The military's innovation division is conducting a thorough examination of cryptocurrencies in order to analyze the vulnerabilities to national security and law enforcement presented by the rise of digital assets.
The Defense Advanced Research Projects Agency, or DARPA, which developed the first technology that underpins the internet, has contracted crypto intelligence firm Inca Digital to carry out the year-long experiment.
The startup will create tools that will provide the Pentagon with a detailed perspective of the inner workings of crypto markets, in part to assist authorities in combating unlawful use of digital assets.
"The initiative happening here is mapping out the cryptocurrency universe in some depth," Mark Flood, a program manager with the CIA, told The Washington Post in an interview.
Aside from combating illicit finance, the agency intends to utilize the data to gain insights into the processes influencing traditional financial markets, where precise information is more difficult to obtain.
The agreement is the latest proof that federal agencies are stepping up efforts to combat rogue regimes, terrorists, and other criminal actors that use cryptocurrency to fund their operations.
The Treasury Department announced its first-ever sanctions against software code last month, targeting Tornado Cash, a business that assisted North Korean hackers and others in laundering stolen cryptocurrency.
The agency released a request for public input on the national security and criminal finance dangers of cryptocurrency this week. Separately, the Justice Department announced earlier this month the formation of a national network of 150 prosecutors to coordinate crypto-related investigations and prosecutions.
Flood stated that North Korean government-affiliated hackers have committed digital heists worth billions of dollars for the regime's weapons development. And, just before the invasion this spring, the Ukrainian government detected Russian strikes on its financial sector.
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"We simply need to acknowledge that the financial sector may become a component of modern warfare in the future, and anything we can do to reinforce and protect the US financial sector and the financial sectors of our allies is beneficial," said Flood, a former Treasury official who has studied systemic financial risk.
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Nonetheless, governments have struggled to regulate cryptocurrency. Due to a lack of regulatory oversight, the business has evolved into a shadow financial system that skilled criminals have found abundant possibilities to exploit.
Inca Digital CEO Adam Zarazinski stated that his company's work for DARPA will be "pretty diverse." Among other things, the project hopes to assist the government in understanding how money flows into and out of blockchain systems, which are public ledgers kept on a distributed network of computers.
It is also meant to separate genuine cryptocurrency trade from bot-driven activity and to identify crypto-based scams.
"There's a lot of fear right now about crypto frauds," said Zarazinski, a former Air Force officer who once worked in criminal intelligence for Interpol. According to him, the scheme's organizers are typically "well-organized, international criminal networks, either expressly backed by opposing countries or given tacit approval to execute these operations, and billions of dollars are taken from Americans and Europeans."
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This is not DARPA's first venture into blockchain technology. In June, the government released a report commissioned from cybersecurity firm Trail of Bits, which discovered that blockchains commonly contain flaws that invalidate their security claims.
However, Flood stated that the agency's current operation is not intended to follow specific cryptocurrency users. "DARPA does not conduct surveillance," he stated. "I'd like to underline that we are very careful in our research not to incorporate personally identifying information."
