As Australia’s foreign and defense ministers and the US secretaries of state and defense prepare to meet for the annual AUSMIN consultations, next week ASPI will release a collection of essays exploring the policy context and recommending Australia’s priorities for the talks. This is an edited extract from the collection’s technology chapter, which suggests five key science and technology areas for increased cooperation between the US and Australia that pose significant national security and defense risks to both countries.
There has never been a better time for US-Australia science and technology cooperation. By signing the CHIPS and Science Act in August 2022, the U.S. government put its money where its mouth is by investing significant resources to combat the rise of China, both a U.S. technology rival and an adversary seeking to undermine global infrastructure and technology standards for domestic benefit.
The US wants to maintain its leadership position, but its critical dependence on semiconductors produced in North Asia has been exposed during the Covid-19 pandemic. Supply chain delays have had a major impact on most sectors of the economy, and this is a challenge that America’s mighty technology sector cannot handle alone.
The timing of the move and its massive financial investment are particularly noteworthy given that U.S. attention is already divided between what is likely to be Russia’s protracted war in Ukraine, an increase in cyber activity and missile testing from North Korea, and efforts to prevent a nuclear-armed Iran. American and Australian policymakers have a lot going for them, but some of the options for addressing these issues and mitigating their risks may exist in entirely new areas. There are certainly important lessons to be learned here, as the US and its allies seek to avoid direct military and potentially nuclear conflict, and advanced technology offers some much-needed alternatives in their arsenals.
Australia is a valuable US ally in a secure science and technology supply chain. We are a nation of thinkers and innovators who share the same democratic principles and have a long history as a trusted defense partner, contributing unique capabilities and services through the Five Eyes partnership. Australia also has the raw materials and rare earth minerals needed to support technological development in many areas, including semiconductors; however, this will need to be prioritized and coordination between government and the commercial sector will be required to meet the demand and timescales.
In cyberspace, there is no dividing line between domestic and international borders, and the lines between criminal activity, national security, intelligence and defense are increasingly blurred. Enforcing artificial divisions that diminish our own access to transnational technological ecosystems only helps our adversaries.
Avoiding Kinetic War: Sanctions, Cryptocurrencies and Blockchain Disruption
Financial leverage is an increasingly effective tool for deterring and disrupting opposing nation-states from traditional military attacks.
One of the most effective weapons the world community has used against Russia in its war against Ukraine has been financial sanctions and trade controls. Sanctions and Russia’s exclusion from the SWIFT system have imposed significant financial costs on its economy, limited its ability to supply and aid the war effort, and put targeted pressure on institutions and influential political leaders, cutting them off from their assets outside of Russia. However, the rise of cryptocurrencies and decentralized finance through blockchain technologies currently circumvents these processes. In fact, we are now witnessing this scenario with North Korea.
North Korea’s economy is heavily buoyed by cryptocurrency revenue from hacking activities and cybercrime after years of US-led economic sanctions and Pyongyang’s failure to extract more money from negotiations over its missile testing program. The market downturn in the ‘crypto winter’ of 2022, exacerbated by the recent collapse of major crypto exchange FTX, has caused the value of this income to drop, prompting North Korea to try to increase cyber attacks to make up for the shortfall.
Non-traditional finance and cryptocurrencies are a dual-use technology: they have been a major factor in global support for the Ukrainian war effort and provide financial security to people in fragile economies, but they also enable large-scale state-sponsored cybercrime and cyberattacks that can threaten national security. Transactions cannot be stopped, funds cannot usually be recovered, and despite the transparency of the blockchain, it can be extremely difficult to identify and disrupt bad actors.
However, many gateways for converting ill-gotten cryptocurrency back to fiat currency are controlled by major exchanges, which can impose sanctions if the account owner can be identified. Similarly, the US has also sanctioned ‘shuffling’ services such as Tornado Cash, which is software used primarily by the North Korean hacking group Lazarus to launder funds obtained through cybercrime. Other new measures will be needed to enforce the rule of law with the code, as investors burned by FTX move to decentralized financing that is less vulnerable to traditional financial crimes such as fraud and embezzlement.
To date, the available liquidity in global cryptocurrency markets is insufficient to support national trade. However, last year the market value of the cryptocurrency economy reached more than US$3 trillion, and crypto-based crime was around US$14 billion. Some countries, such as El Salvador, have already adopted cryptocurrencies such as bitcoin as their national currencies, and Australia and the United States are exploring the development of their own central bank digital currencies.
The crypto industry should recover from the FTX collapse if history is anything to go by: this is not the first crypto collapse and certainly not the first case of fraud and bankruptcy in traditional finance, especially before heavy banking regulation. sector. If adoption trends then continue, it is likely that Russia will be able to mitigate today’s sanctions and removal from SWIFT using the cryptocurrency ecosystem in the near future.
Western allies urgently need a set of new capabilities to impose financial costs on international adversaries through the domain of cryptocurrencies and digital finance, and to combine this with cyber disruption of bad actors. Current efforts are nascent and scattered, and the national security impacts are often underappreciated outside of law enforcement. The US administration called for a whole-of-government approach in March 2022, but this is an important international issue that will require a coalition effort.
The Australian Department of Defense could do a lot to help with this work and develop its own cyber disruption program – pinning down bad actors in cyberspace based on their technologies and behavior is the bread and butter of the intelligence community. Intelligence needs to be fused with blockchain analytics and real-world events to create a holistic picture of digital activities and identities. This knowledge must then be shared with operators who can best act on it in a manner similar to the international exchange of cyber threat intelligence, but the operations may be legal, economic, commercial, diplomatic or military.
FTX may actually have given us a golden opportunity to transform the blockchain ecosystem.
Recommendations: Australia should propose a collaborative initiative to generate and share intelligence to support operations to identify bad actors and block and disrupt their financial activities through blockchain. We should develop procedures for desensitization and sharing of this information for US and Australian government agencies to provide better opportunities for defense activities, inform crypto regulatory efforts, and provide better support to existing law enforcement, homeland security, and Department of Justice – General Operations the state prosecutor.