A new type of warfare is upon us. In this new mode of war, finance is the most powerful weapon, bullets are not fired, financial institutions are the targets, and almost everyone is at risk.  Instead of smart bombs, improvised explosives, and unmanned drones –– economic sanctions, financial restrictions, and cyber programs are the weapons of choice. This is the new reality of modern financial warfare.

The armaments of modern financial warfare are as vast, diverse, and important as the myriad of ways to raise and move money. Broadly, the financial weapons of war can be divided into analog weapons and cyber weapons, both of which can be used for offensive and defensive purposes. Analog weapons include policy actions, such as economic sanctions, anti-money laundering regulations, and banking restrictions. Cyber weapons include distributed denial-of-service attacks, data manipulation hacks, and destructive intrusions to disrupt financial transactions and institutions. Modern financial warfare often involves the concerted use of both analog and cyber financial weapons of war.

The growing usage of financial weapons in global conflicts presents critical challenges for traditional laws and norms.  The policy challenges posed by financial warfare are rooted deeply in core tensions between the conventional laws of war and the realities of the world.  Questions and issues about how longstanding laws and norms about war should govern financial hostilities, cyberattacks, and non-state actors are at the heart of these core tensions.  How should we adapt old laws and old norms for new realities where the hostilities target private financial institution to cause economic disruption, where the weapons of choice are malicious computer programs, and where the bad actors are frequently anonymous or difficult to identify?  Because the world changes swiftly, and the law changes slowly.  The disparate timelines of law and war create significant tensions and unanswered questions. In terms of financial warfare, answers to critical questions concerning financial hostilities, cyberattacks, and non-state adversaries remain works-in-progress and render traditional rules of law impotent to fully address the dangers of modern warfare and national security.

While many larger legal and political questions concerning financial warfare remain unresolved, a nation’s right to reasonably protect its financial infrastructure and financial interests from legitimate threats should not be questioned. While broader, international, and multilateral consensus remains forthcoming, domestic actions can be taken with greater urgency to better focus public and private resources on financial warfare in a coordinated manner.  To better enhance financial defenses and capabilities, policymakers should introduce innovative cybersecurity incentives, advanced technological stress tests, and comprehensive financial war games to intelligently marshal public and private actors against the emerging threats posed by the financial weapons of war.  First, since much of modern finance operates in a privately held cyberspace infrastructure, policymakers should design incentives that encourage private businesses to expeditiously enhance their cybersecurity capabilities in response to the emerging threats of financial weapons of war.  Because private firms are frequently motivated by profits, carefully calibrated incentives may be necessary to spur timely cybersecurity improvements and investments. In the absence of incentives, investments in cybersecurity may remain stagnant as businesses focus on their bottom line rather than their information security and institutional stability.

Second, policymakers should design advanced technological stress tests to assess the information technology infrastructure of systemically important private and public financial institutions and agencies. These tech stress tests should be constructed and implemented to analyze the capabilities and vulnerabilities of the information technology systems of these entities similar to how banking regulators imposed capital stress tests to large financial institutions following the financial crisis.  These tests can help address some of the informational challenges associated with cybersecurity. They can provide policymakers and key industry stakeholders with a more holistic, mosaic view of the cyberthreats being experienced by the financial system rather than just seeing glimpses of the threats based on firm-by-firm disclosures.

Third, policymakers should design comprehensive military exercises that include serious threats to the American financial system and American financial interests to better prepare for modern conflicts and warfare. These war games should marshal military resources, as well as private resources to participate in these exercises. The participation of private institutions is critically important to having effective war games because private firms play such an important role in the global financial infrastructure and in financial warfare.  Private firms like banks, clearinghouses, and exchanges are at the frontlines of the financial theater of war, and they can certainly play a more active role in enhancing our national security readiness and our recovery capabilities. Just as war games have long assisted the military in preparing for conflict in the theaters of land, air, and sea, these war games can help the military and private firms better prepare for conflicts in the financial theater of war.

Financial warfare will be one of the most pressing challenges for political leaders, military commanders, financial regulators, and corporate executives in the near future. The emergence and confluence of analog and cyber financial weapons will pose some of the most vexing and daunting threats for law and society in the coming years.  As such, more focused attention and action is needed to tame the savageness of financial weapons, safeguard the economy of the homeland, and promote the integrity of the global financial system.

The preceding post comes to us from Tom C.W. Lin, Associate Professor of Law at Temple University Beasley School of Law, and is based on his recent article entitled “Financial Weapons of War,” 100 Minnesota Law Review 1377 (2016).  A full version of the paper can be found here.