prioritized and government and business sectors need to align to meet demand and timeframes.
Cyberspace has no domestic and international borders, and the lines between criminal activity, national security, intelligence, and defense activities are increasingly blurred. Enhancing artificial divisions and weakening our own attitudes toward multinational technology ecosystems will only help our adversaries.
Avoiding Momentum Wars: Sanctions, Cryptocurrencies, and Blockchain Disruption
Financial leverage is increasingly an effective tool for deterring and disrupting hostile nation-states ahead of traditional military strikes.
One of the most effective weapons used by the international community in Russia’s war against Ukraine is financial sanctions and trade controls. Sanctions and Russia’s exclusion from the SWIFT system have imposed enormous financial costs on its economy, limiting its ability to resupply and aid war efforts, and exerting targeted pressure on institutions and influential political leaders, Separating them from assets outside Russia. However, cryptocurrencies and decentralized finance, which have emerged through blockchain technology, currently bypass these processes. In fact, we are now witnessing this play out in North Korea.
Cryptocurrency proceeds from hacking and cybercrime have provided a strong boost to the North Korean economy following years of U.S.-led economic sanctions and Pyongyang’s failure to extort more money from talks over its missile-testing program. The “crypto winter” market downturn of 2022, combined with the recent collapse of major cryptocurrency exchange FTX, has exacerbated the plunging value of this income, leading North Korea to seek to step up cyberattacks to make up the shortfall.
Alternative finance and cryptocurrencies are a dual-use technology: they have been a major driver of global support for the war effort in Ukraine and provide financial security for people in fragile economies, but they have also enabled massive, state-backed Cybercrime and cyberattacks that can undermine national security. Transactions cannot be stopped, funds often cannot be recovered, and despite blockchain’s transparency, it can be extremely difficult to identify and disrupt bad actors.
However, many of the gateways that convert illicitly obtained cryptocurrencies back to fiat are controlled by major exchanges, and sanctions could be imposed if account owners can be identified. Likewise, the U.S. has also approved “hybrid” services such as Tornado Cash, software primarily used by the North Korean hacking group Lazarus to launder the proceeds of cybercrime. As investors burned by FTX turn to decentralized finance, it will require other new measures to enforce the rule of law through code, which is less susceptible to traditional financial crimes such as fraud and embezzlement.
To date, the global cryptocurrency market has not been liquid enough to support domestic trade. Last year, however, the market capitalization of the cryptocurrency economy reached more than $3 trillion, and the proceeds of crypto-based crimes were around $14 billion. Some countries, such as El Salvador, have adopted cryptocurrencies such as bitcoin as their national currencies, and Australia and the United States are both researching and developing their own central bank digital currencies.
The crypto industry should recover from the FTX crash, if history is any guide: it wasn’t the first crypto crash, and it certainly wasn’t the first case of fraud and bankruptcy in traditional finance, especially before heavy regulation of the banking sector. If adoption trends continue, it is likely that Russia will be able to mitigate today’s sanctions and removal from SWIFT by using the cryptocurrency ecosystem in the near future.
Western allies urgently need a new set of capabilities to impose financial costs on international adversaries through the sphere of cryptocurrencies and digital finance, and combine this with cyber disruption against bad actors. Current efforts are fledgling and isolated, and the national security implications are often underestimated outside of law enforcement. The US government called for a whole-of-government approach in March 2022, but this is a major international issue that requires concerted efforts.
The Australian Defense Force can do a lot to help with this work and develop our own cyber sabotage program – attributing bad actors in cyberspace through their techniques and behavior is the bread and butter of the intelligence community. Intelligence needs to be combined with blockchain analytics and real-world events to build a holistic picture of digital activity and identity. This knowledge must then be shared with operators who can best act in a manner similar to international cyber threat intelligence sharing, but the operations may be legal, economic, commercial, diplomatic or military.
In fact, FTX may have given us a once-in-a-lifetime opportunity to reshape the blockchain ecosystem.
Suggest: Australia should come up with a collaborative initiative to build and share intelligence to support efforts to identify bad actors and stop and disrupt their financial activities through blockchain. We should have processes in place to enable U.S. and Australian government agencies to desensitize and share this information to provide better options for national defense activities, to inform cryptocurrency regulatory efforts, and to inform existing law enforcement, homeland security, and Department of Justice-General Better support for the functioning of the Attorney-General’s Department.