A few months ago, Russia created what could turn out to be its second “Sputnik,” although most of the world took little notice.
A Russian scientific institution successfully tested a blockchain technology platform that can theoretically withstand a hack from a quantum computer. Quantum computing machines use subatomic particles to process data a million times quicker than regular computers, but they do not exist today outside experimental laboratories. Most experts agree that it will be a few decades before quantum computers are commercially deployed. But when they are, the encryption we all rely on to to protect Internet servers, passwords, and email and messaging traffic may become obsolete.
So, creating a digital platform that is quantum hack-proof is a huge cryptographic leap forward. It is a sign of Russia’s intent to position itself strategically as a global leader in blockchain technology. But it also is of great national security significance to the United States, on two fronts. One, it shows Russia’s potential espionage advantage by advancing in cryptographic methods to secure data in ways that the U.S.government is neglecting. And, two, it signals that Russia may be able to withstand America’s economic sanctions tools in the future.
Blockchain technology, the distributed ledger software protocol which enables immutable, peer-to-peer digital transfers like the bitcoin cryptocurrency, is gaining interest around the world. Running as computer code, the technology allows parties to transact financially across borders, without a bank as a third party. But its potential lies not just in finance. Blockchain tech provides new approaches to managing data, so applications are being developed as pilot projects in both the private and public sectors to bolster cybersecurity, secure global supply chains, authenticate personal identities, and more.
There is clear evidence that Russia’s move to expand blockchain technology is occurring with an eye toward national security benefits. TC 26, a technical body within Russia’s security services that focuses on cryptography, hosted a presentation last month which acknowledged opportunities for adapting blockchain technology outside of the banking sector. This should not be a surprise. Even two of our national security expert colleagues proposed recently that blockchain technology could help bolster America’s defense industry against cyber-sabotage.
Some Russian policymakers have been less than subtle in signaling that cryptocurrency technology could increase their nation’s resilience against its adversaries. In an environment where Western sanctions are inhibitingthe Russian economy/business sector, one member of parliament declared last year that the technology could help Russians circumvent U.S. and EU sanctions. And while the digital currency marketplace currently is not nearly big enough or developed enough to replace capital influx lost through sanctions, innovative entrepreneurs are moving in that direction by creating new business models to send money where Western banks will not.
Earlier this year, Swedish startup Brave New World Investments launched an operation to help customers invest in Iranian firms by using bitcoin. Brave New World itself has no bank account because most banks in Sweden, wary of U.S. pressure, are skittish about transacting with companies involved in Iran. Instead, the company operates fully on bitcoin and cashes out its digital currency funds in Iran in rials so they can be invested locally in the Tehran Stock Exchange. This sends a clear message that should not be lost on the U.S.Treasury Department: Blockchain technology enables actors to make international transactions without going through the conventional financial system which the U.S. unquestionably has shaped, commanded, and safeguarded since the end of World War II.
And what makes Russia’s charge toward blockchain tech most noticeable is Moscow’s about-face on the technology. As recently as March 2016, the Russian Ministry of Finance was pushing for legislation to criminalize bitcoin use in the country, viewing cryptocurrencies’ decentralization and pseudonymity as a threat to Russia’s financial stability. But in the past year, as the Russian government has engaged the blockchain tech community more, officials at the highest levels have declared their support for technology, and several Russian financial institutions — including four banks sanctioned by the U.S. and EU — have initiated blockchain pilots.
This March, Russian Prime Minister Dmitry Medvedev called on the government to start researching how blockchain tech could be used to support Russia’s economic and public administration services. By May, Russia’s IT regulatory agency announced plans to implement policies to prepare government-wide adoption of blockchain tech by 2019. Then in June, the deputy chair of the Russian central bank said Russia should develop its own national cryptocurrency after completing its pilot blockchain projects.
She also said that for the next 7-10 years, Russia will be focusing on “digital letters of credit, custodian accounting, and digital bank guarantees using the blockchain.” Also in June, a group of Russian financial institutions led by the Central Bank declared that it had developed a working software system for sending intra-bank financial messages named Masterchain, based off the distributed ledger protocol called Ethereum.
Released in 2015, Ethereum is a blockchain platform for building “smart” contracts and is the second most popular blockchain system after Bitcoin. Interestingly, the co-founder of Ethereum — a 23-year-old Canadian whose family, coincidentally, immigrated from Russia — recently met with President Putin at an economic forum in St. Petersburg. According to the Kremlin, during the meeting Putin expressed his support for introducing Russian business partners to Ethereum.
But the lesson here is not to fear this technology or ban it or even to try to get the Russians to stop pursuing it. Just as the Sputnik launch nearly 60 years ago was a signal to the world that a new age of technology and exploration had begun, Russia’s advancement toward blockchain solutions should also signal that a new race — a crypto-race — is on.
As President Kennedy spurred on 1960s America to win the space race, President Trump should direct the U.S. government’s computer scientists, technicians, and financial experts, in coordination with the private sector to develop a nation-wide plan for leading the world in blockchain technology. Russia certainly has a strategy in this race. The U.S. needs to come up with one. And soon.
Yaya J. Fanusie is a former CIA analyst and is director of analysis at theFoundation for Defense of Democracies’ Center on Sanctions and Illicit Finance. Boris Zilbermanis deputy director of congressional relations at the Foundation for Defense of Democracies, where he is also a Russia analyst.