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In this blog, Katie Laverick, Fivecast Tradecraft Advisor delves into the world of blockchain, China’s increasing dominance in this emerging technology, and the steps US lawmakers are taking to address the threats.  Katie is an experienced intelligence-trained professional with qualifications in Law & Legal Practice and International Relations.

In a move that embodies the concrete actions surrounding the ongoing technology decoupling between the United States and China, two US House Representatives, Zach Nunn (R-Iowa), and Abigail Spanberger (D-Virginia), have proposed the Creating Legal Accountability for Rogue Innovators and Technology (Clarity) Act.

The Chinese Communist Party is invested heavily in emerging technologies and international surveillance, and the bipartisan Clarity Act aims to protect national security by prohibiting federal agencies from utilizing blockchain networks developed by Chinese-owned companies. Proponents and supporters of the bill insist Chinese-based blockchain networks pose a risk to US critical infrastructure and present vulnerabilities through the exposure of sensitive information. This blog will consider the nuances of the bill, the implications for the blockchain industry, and the response from companies caught in the crosshairs.

Blockchain technology is a decentralized, distributed ledger that stores the record of ownership of digital assets.

The clarity act

The Clarity Act would place restrictions on federal agencies that prohibit entering into contracts with Chinese companies for blockchain networking. Representatives Nunn and Spanberger emphasize the potential risks foreign adversaries pose to national security and sovereign interests. The Chinese state-controlled Blockchain-based Service Network (BSN), its IT infrastructure service Spartan Network, and its technology provider Red Date Technology are specifically named in the bill. Blockchain companies Conflux Network and iFinex, parent company of Tether which is the owner of the world’s largest stablecoin, Tether, are also mentioned within the proposed legislation.

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addressing concerns

In addition to preventing federal agencies from employing Chinese-owned blockchain network infrastructure, the bill requires that federal agencies, including US Secretary of the Treasury, Secretary of State, and the Director of National Intelligence report on the risks posed by foreign blockchain giants, such as the risks of blockchains bypassing the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment messaging system and the impact on countries participating in the Belt and Road Initiative.

“Our bipartisan bill ensures that the federal government is not giving China a backdoor to access critical national security intelligence and Americans’ private information. We must pass this bill now before it’s too late.”

– U.S. Representative Zach Nunn, Iowa

Experts in the national security, including Yaya Fanusie, Senior Fellow at the Center for a New American Security, see the proposed bill as a positive step highlighting the need for the US federal government to stay informed about the evolving landscape of emerging technologies.

BSN’S INTERNATIONAL OPERATIONS

BSN was founded in 2020 and specializes in building blockchain technology for commercial and government customers, and has been exposed as having links to the Chinese Community Party. BSN operates a blockchain infrastructure service in China and made strides internationally last year with the launch of the Spartan Network.

In responding to the proposed Clarity Act, BSN relied on their governance structure to distance their international operations from Chinese Communist Party control. Vice President Tim Bailey, of Hong-Kong based Red Date, claimed that Red Date is limited as one BSN Foundation member equal to that of any other member. Bailey relied on the Singapore based location of BSN, with members from US, Europe, and Asia in an attempt to reduce US concern over CCP surveillance.

President of Conflux Network, Fan Long, defended the company’s regulatory compliance in China but argued that this does not translate to Chinese Communist Party control. Through X – formerly Twitter – Long expressed skepticism about the ongoing US-China tensions, “Capitol Hill’s got that US-China drama on repeat,” but affirmed the company’s commitment to CCP regulatory compliance without the need for sacrificing national security.

Bipartisan Consensus

The bill reflects a continued interest by the US in protecting against China’s technological advances, and how this advancement threatens national security interests. Recent tensions over TikTok underscore the importance of limiting the influence of Chinese-linked technology in privacy and data protection. “While we must ensure that our trade policies are fair, the US will also prioritise economic and national security, including protecting advanced technologies,” – US Senate Majority Leader Chuck Schumer said in a press conference.

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As legislation is introduced to restrict technological advancements, it’s uncertain how the blockchain industry will handle increased levels of regulatory scrutiny and increased geopolitical tensions. China-connected companies such as BSN and Conflux are using their regional significance and governance structures to separate from their Chinese origins. The bill, while facing challenges, reflects the broader geopolitical landscape where legislating on advanced technology is necessary for protecting national interests. The blockchain industry will need to adapt to the evolving regulatory environment while continuing to push the boundaries of innovation on a global scale.

Recommendations

Strengthening Counterintelligence Measures:

In response to the proposed Clarity Act and escalating concerns regarding foreign interference, the US government should prioritize and reinforce counterintelligence efforts:

  • Enhancing Federal Agency Capabilities: Improve the capabilities of federal agencies involved in national security by investing in advanced technologies, training, and recruitment to better detect and deter foreign espionage activities.
  • Comprehensive Monitoring and Investigation: Implement a comprehensive approach to monitor and investigate potential foreign influence campaigns. This involves continuous assessment of emerging threats within the technology sector, fostering collaboration between intelligence agencies, and deploying advanced tools to safeguard critical infrastructure integrity.

Promoting Technological Sovereignty:

To fortify national security and diminish vulnerability to external influences, the United States should prioritize technological sovereignty:

  • Strategic Investment in Domestic Technologies: Initiate a strategic shift by investing in the development of domestic technologies. This will reduce reliance on foreign suppliers, particularly those that may pose risks to national interests.
  • Fostering Innovation and Research: Prioritize innovation and research in key technological areas. By supporting homegrown talent and encouraging advancements in critical sectors, the U.S. can establish itself as a global leader in innovation.
  • Economic Resilience and Technological Autonomy: Recognize that promoting technological sovereignty not only aligns with national security imperatives but also contributes to economic resilience and technological autonomy. This approach positions the United States as a self-reliant and influential force in the global technological landscape.

OSINT FOR NATIONAL SECURITY USE CASES

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