The military's innovation division is investigating cryptocurrencies in depth in order to assess the threats to national security and law enforcement posed by the rise of digital assets.
The Defense Advanced Research Projects Agency, or DARPA, which created the first internet technology, has hired crypto intelligence firm Inca Digital to carry out the year-long experiment.
The startup will develop tools that will provide the Pentagon with a detailed understanding of the inner workings of cryptocurrency markets, with the goal of assisting authorities in combating illegal use of digital assets.
"The initiative here is mapping out the cryptocurrency universe in some depth," Mark Flood, a CIA program manager, told The Washington Post in an interview.
Aside from combating illicit finance, the agency plans to use the data to gain insights into the processes influencing traditional financial markets, where precise data is more difficult to obtain.
The agreement is the latest evidence that federal agencies are redoubling their efforts to combat rogue regimes, terrorists, and other criminal actors who use cryptocurrency to fund their operations.
Last month, the Treasury Department announced its first-ever software code sanctions, targeting Tornado Cash, a company that assisted North Korean hackers and others in laundering stolen cryptocurrency.
This week, the agency issued a request for public input on the national security and criminal finance risks of cryptocurrency. Separately, earlier this month, the Justice Department announced the formation of a national network of 150 prosecutors to coordinate crypto-related investigations and prosecutions.
Flood claimed that North Korean government-affiliated hackers committed billions of dollars in digital heists to fund the regime's weapons development. In addition, the Ukrainian government detected Russian strikes on its financial sector just before the invasion this spring.
The history of cryptocurrency is a house of cards, from Bitcoin to Stablecoin.
"We simply need to recognize that the financial sector may become a component of modern warfare in the future," said Flood, a former Treasury official who has studied systemic financial risk.
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Nonetheless, governments have found it difficult to regulate cryptocurrency. Due to a lack of regulatory oversight, the industry has evolved into a shadow financial system with numerous opportunities for skilled criminals to exploit.
According to Inca Digital CEO Adam Zarazinski, his company's work for DARPA will be "pretty diverse." The project hopes to help the government understand how money flows into and out of blockchain systems, which are public ledgers maintained on a distributed network of computers.
It is also intended to distinguish legitimate cryptocurrency trade from bot-driven activity and to identify cryptocurrency-based scams.
"There's a lot of fear right now about crypto frauds," said Zarazinski, a former Air Force officer who previously worked for Interpol in criminal intelligence. According to him, the scheme's organizers are typically "well-organized, international criminal networks that are either explicitly backed by opposing countries or given tacit approval to carry out these operations, and billions of dollars are stolen from Americans and Europeans."
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DARPA's foray into blockchain technology is not its first. In June, the government released a report commissioned by cybersecurity firm Trail of Bits that revealed that blockchains frequently contain flaws that render their security claims invalid.
Flood, on the other hand, stated that the agency's current operation is not intended to track specific cryptocurrency users. He stated, "DARPA does not conduct surveillance." "I'd like to emphasize that we take great care not to include personally identifying information in our research."
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