Pentagon Launches Effort to Assess Crypto’s Threat to National Security

The military’s innovation office is launching a sweeping review of cryptocurrencies to assess threats to national security and law enforcement posed by the rise of digital assets.

The Defense Advanced Research Projects Agency — better known as DARPA, the office that developed the earliest technology undergirding the internet — has hired crypto intelligence firm Inca Digital to conduct the year-long project. The company will develop tools that give the Pentagon a granular view of crypto markets’ inner workings, in part to help authorities crack down on illicit uses of digital assets.

“The program underway here involves mapping out the cryptocurrency universe in some detail,” Mark Flood, a program manager with the agency, said in an interview with The Washington Post. Beyond fighting illicit finance, the office aims to use the data for insights into dynamics shaping traditional financial markets, where detailed information is harder to gather.

The deal is the latest evidence that federal agencies are ramping up efforts to thwart rogue regimes, terrorists and other criminal actors using crypto to fund their operations.

The Treasury Department last month issued its first-ever sanctions against software code to target Tornado Cash, a service that helped North Korean hackers and others launder stolen crypto. This week, the department issued a request for public input on crypto’s national security and illicit finance risks. Separately, the Justice Department this month announced that it’s launching a national network of 150 prosecutors to coordinate crypto-related investigations and prosecutions.

Flood noted that hackers affiliated with the North Korean government have carried out digital heists netting billions of dollars for the regime’s weapons program. And the Ukrainian government reported Russian attacks on its financial industry just before the invasion this spring.

“We just need to acknowledge that the financial sector may be a component of modern warfare going forward, and anything we can do to reinforce and protect the U.S. financial sector and our allies’ financial sectors is beneficial,” said Flood, a former Treasury official who has researched systemic financial risk.

Still, governments have struggled to police cryptocurrency. The industry’s lack of regulatory guardrails has allowed it to grow into a shadow financial system that sophisticated criminals have found ample opportunities to exploit.

Inca Digital CEO Adam Zarazinski said his firm’s work for DARPA will be “fairly wide-ranging.” Among other goals, the project aims to help the government understand how money flows in and out of blockchain systems, or public ledgers maintained on a distributed network of computers. It’s also intended to distinguish real crypto trading from bot-driven activity and ferret out crypto-based scams.

“There’s a lot of concern about crypto scams right now,” said Zarazinski, an Air Force veteran who also worked in criminal intelligence for Interpol. He said organizers of the schemes are frequently “well-organized, transnational criminal networks, often either backed explicitly by adversarial countries or given tacit approval to do these operations, and billions of dollars are being stolen from Americans and Europeans.”

The project is not DARPA’s first foray into blockchain technology. The agency issued a report in June commissioned from cybersecurity firm Trail of Bits that found blockchains frequently contain vulnerabilities that undermine their security claims. But Flood said the agency’s aim with its latest project is not to track individual crypto users. “DARPA is not engaged in surveillance,” he said.

“I’ll emphasize that we are careful in this research that we do not get involved in personally identifiable information", he added.