The Taiwan Banker

The concept of war has long gone beyond pure kinetic confrontation, entering the era of “total warfare.” In addition to traditional military operations, one country might attack another through diplomacy, intelligence, the economy, or finance. The weaponization of finance especially cannot be underestimated since the rapid digitalization of finance. Therefore, the realization of political goals through financial warfare has become an issue of great concern.This is why in recent years, the U.S. national security establishment has increasingly recruited people with financial backgrounds from the Fed or Wall Street to plan how to cut off funding for terrorist organizations, or implement financial sanctions in order to force compliance. The National Security Council recruited Daleep Singh from the New York Fed to be responsible for international economic affairs, while the Treasury Department hired BlackRock executive Wally Adeyemo as undersecretary to handle sanctions against Russia for its annexation of Ukraine. A few hours after Russia invaded Ukraine, Canada’s Finance Minister Chrystia Freeland (of Ukrainian origin) drafted financial sanctions against Russia, obtaining the support of the G7.Cheap and effectiveIn contrast from traditional warfare, financial warfare can be operated remotely, or in the “fifth domain,” avoiding the casualties of traditional attacks, and leaving a large gray area of warfare and preventing attribution. On February 10, 2022, on the eve of Russia’s invasion, the European Central Bank (ECB) warned that due to the rising geopolitical tensions, the risk of cyberattacks on eurozone financial institutions had increased significantly. The sector was reminded that global tensions could rise again, triggering more cyberattacks, prompting vigilance. As Russia invaded Ukraine, the financial industry was subject to more frequent cyberattacks. Both countries suffered from intensive distributed denial of service (DDoS) attacks, and incidents also occurred around the world, such as New Zealand and Australian banks, the Japanese cryptocurrency exchange Liquid, the German banking IT company Fiducia & GAD, and SWIFT. The latter attack was understood to be an act of retaliation for excluding Russia from SWIFT.Since finance is closely related to livelihoods and property, IT systems in the financial sector can be attacked to disrupt their services, stock or foreign exchange markets can be disrupted to cause market fluctuations, or false information can cause bank runs. All these scenarios can cause social unrest, affecting the morale of the people, and thereby reducing overall combat effectiveness. In short, financial warfare can be the cheapest and most effective way to pave the way for military action.A report by the Carnegie Endowment for International Peace noted that from 2007-2019, 94 cyberattacks caused large losses to the financial industry, of which 23 are believed to have been state-supported. The report named Iran, Russia, China, and North Korea. In October 2022, the Bank of England issued a report attributing the increase in cyberattacks on the financial industry not only on political ends, but also because many banks rely heavily on cloud services and provide consumer services through mobile networks. A report from the Swedish central bank also pointed out that because the financial system requires support from cloud services and the energy supply, these have become entry points for attackers. Due to the recent promotion of digital transformation, coupled with measures such as pandemic isolation, banks are providing more online service channels, which has also increased the risk of cyberattacks. Common network attacks include ransomware, distributed denial of service, and phishing viruses.As geopolitical risks increase, the financial industry must strengthen its defense against state-sponsored attacks. Such attackers are not only rich in information knowledge and skills, but also have a good understanding of financial IT operations. The use of cyber capabilities to attack politically hostile financial institutions may become a new normal.Multiple modes of attack Financial warfare can be roughly divided into three categories: network attacks, physical attacks and market-based attacks. The objectives may include interrupting financial services, tampering with data, extortion, or theft. Of course, it is also possible to quietly lurk to open backdoors or steal data, waiting for the bugle to sound before attacking. Physical attacks destroy the physical infrastructure behind financial services, such as power and communication networks. Market attacks aim to cause turmoil in the stock and foreign exchange markets, capital outflows, or bank runs.Of course, these methods can also be combined with each other to form hybrid attacks, or AI could be used to create deepfakes, increasing the destructive effect. For example, in 2013, the Associated Press (AP) tweeted a news item saying that an explosion occurred in the White House and President Obama was injured. Although the AP quickly stated that it was fake news and its account had been hacked, the Dow Jones Index immediately fell 140 points; US$130 billion was wiped out of the U.S. stock market. Stocks quickly rebounded afterwards, but the incident pointed to the risks of social media manipulation to affect the stock market. High-frequency traders now crawl through the comments in social media, especially news and speeches of industry leaders. Thus, information on any disturbance may trigger automatic buying and selling, resulting in irrational market fluctuations. Although these they now also use machine learning to eliminate unreliable news sources, disinformation is constantly changing, and victims often only realize it afterwards.At the beginning of Russia’s invasion of Ukraine, a video appeared on social media in which Ukrainian President Zelensky publicly called on his country to lay down its weapons and stop resisting. Zelensky immediately stated on his social media that it was a malicious video made using AI. With further development, it will become easier for fake videos to be mistaken for real ones. Moreover, the impact should not be underestimated if social networking sites of trusted media are hacked to distribute these fake videos.In Taiwan’s case, financial warfare may occur within a range of contexts, ranging from direct to indirect attacks, from the tactical to the strategic level. It can be categorized into three broad tactics: persuasion, coercion and attack. Of course, these strategies may be used in conjunction, or their implications may overlap. Persuasion refers to soft, indirect methods to increase dependence on China. It can also include brainwashing through cognitive operations, or false information to disrupt the market or reduce trust in local finance. In addition to being tougher than using threats and inducements, coercion may also add attacks on financial information systems, the use of false information to attack the stock and foreign exchange markets, or inducement of bank runs. In addition, this also includes preventing Taiwan from participating in international organizations, or banning imports of Taiwanese agricultural products on the grounds that they do not comply with relevant regulations. A military attack would be the last resort, but attacks on the financial sector may precede a full kinetic attack, aiming to create social unrest and spread distrust in the government and financial system in order, undermining public morale. China may freeze or confiscate Taiwanese assets in China, shaking the will of the people to resist, and reducing Taiwan’s resources to support a protracted war.Rehearsing the playbook In order to improve Taiwan’s financial resilience, investment from relevant parts of the government and the entire financial industry is needed, finding the vulnerabilities in Taiwan’s financial system based on the attack patterns and potential targets of financial warfare, as well as possible attack strategies, and then designing scenario scripts, including impact mitigations and backup plans. Through repeated drills, improvement measures or investments can be proposed.In addition, it is also necessary to anticipate the sequence of possible attacks from now until the start of the full war, including current possible methods both now and when the crisis escalates, precursor attacks prior to D-Day, and financial attacks after the kinetic attack. Based on the intelligence collected at home and abroad, the government has established early warning mechanisms to notify relevant stakeholders, dynamically researching and judging possible attack plans. In addition, emergency measures under various scenarios must be planned in advance, so that in real-time, they only need to be announced and implemented according to the schedule. If they are not discussed beforehand, a prompt response will be unlikely or impossible. The degree cross-Strait tensions mainly depends on China’s intent to challenge US hegemony. The more eager it is to challenge the U.S., the more tense cross-strait relations will be. If it does not challenge the global political and economic structure, on the other hand, the U.S. will give it opportunities to develop, such as when it helped it join the WTO, allowing it to ride the coattails of globalization and enjoy the fruits of rapid growth. Since cross-Strait relations depend on so many factors outside the control of Taiwan, all we can do is strengthen our own resilience, especially our financial industry, which is at the forefront of geopolitics. Honda Chen is a Senior Research Fellow at TABF; John Whitley is the former Acting Secretary of the U.S. Department of the Army