Digital Assets and National Security

 Currency by definition is a medium of exchange which provides a universally accepted value in the market place of a region. The value depends on users’ trust. A national government taxes by debiting currency and spends by expending it. It controls the supply of the currency through its monetary policy. The crux of this policy is the ability of a nation-state to control its money supply aimed at curbing inflation and maintaining price stability; alternatively, it may be used to expand the supply for boosting growth and employment. Monetary sovereignty is thus an essential component of national sovereignty.

Decentralised finance is a system by which financial products become available on a public decentralised blockchain network as digital assets, making them available for anyone to use. For the purpose of this article, only digital assets independent of the Government are being considered and include any digital assets which may be exchanged as a symbol of value like crypto currencies and Non-Fungible Tokens (NFTs) etc. Such assets can cause disruption in a nations financial system and adversely impact national security.

Digital Assets and Blockchain

Most discussions on digital assets invariably extol the virtues of blockchain and how it can potentially revolutionise innumerable aspects of governance. However, digital assets and blockchain are different. Blockchain is essentially an enabling technology for record-keeping systems. Post its appearance in 2008, the technology has evolved and has become the foundational core of systems where data integrity is key. Many large companies have already adopted the technology, while national governments and/or their departments have been experimenting with it. Recent advances in (what is claimed as virtually unbreakable) encryption technology further boosts digital data storage. Within India, Niti Aayog, in a pilot project, optimised the fertiliser subsidy supply chain using blockchain and has recommended its use for other sectors where data integrity of immutable records are essential such as land records, organic farming, etc.[1]

Digital assets are essentially powered by blockchain and are independent of the state. The independence is maintained by encryption and removing government’s control over creation and circulation quantum. The latter has the potential to jeopardise a nation’s monetary policy while the former promotes anonymity.

Impact on Security

The inbuilt anonymity of digital assets makes them ideal for moving value incognito across borders, defeating national constraints on them. Increasingly, such assets will be made use of by terrorists, smugglers of banned and illicit goods, money launderers, those attempting to buy influence etc. Reportedly. some terrorist organisations like al-Qassam Brigade (Hamas’s military wing), al-Qaeda, and Islamic State of Iraq and the Levant (ISIL)[2] are using cryptocurrencies to raise funds. While some accounts have been seized, it is suspected that many more are still operating. With India’s adversaries increasingly attempting to use money power to subvert society[3] and paralyse politics, digital assets will provide them with a novel method to do so with increased anonymity.

Debt diplomacy is today accepted as a tool of our adversary at the international level. At the micro level, cases of corporate debt hostage are also known. While the former aims to entrap nations, the latter lays a debt trap for corporates and individuals who are then used for technology transfer, influence buying as also using the local system against the state. Many justify this as permitting small business access to international finance. However, it defeats the national capital controls imposed and thereby aids in subversion of the national economy. This can be done by transferring excess liquidity created outside the nation or infusing excess liquidity when aim is to contract the money supply. This can hamper both employment generation and inflation control. The experiment of Auroracoin[4] of Iceland is one such example.

Ransomware attacks have been on the rise in the world, with ransom being demanded in digital assets. Its anonymity aids the attackers in concealing their identity. Infrastructure used for digital assets is based on blockchain and encryption technology. Widespread availability of digital assets would lead to unregulated availability of such infrastructure, which could be used for storing data and plans by groups inimical to the state. This would render the security effort much more difficult. Reportedly AQAP and ISIL have been distributing their English language magazine Inspire and Dabiq respectively, using blockchain. Both have been on the forefront of radicalisation and spread of the terror ideology.

Such infrastructure can also be used to launch attacks into other networks with which it is connected. The anonymity such infrastructure provides makes detection of the attacker’s identity almost impossible. In addition, the computerised pool used for mining cryptocurrencies are ideal architecture to support a cyber-attack. Trading digital assets require that the system is linked to the banks, which in turn have access to most of the national cyber infrastructure. The arrangement thus renders the national cyber infrastructure at a much higher risk.

Separatist movements historically have asserted their political and economic control by issuing alternate currency in the areas they control. While non-state actors are as of now, not using cryptocurrencies, this could change in the near future. Scottish separatists are already experimenting with the Scotcoin – a cryptocurrency.[5] Other experiments towards this include Pesetacoin, Spaincoin, Greeccoin etc. Not only can the separatist’s movement issue their own but also mandate use of an existing cryptocurrency to erode trust in the national currency. While, the trend is on the rise, the world’s richest, most powerful and industrialised countries, have largely managed to keep their population shielded and have amongst the least users worldwide[6].

Various attempts are also being made by corporates towards this end – the most famous being Elon Musk announcing that payment for Tesla would be accepted in Bitcoins[7] as also Amazon too planning on the same[8]. Potentially, it can permit them to hide transactions, evade taxes and also deal in illegal products. This would further be accentuated by emerging decentralized exchanges.[9] Such exchanges would increase the anonymity by countervailing the “know your customer” guidelines of the Government.

Need for Regulation

The regulators seemingly are conscience of the dangers. In April 2018, RBI had banned banks from supporting crypto transactions after cases of fraud through virtual currencies were reported. However, the Supreme Court struck down the ban in March 2020. Among the reasons cited was that cryptocurrencies were not illegal though unregulated in India[10]. Hence, legislation for regulation of these are essential and urgent.

March of technology cannot be stopped and hence digital assets will remain a reality; banning them will only shift them underground. Hence, it’s important that they be regulated and their linkages be adequately controlled. This should include:

• Proscribe the use of non-government digital assets as a symbol of value, thereby any sale using the same be considered illegal.
• All digital assets should be held electronically but exchanges or intermediaries should not be permitted to hold the same.
• Gifting or receipt of digital assets be proscribed. This would ensure that all asset purchased are either held or a sold through a money trail which in turn can be tracked in the event of illegal activities.
• Digital assets have no intrinsic value hence, gains from the same be taxed at par with gambling gains.
• Crypto Exchanges should be registered as corporates and pay taxes on transactions at par with others. Those crypto exchanges dedicated to a single digital asset should be banned as in the quest for additional customers, these may resort to illegal operations.
• Crypto exchanges should have limited registered intermediaries only who should be able to place own/customers’ orders. In turn, the exchanges must have full knowledge of the intermediaries and maintain records of their transactions, for scrutiny if required. Intermediaries in turn should have full knowledge of their customers and be responsible for any illegal activity using their accounts.

Conclusion

Digital finance is a developing area at the intersection of blockchain, encryption, digital assets, and financial services. Its unregulated availability in society has the potential to undermine and destabilise the nation. Adequate legislation to channelise it into an asset class is therefore urgently warranted. Any delay would only auger poorly for national sovereignty and governance.

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[1] “Blockchain The Indian Strategy Part 1” available on https://niti.gov.in/sites/default/files/2020-01/Blockchain_The_India_Strategy_Part_I.pdf accessed on 10 Jan 2021.

[2] ‘Global Disruption of Three Terror Finance Cyber-Enabled Campaigns’ The United States Department of Justice available on https://www.justice.gov/opa/pr/global-disruption-three-terror-finance-cyber-enabled-campaigns

[3] ‘ED probes media portal’s funding from businessman ‘linked’ to China regime’ Times of India 18 July 2021 available on https://timesofindia.indiatimes.com/india/ed-probes-media-portals-funding-from-businessman-linked-to-china-regime/articleshow/84514212.cms

[4] ‘Auroracoin’ Investopedia available on https://www.investopedia.com/terms/a/auroracoin.asp

[5] ‘Can Virtual Currencies Increase Political Power?’ JSTOR available on https://www.jstor.org/stable/10.7249/j.ctt19rmd78.9?seq=2#metadata_info_tab_contents

[6] ‘Which Countries Are Using Cryptocurrency the Most?’ Yahoo Finance available on https://finance.yahoo.com/news/countries-using-cryptocurrency-most-210011742.html

[7] Jon Porter (2021) “You can now buy a Tesla with bitcoin in the US’ The Verge 24 March 2021 available on https://www.theverge.com/2021/3/24/22347905/tesla-bitcoin-payment-us-cryptocurrency-elon-musk

[8] See Business Standard 26 July 2021 “E-com giant Amazon may soon allow digital currency as payment mode” available on https://www.business-standard.com/article/companies/e-com-giant-amazon-may-soon-allow-digital-currency-as-payment-mode-121072500226_1.html accessed on 28 July 2021

[9] See “The Economic Times” 28 July 2021 “WazirX to launch decentralised exchange next month” available at https://economictimes.indiatimes.com/tech/technology/wazirx-to-launch-decentralised-exchange-next-month/articleshow/84806149.cms accessed on 28 July 2021.

[10] Sandeep Soni (2021) ‘RBI: Banks can’t cite 2018 crypto-ban order quashed by SC to caution customers against virtual currencies’ Financial Express 31 May 2021 available on https://www.financialexpress.com/market/rbi-banks-cant-cite-2018-crypto-ban-order-quashed-by-sc-to-caution-customers-against-virtual-currencies/2262513/

https://chintan.indiafoundation.in/articles/digital-assets-and-national-security/   

 

Commentary: China’s Quest for Global Primacy by Timothy R. Heath, Derek Grossman, Asha Clark (Rand Publication)

 By Col Akshaya HandaJuly 1, 2021

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All the three authors of the paper are senior defence analysts with RAND Corporation and have extensive experience in studying and analysing China. Prior to joining RAND Timothy Heath served as the senior analyst for the US Pacific Command’s China Strategic Focus Group. Derek Grossman served over a decade as the daily intelligence briefer to the director of the Defence Intelligence Agency, and to the assistant secretary of defence for Asian & Pacific Security Affairs. Asha Clark is an experienced Defence Analyst and has worked with various think tanks and also with the US Government.

Conflict and/or Competition

Deng Xiaoping had emphasised, “Hide your strength, bide your time” as the guiding philosophy of Chinese Foreign Policy. However, even before Xi Jinping came to power, calls for a reinterpretation of the quote had started rising[1]. In less than half a decade, post the ascendance of Xi Jinping, most observers agree that Deng Xiaoping’s policy has been irrevocably abandoned[2].

US and China are today the two premier powers in the world, with the gap between their comprehensive national power (CNP) diminishing rapidly. This has often raised concerns of as to whether the two powers are likely to fall into the Thucydides trap.[3] The postulation has been further reinforced by Xi’s pledge that by 2049, China will have achieved the “great rejuvenation of the Chinese nation” – a term that encapsulates both economic and territorial significance[4]. However, the Chinese author’s assert that “it is true that the United States has come to regard China as its most important competitor, but that does not mean that China and the United States will eventually engage in war or other forms of all-out conflict and confrontation”[5]. Albeit, simultaneously they blame the US and the west for competition and likely conflict.[6]

Vision and Path to Global Leadership

China’s ‘Vision of Global Leadership’ – as per the authors – is to be the “first among equals permitting it to set norms, rules and values for the world”. It aims to achieve this vision by establishing a network of client states and, employ its CNP to wrest control of global/multilateral institutions and also renovate them to uphold Chinese norms, values and preferences especially in the management of space, cyber, law and maritime domains. On its periphery it aims to become the predominant economic, political and security power, and use its BRI to incorporate the developing world as part of its political and security constituency.

The research concludes that the reduction in the gap of CNP between the US and China has emboldened the latter to seek Global Domination, by winning the inevitable competition while avoiding conflict with the US. It aims to achieve this by establishing primacy in the Indo-Pacific, hegemony centred on Eurasia, Middle East & Africa and Chinese leadership in the international order. For this, it will rely on its economic prowess and diplomatic manoeuvre i.e., by keeping the US and Europe divided; cooperating with Russia, with the latter being the junior partner; network of client states across the developing world in Eurasia, Africa, Middle East and Latin America and many such measures.

The employment of non-military domains to achieve geostrategic aims is not new to China. Therefore, it is not difficult to predict that in addition to diplomacy, China also defends its sovereignty and interests with ‘combination punches’ including administrative, economic and military measures, as well as a combination of official and non-governmental parties[7]. This has since been refined to what some believe to be “the three forms of warfare concept, vis public opinion warfare, psychological warfare and legal warfare, which are conducted to create internal contradictions”[8]. Hence, the conjectures of the authors are plausible as they are consistent with China’s international behaviour of claiming peaceful intent while systematically interfering in internal matters of other states with an aim to (at best) convert them into client states or (at worst) hinder their capability to take decisions inimical to Chinese interests. These are also supported by voices coming out of China who believe that before the Opium War, China was the centre and method of the world and that China is finally returning as both centre and method under Xi Jinping[9].

As per the authors, for success, China will have to avoid war with the US for achieving its goal although limited/proxy wars are possible; US power be degraded, to a level where it is limited to the American continent and globally it accepts China’s leadership while refraining from interfering with Chinese interests and; Chinese primacy over Eurasia, Middle East and Africa is established. Also, the US and China manage their differences as per norms upheld by China while cooperating on shared concerns defined by China. Since, Taiwan, South China Seas, US Military presence in Asia etc, may act as a deterrent to the Chinese plan therefore Chinese Defence Strategy will remain important to the overall scheme. It will aim to forestall US attempts from China building a superior military while preventing conflict with the US, managing crisis and engaging in a proxy or limited conflict, deterring the US from challenging China anywhere along its periphery and supporting grey zone and diplomatic activities as also discrediting or weakening US appeal.

While deterring war with a superior military power would certainly be aimed for – India is likely to be viewed differently. It’s a power, which can challenge China in critical domains vis periphery, developing world as well as multi-lateral forums. Hence, China is likely to use its full arsenal against India to protect its perceived interests. Apart from its grey zone tactics and deterrence, if need be, limited war or hostilities may be resorted to. In the US-China paradigm, deterrence would suffice but a perceived militarily weaker power, capable of challenging in multiple domains is unlikely to be accepted. In addition, it will have the advantage to discredit US as a dependable military partner. Hence, the regions of conflict are likely to be in areas inaccessible to the US military.

The authors have identified the main challenge to the Chinese plans as being domestic vis economic imbalance, corruption, regional unrest and the demographic challenge. The fact that PLA is an unattractive partner and lacking power projection capability also finds mention. Some other factors which may be included are the politics within the CCP leading to reports of conflict with[10],[11] and side-lining[12] of the premier, once likely considered to be the President; China turning away from foreign influences[13] and trying to control businesses which were the engine of its economic resurgence[14]. All this is likely to adversely affect its economy. The Anti-Sanctions Law passed in June 2021 permitting it to throw out foreign multinationals and confiscate their assets in response to sanctions imposed on Chinese officials would further disincentivise foreign investment[15].

Implications

As per the authors, the implications for the US are that it needs to strengthen its network of alliances and partnerships while considering Indo-Pacific as the critical domain and upholding US credibility as a global leader. For this, it needs to build short and long-term capabilities to deter China. This would involve sustained investment in future military capabilities, better protection of US interests in Indo-Pacific and cyber, greater importance to military diplomacy, continued provisioning of public goods like sea lanes of communications (SLOCs) and expansion of capabilities to areas not touched upon yet.

China’s aim to build the most powerful military in Asia has serious implications for India. Coupled with its endeavour of surrounding India with client states, attempts to reform global governance to confirm to it and the propensity of employing both grey-zone tactics and proxy war demands the highest level of vigil within India. Also – unlike the US-USSR competition – considering the proximity and direct nature of the threat, non-alignment is no longer a viable option. While the US-China competition is likely to last a decade-plus, it also offers India an opportunity to replace China as a manufacturing hub. However, moving up the technological ladder too would be critical.

Conclusion

Earlier a nation state’s survival depended upon military power and consequent territory & wealth it holds. However, today global primacy is more an issue of being able to hoist one’s values and preferences on the world – a game which China has planned for in detail. While the west prepares for and counters the same; nations on China’s periphery, perceived to be inconvenient and militarily weak may face conflict, especially in areas inaccessible to western militaries. It would have the added advantage of discrediting the west as a trustworthy partner. A strong and technologically advanced military force capable of deterring the PLA is therefore essential. Simultaneously, the competition between the West and China provides an opportunity for India to move up the technology ladder and emerge as the manufacturing hub of the future.

Endnotes:

[1]Huang Youyi  “Context, not history, matters for Deng’s famous phrase” Global Times 15 June 2011, Accessible on https://www.globaltimes.cn/content/661734.shtml. Accessed on 15 June 2021.

[2]Kevin Rudd  “Emperor Xi’s China Is Done Biding Its Time” Bloomberg Opinion. Accessible on https://www.belfercenter.org/publication/emperor-xis-china-done-biding-its-time. Accessed on 15 June 2021.

[3] In 12 of 16 cases over the last 500 years, in which there was a rapid shift in the relative power of a rising nation that threatened to displace a ruling state, the result was war.  Graham Allison “The Thucydides Trap: Are the U.S. and China Headed for War?” The Atlantic, 24 September 2015. Accessible on https://www.theatlantic.com/international/archive/2015/09/united-states-china-war-thucydides-trap/406756/. Accessed on 15 June 2021.

[4]Editorial Board, “China’s long march to national rejuvenation” Financial Times. Accessible on https://www.ft.com/content/d45119de-e11f-11e9-b112-9624ec9edc59. Accessed on 15 June 2021.

[5]Zuo Fengrong  “The Thucydides Trap and a New Type of Great Power Relationship: Discursive Competition in Sino-American Relations” Reading the China Dream. Accessible on https://www.readingthechinadream.com/zuo-fengrong-ldquothe-thucydides-trap.html. Accessed on 15 June 2021.

[6] “We might describe U.S. national identity as ‘democracy first, white people first, and America first,’ and another word for ‘America first’ is hegemony.  Whether it was Time magazine founder Henry Luce’s ‘American Century’ from 1941, or Secretary of State Hilary Clinton’s ‘American Pacific Century’ in 2011, or Joe Biden’s ‘Why America Should Lead the World Again’ from his presidential campaign, all reflect the hegemonic attitude that America is the only power. Xie Tao (2020) “2020:  Sino-American Relations and U.S. Politics in the Time of the Pandemic” Reading the China Dream, available on https://www.readingthechinadream.com/xie-tao-2020.html  accessed on 17 June 2021.

[7]People’s Daily Online  “China defends sovereignty by combination punches”. Accessible on http://en.people.cn/90883/7907944.html. Accessed on 16 June 2021.

[8]Wu Su-wei and Jonathan Chin “Measures against China’s ‘gray-zone’ tactics detailed” Taipei Times. Accessible on https://www.taipeitimes.com/News/taiwan/archives/2021/03/22/2003754269. Accessed on 16 June 2021.

[9]Zhang Cheng “China as Center and Method” Reading the China Dream. Accessible on https://www.readingthechinadream.com/zhang-cheng-china-as-center-and-method.html. Accessed on 17 June 2021.

[10]Lingling Wei and Jeremy Page  “Discord Between China’s Top Two Leaders Spills Into the Open” The Wall Street Journal. Accessible on https://www.wsj.com/articles/discord-between-chinas-top-two-leaders-spills-into-the-open-1469134110. Accessed on 16 June 2021.

[11]Kalpit A Mankikar  “Is China facing a Xi Jinping-Li Keqiang rivalry amidst a job crisis?” Money Control. Accessible on https://www.moneycontrol.com/news/opinion/china-facing-a-xi-jinping-li-keqiang-rivalry-stall-economy-job-crisis-5442631.html. Accessed on 16 June 2021.

[12]BBC  “Li Keqiang: China’s marginalised premier” BBC News. Accessible on https://www.bbc.com/news/world asia-china-19870221. Accessed on 16 June 2021.

[13]Vijay Gokhale “Cracks in Fortress Beijing: Insularity, inequality, conformity, discord with neighbors – these didn’t make America No 1” The Times of India 16 June 2021 page 10.

[14]In September 2020, an 18-year prison sentence was imposed, on a real-estate executive Ren Zhiqiang who’d criticized Xi in a private email. The following month, the world’s largest initial public offering, that of the financial firm Ant Group was axed. Beijing subsequently launched an antitrust investigation into Ma’s other creation, the e-commerce company Alibaba Group and later carved out the company into smaller companies. Then in April 2021, Ma was removed as president of Hupan University, the ultra-elite business school he founded and endowed in 2015. Finally in May 2021, regulators approved Jack Ma’s Ant Group to start running a new finance company. It will absorb the most profitable part of Ant — the consumer lending business. Ant will contribute its massive portfolio of $155 Bn in outstanding loans – in effect handing over the Finance Business to a State Owned Enterprise.  Simultaneously, in November 2020, a leading private businessman Sun Dawu who ran an agricultural conglomerate, was arrested because he had spoken in favor of political reform. Finally, until a recent low-key appearance, Jack Ma, the founder of both Ant Group and the e-commerce giant Alibaba, hadn’t been seen in public for months after he criticized the party’s handling of financial reform. See John Pomfret (2021) “China’s Leader Attacks His Greatest Threat” The Atlantic available on https://www.theatlantic.com/international/archive/2021/01/china-xi-jinping-business-entrepreneurs/617777/?utm_source=pocket&utm_medium=email&utm_campaign=pockethits accessed on 17 June 2021, Michael Schuman (2021) “The Undoing of China’s Economic Miracle” The Atlantic available on https://www.theatlantic.com/international/archive/2021/01/xi-jinping-china-economy-jack-ma/617552/ accessed on 17 Jun 2021 and George Calhoun (2021) “The Sad End Of Jack Ma Inc” Forbes available on https://www.forbes.com/sites/georgecalhoun/2021/06/07/the-sad-end-of-jack-ma-inc/amp/ accessed on 17 June 2021.

[15]South China Morning Post  “China’s anti-sanctions law: how companies can avoid picking a side” South China Morning Post. Accessible on https://www.msn.com/en-xl/news/other/china-s-anti-sanctions-law-how-companies-can-avoid-picking-a-side/ar-AAL76Kn. Accessed on 17 June 2021.

https://www.claws.in/commentary-chinas-quest-for-global-primacy-by-timothy-r-heath-derek-grossman-asha-clark-rand-publication/