Cryptocurrencies are rapidly becoming an integral part of the United States economy and financial system. Bitcoin (BTC) has experienced a surge in value, thanks to the introduction of exchange-traded funds (ETFs), which have attracted a large number of new consumers. While this is generally positive news, the rise of Bitcoin also highlights the need for increased regulatory measures, similar to other emerging technologies like AI. In a globally connected world where national security interests are at stake with each new disruptive technology, it is crucial to address the risks associated with critical network and infrastructure vulnerabilities.
China has emerged as a significant player in these discussions. The United States has responded to perceived technology threats from Chinese companies like Huawei, TikTok, and Chinese EV manufacturers with decisive actions. However, the risks posed by cryptocurrencies are even more concerning because Bitcoin miners represent a potential silent, integrated hardware layer within the US energy and telecom infrastructure.
It is imperative for regulators to take action and ensure that Chinese crypto mining technology has no chance of crippling vital US utility and financial systems. Bitcoin mining is the process by which new Bitcoins are introduced into circulation. It also serves to secure the network by validating and confirming all transactions on the blockchain, which is Bitcoin’s underlying public ledger. Miners compete to solve complex mathematical problems, and the first to solve the problem is rewarded with newly minted Bitcoins and transaction fees.
Bitcoin mining requires significant computational power and energy and is carried out using sophisticated mining rigs powered by advanced semiconductors called ASICs. Currently, China dominates the supply of ASICs for Bitcoin mining, accounting for 98% of today’s chips. These chips, designed in China, are manufactured by TSMC using their latest and most advanced manufacturing process.
This dominance poses a significant threat to US trade policy and competitiveness, as well as national security. Chinese companies like Bitmain, despite the imposed tariffs on Chinese imports resulting from ongoing trade disputes, are circumventing these measures by setting up subsidiaries or affiliates in other countries. They are also resorting to aggressive dumping and price-cutting tactics, which significantly limits the adoption of US-based ASIC suppliers. This undermines not only the tariffs but also the efforts to increase domestic semiconductor manufacturing in the US through initiatives like the CHIPS Act.
The increasing number of mining facilities in the US, many of which are Chinese-owned and powered by China-manufactured miners, has raised concerns among national security experts due to their proximity to critical US infrastructure. There is a fear that these facilities could be used as Trojan horses, allowing Chinese intelligence agencies to conduct cyber-espionage and potentially target sensitive military installations, power grids, or communication networks.
Chinese companies, both state-owned and private, operate under a legal framework that requires them to cooperate with China’s intelligence services when requested. This raises concerns about Chinese authorities leveraging their influence within seemingly innocuous crypto mining operations to gather valuable data on US domestic affairs. Additionally, the technical complexity of crypto mining equipment creates potential backdoor vulnerabilities, with experts warning that Chinese-manufactured hardware may contain hidden security backdoors that could enable covert data transmission or remote sabotage of critical infrastructure.
Furthermore, Bitcoin and related blockchains are becoming increasingly critical to the US financial system and economy. Around 40% of US adults own some form of cryptocurrency, and the Bitcoin mining industry is projected to grow at a 9% compound annual growth rate through 2029. Any major disruption in trading, mining activity, or price destabilization would have significant negative impacts that will continue to grow.
Unfortunately, relying on Chinese suppliers for the validation of Bitcoin transactions poses a significant risk to the US financial system. With China’s substantial presence in the US crypto mining industry, there is a possibility that China could seek to influence or even disrupt its operation during times of heightened tension. This could be achieved by restricting Bitcoin mining rig imports to the US or using its influence over Chinese suppliers to manipulate the Bitcoin network, thereby disrupting its functioning and stability. This would negatively impact US users, investors, and financial institutions.
Given the clear risks involved, it is crucial to take immediate action. Policymakers need to implement new regulations that better protect US national interests and enforce existing policies more rigorously. This should include the implementation of strict cybersecurity protocols and monitoring mechanisms within mining facilities, greater supply chain transparency, rigorous background checks on Bitcoin mining investors, and the establishment of cooperative international standards to address cross-border security concerns and prevent regulatory arbitrage.
The development of a robust sector for Bitcoin mining technologies in the US is also critical. It is urgent for the US to invest in and incentivize domestic companies to design advanced semiconductors for Bitcoin mining. The CHIPS Act provides an opportunity to kickstart this effort, and the private sector must also prioritize and invest in this area. Doing so will not only help mitigate security and economic risks but also ensure a resilient supply chain, promote economic growth, and establish long-term technology leadership in this rapidly growing industry.
Finally, the US should take a strong stance by banning Chinese-manufactured mining hardware, similar to the ban on Huawei for 5G networks to protect the US communications sector. Additionally, no Chinese-owned Bitcoin mining operations should be allowed to operate on US soil. The existing framework that applies to the Committee on Foreign Investment in the United States (CFIUS) should also be extended to cover Bitcoin mining.
Authoritarian regimes often feel threatened by any form of power distribution. Bitcoin’s decentralized nature is based on open participation and collaboration from around the world, creating a diverse and widespread ecosystem beyond the borders of any single country. However, creating a highly centralized supply bottleneck through an unpredictable country goes against these values. Moreover, it could jeopardize the longevity of the entire cryptocurrency system and allow a technologically controlled Trojan horse from China to enter the US.
Sriram Viswanathan is the founding managing partner of Celesta Capital, a deep-tech venture capital firm based in Silicon Valley. He holds an MBA from UCLA and a degree in computer science from the Indian Institute of Science.
This article is for general information purposes only and should not be taken as legal or investment advice. The views expressed here are solely those of the author and do not necessarily represent the views of Cointelegraph.