Security Clearance & CryptocurrencyUpdated: June 17, 2021
Active duty military members must periodically renew their security clearances. And, depending on your clearance level, this may be a particularly intrusive process. With the increasing popularity of cryptocurrencies, many troops have asked if holding Bitcoin or other crypto types will affect their clearances. As such, we’ll use this article to outline some security clearance and cryptocurrency considerations.
Specifically, we’ll discuss the following:
- Cryptocurrency Overview
- Security Clearance Concerns with Cryptocurrency
- Final Thoughts on Security Clearances and Cryptocurrency
According to the IRS, a cryptocurrency: […] Is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. But, unlike traditional currencies like the US dollar, no central government or financial authority controls cryptocurrencies. Rather, mathematics and the decentralized control enabled by this distributed, publicly-available ledger “regulate” cryptocurrencies. Basically, because anyone can see this virtual ledger, people are incentivized to follow the rules.
However, the term virtual currency is somewhat misleading, as the IRS doesn’t actually consider cryptocurrency as actual currency like US dollars. Rather, it: […] is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency. Put simply, the IRS considers cryptocurrency to be property – not currency.
In theory, the fact that the IRS has declared cryptocurrency as property should influence the views of other federal agencies. But, when it comes to cryptocurrency treatment and reporting requirements, the Department of Defense (DOD) and the Director of National Intelligence (DNI) have not offered clear guidance. Accordingly, cryptocurrency holdings remain a gray area for military members concerned about their security clearances. While the DOD and DNI have stated they are working on guidance, no firm policies currently exist.
Due to this ambiguity, military members – understandably – want to know: 1) Do I need to report my cryptocurrency holdings during security clearance applications? And, 2) Will my cryptocurrency holdings affect my security clearance?
Security Clearance Concerns with Cryptocurrency
With respect to the first question, technically speaking, no, military members do not currently need to report their cryptocurrency holdings (though this will likely change when DOD and DNI publish clear guidance). To answer the second question, we need to first review the major purpose of a security clearance. According to the US Government: “background investigations for national security positions are conducted to gather information to determine whether you are reliable, trustworthy, of good conduct and character, and loyal to the [United States]. In simple terms, can the government trust you?”
When it comes to cryptocurrency, background investigators generally consider three potential issues that will affect this trustworthiness and, by extension, your security clearance. While these situations hopefully don’t apply to you, it helps to understand why an investigator may worry about cryptocurrency when reviewing your security clearance:
1) Financial Issues
Financial issues consistently rank as the number one reason why people have their security clearances denied or revoked. First, if you face major financial issues, those issues may speak to your reliability. While some financial problems arise for issues outside of our control (e.g. medical emergencies), risky investments can also create problems. If you’re willing to take huge gambles with your financial health, the government may question your judgment when it comes to national security matters.
Second, major financial issues can open you up to blackmail and other manipulation, particularly if you’ve used debt to purchase cryptocurrency. Due to the massive volatility of crypto, borrowing money to invest can quickly get someone into a lot of debt. If you end up owing too much money, you may expose yourself to negative influence, with someone forcing you to compromise security matters to forgive debt.
2) Criminal Behavior
Criminal behavior serves as another major reason why people lose their security clearances (or have their initial applications rejected). Today, a perception exists that a large percentage of cryptocurrency transactions are used for criminal activity. Frankly, it doesn’t matter whether or not this is true. What matters to a background investigator is that cryptocurrency can be used to finance illegal activity and purchases (e.g. selling and buying illegal drugs or services on the dark web).
As a result, from an investigator’s perspective, a large amount of cryptocurrency could indicate involvement in these sorts of activities.
3) Foreign Influence
Finally, foreign influence consistently ranks as a major reason for security clearance problems. As outlined above, confirming loyalty to the United States serves as a central purpose behind the entire clearance process.
With conventional banking, the government has plenty of tools to flag suspicious bank transfers. For example, financial institutions are required to file Suspicious Activity Reports when they suspect money laundering or fraud. Tools like this make it far easier for the government to identify a major deposit in someone’s bank account from a foreign government.
Cryptocurrency transfers, on the other hand, are largely untraceable. As such, a foreign government could send regular transfers to a military member in return for classified information – without a clear mechanism for the US government to flag those transfers.
Once again, we’re not suggesting that holding cryptocurrency means that you’re being influenced by a foreign government. Rather, because the potential for this influence exists, background investigators will want to know the source of your cryptocurrency holdings.
Final Thoughts on Security Clearances and Cryptocurrency
Technically speaking, military members do not currently need to report cryptocurrency holdings on their security clearance applications. However, certain federal employees and contractors do need to file cryptocurrency disclosures, suggesting that service members will also need to in the future.
But, when it comes to security clearances, one characteristic proves more important than any others: honesty. Bottom line, don’t lie during the security clearance process – either through commission or omission. In your interview, it’s far better to disclose cryptocurrency holdings – even if not technically required to do so – than appear to hide something from an investigator.
If you have an honest explanation for how you received your crypto, you shouldn’t have any issues. As discussed, your investigator will primarily want to confirm you’re not dealing with: 1) financial issues, 2) criminal activity, or 3) foreign influence.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.