Beyond Bitcoin: Could China Embrace Blockchain for Defense and Security Applications?

Since January 2016, bitcoin (比特币) has skyrocketed from less than $1,000 and nearly peaking at $20,000 in December—a 2,100 percent increase. Despite its volatility, euphoria over bitcoin along with other cryptocurrencies (加密数字货币) has spread across the globe and nowhere has this been more evident than China. The surge in trading volume of bitcoin reached such high levels in 2016 that it may have contributed to a major outflow in China’s foreign reserves when they shrank nearly 8 percent to $3 trillion.  In the first half of 2016, up to $400 million worth in yuan was spent on initial coin offerings (ICOs) in China and it is estimated that over $20 billion around the globe was tied to bitcoin the whole year (People’s Bank of China, September 4, 2017; HBR; February 28, 2017).

Since bitcoin debuted in 2009, a smorgasbord of digital currencies has sprung up, quickly followed by a surge of Chinese entrepreneurs looking to make it rich in the digital currency business. However, despite official concern about cryptocurrency, the technology that underpins bitcoin, known as distributed ledger technology (分布式账本技术) or blockchain (区块链), is being evaluated for application by other Chinese industries and sectors.  Specifically, it has piqued the interest of a small group of cyber security experts and media in China that view blockchain as holding great promise for application across China’s broad national security interests and apparatus.

Defense and Security Uses for Blockchain Despite the Bitcoin Crackdown?

Even though China has quickly become a global leader in cryptocurrencies, fear of the currency’s potential use in illicit purchases on the dark web, money laundering, and offshoring of badly needed currency have left Chinese authorities unnerved.  As a result, the government began cracking down in the last quarter of 2017.  In September, a notice was issued to shutter cryptocurrency exchanges, restrict any new ICOs, and ban the trading of digital cryptocurrency under the pretext of reducing financial risks (People’s Daily, November 9, 2017; People’s Bank of China, September 4, 2017).

On January 3, the People’s Daily warned that bitcoin was a “bubble” reminiscent of the 17th century Dutch Tulip craze, considered the first recorded speculative bubble (People’s Daily, January 3, 2018). A few days later, officials asked that all Chinese make an “orderly exit” from bitcoin trading and related activities (China Daily, January 5). As a result of the crackdown, some bitcoin entrepreneurs have moved their operations out of China.

Meanwhile, the rest of the world is charging ahead with new and innovative ways to leverage the blockchain.  One Chinese website points out that “blockchain technology has gradually extended from a single digital currency to smart contracts (智能合约), Internet of Things (IoT) (型的物联网), e-commerce, social communications, file storage, and other fields” (China Military Online, June 2, 2017). More importantly, blockchain has gained the attention of the financial and commercial sectors because it is viewed broadly as a “trust-maker” (信任制造机) that could secure investment vehicles, maintain credit histories, improve quality control, and provide consumer guarantees (China News; June 2, 2017).

Indeed, many of these uses are interchangeable with defense and security priorities.  A few nations, such as Estonia, an early pioneer in the technology and a member of NATO, as well as the American Defense Advanced Research Project Agency (DARPA) are seeking ways to employ blockchain. One groundbreaking proposal in National Defense Science and Technology (NDST) in 2016 and a concentrated release of associated articles on June 2, 2017 asserts that China should consider blockchain in military and security operations.

While these articles are in no way an official indication of China’s current or future use of blockchain, the articles do offer a glimpse of the novel ways in which this technology could be leveraged.  Moreover, it would seem that the technology would align with the civil-military application goals tied to the broad informatization (信息化) campaign enshrined in China’s 2015 Military Strategy and 13^th Five-Year Plan for Informatization (2016-2020) among others (Defense White Paper, State Council; accessed January 18, 2018).  Per the 2015 Military Strategy, China senses its cyber vulnerabilities and admitted it is “one of the major victims of hacker attacks” (ChinaDaily, May 26, 2015).

But before that proposal and the string of related articles can be assessed, it is integral to understand some of the key terms and concepts associated with blockchain first.  Because of blockchain’s novelty, it is vaguely understood and generally regarded as a “black box” (黑箱) both in and outside of China.

A Primer on Bitcoin and the Technology Behind It – Blockchain

The concept of blockchain was first proposed in a 2008 article entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” under the pseudonym Satoshi Nakamoto. [1] Inspired by the 2008 financial crisis, bitcoin was intended as a decentralized currency, unbound to national currency regimes. It was designed as both a digital asset and a payment system that allows users to transact directly without an intermediary through a peer-to-peer or distributed network.

This distributed, public ledger is shared among various participants or nodes. As new transactions, known as blocks, are made and recorded to the shared ledger, they create a chain, hence the name “blockchain.” To insure the fidelity of the ledger, the various nodes use a digital signature and run complex algorithms, known as a hash (哈希), to authenticate those digital signatures. Solving this authentication process is called “mining’ (挖矿) and results in a proof of work (POW) (矿工工作量的证明).  Since mining can require a substantial amount of processing power, personnel, and energy depending on the blockchain size, an incentive mechanism was created to encourage participation in this process, either a set value or percent of the transaction.  Oftentimes, miners will join ‘pools’ (矿池) to combine their resources.  This “competitive mechanism” (竞争机制) creates a dynamic cycle of “competition – verification – synchronization – competition” (竞争-验证-同步-竞争). Once a new block is verified by a majority of the network nodes, a notification is sent and the ledger is updated locally, then the process begins anew.

The complexity of blockchain has multiple advantages: it is decentralized, making it more survivable; totally anonymous, except between the nodes involved; and the rewards process encourages good behavior among the participants.  Further, nodes can enter and exit the process as long as the latest ledger is downloaded and processed.  Finally, to execute a successful attack on a blockchain, a majority of the ledger must be degraded or controlled, known as the ‘51 percent’ attack, which requires immense resources to be effective. The combination of decentralization, verification and security has attracted interest from both defense and commercial sectors.

PLA-Chain – A New Cyber Tool for China?

The specter of a defense- and security-based blockchain does raise some interesting prospects. Despite the aforementioned Estonian and American experimentations with blockchain, there is, however, a limited amount of authoritative material on the subject in China.  One scholarly article, perhaps the first, published in NDST in 2016 that proposes the use of blockchain by China’s national security interests deserves particular attention. [2] Of the three researchers that contributed to the NDST article, each of whom holds a PhD and is focused on cyber security, one in particular stands out: Zhu Qichao. Dr. Zhu Qichao is not only the director of the Center for National Security and Strategic Studies at the National University of Defense Technology in Beijing, but also a colonel in the PLA and a thought leader in China’s artificial intelligence efforts. Last June, he was a guest speaker at the Shangri-La Dialogue and panelist for the “Defense Implications for Emerging Technologies” alongside many other notable defense officials (ISS.org, accessed January 14).

In the article, three main areas of military and security employment were outlined: intelligence operations, weapons life cycle and personnel management, and military logistics. This foundational approach may very well frame future Chinese security-related blockchain endeavors and perceptions.

For intelligence operations, the ability to discretely “pay intelligence professionals and informants” (情报工作绩效激励) is critical. Blockchain allows participants to apply for one or more accounts, regardless of “national and geographical restrictions,” with no direct correlation between different accounts. Touting the weapons life cycle and personnel management advantages, blockchain would allow Chinese military and security-related commercial and industrial partners as well as leadership to maintain secure information transfers and communications to include sensitive studies, combat readiness statuses, and production timelines.

Furthermore, blockchain would alleviate three major dilemmas faced by existing paper and electronic records in China: centrally located files that usually lack back-up mechanisms; safe and easy transfer of archival files; and the lack of archival supervision, which, as the article noted, “lends itself to tampering and deletion.” Finally, as military logistics becomes more “smart” or “intelligent” (智能化军用物流), blockchain can improve the entire logistics enterprise by making it more robust, dynamic, and resilient by creating small, interconnected networks similar to a small IoT (小型的物联网).  As a result, this new enterprise is less risky and more survivable since it avoids a “centralized management strategy” that is over-reliant on a few critical information centers or other key geographical sites.  The NDST’s recommendation was reprised a year later in a slimmed down, summation in Liberation Army Daily by Zhang Min.  This article gained significant traction as it was widely circulated and republished in a variety of Chinese media outlets to include Xinhua (Xinhua, China Military Online, China News; June 2, 2017). In February 2017, an article published in PLA Daily suggested that blockchain could even be extended to other areas such as Public Opinion Warfare (舆论战).

Conclusion

Despite these benefits, blockchain is not a panacea for China’s security challenges. As the NDST article contends, significant challenges remain before blockchain could be implemented. First, the issue of confidentiality for the large amount of classified military information and where those “densities” of information would be stored on the blockchain needs to be addressed. Second, constructing these various blockchain would require a substantial amount of resources (power, programmers, processing power, etc.) and dedicated nodes. Third, because blockchain architecture is decentralized, its communications would bypass a centralized server, thereby raising regulatory and control issues.  Finally, the authors allude to the fact that the “liberalism” at the heart of blockchain architecture may be irreconcilable with the degree of control with which Party and military leadership would likely seek to exercise, even though it is not specifically stated in such terms. Regardless of these shortcomings, blockchain is seen as a “disruptive” (颠覆性) tool that will create value for China in the information age.

Blockchain has yet to prove its military and security bona fides in China.  However, as the technology becomes more mainstream, regulated, and slowly sheds its illicit reputation, it is very likely that its use will proliferate across the public and private sectors in China. Even if China continues its crackdown on cryptocurrencies in the future, the technology behind it has been recognized as having intrinsic value and utility for Chinese defense issues.

Notes:

1. Satashi Nakamoto, “Bitcoin: A Peer to Peer Electronic Cash System,” (Oct 2008), available at https://bitcoin.org/bitcoin.pdf
2. Lian Lin, et al, “Blockchain Technology and Its Potential Military Value [区块链技术及其潜在的军事价值],” National Defense Science & Technology [国防科技], vol. 37 no. 2. (Apr 2016); p. 30-34.