The Dominion of Melchizedek: A Fraudulent Nation that Never Was

How Technology-Fueled Fraud is Funding the Next War

"We believe that data is the phenomenon of our time. It is the world’s new natural resource. It is the new basis of competitive advantage, and it is transforming every profession and industry. If all of this is true—even inevitable—then cybercrime, by definition, is the greatest threat to every profession, every industry, every company in the world" - Ginni Rometty, former CEO of IBM

“I believe most major companies have already been breached or will be breached, resulting in substantial losses of information, economic competitiveness, and national security. Many are breached and have absolutely no knowledge that an adversary was or remains resident on their network, oftentimes for weeks, months, or even years.” – US Rep. Michael McCaul

Before we begin, we wanted to give special thanks to Audere Summer Intern Arthur Lewis for his contributions to this week’s post.

THE MEN WHO WOULD BE KING

The early 1990s were an extraordinary time. Blockbuster Video was booming, plaid was a fashion statement and not a fintech, and Liam and Noel Gallagher were still on speaking terms. Sort of. With the Soviet Union's collapse marking the end of the Cold War and the internet beginning to revolutionize global communication, innovation was in the air.

Amid this backdrop, two men in Arizona envisioned something far more ambitious than a tech startup—they launched a sovereign nation.

Welcome to the Dominion of Melchizedek, a country that never existed beyond a PC and some clever graphic design. This tale of digital deception would foreshadow a new era of cybercrime that now threatens the very foundations of global security.

VIVA LA REPUBLIC!

David Pedley and his son Mark saw a unique opportunity amid the intersection of the rapid dissolution of the Soviet Union and the rise of the internet. With just a PC and some design tools they created a new sovereign nation: the Republic of Melchizedek, a former Soviet Republic purportedly located as an archipelago in the South Pacific.

With just a PC and some design tools the two men created a new sovereign nation: the Republic of Melchizedek

If the name “Melchizedek” seems vaguely familiar, that’s because it is the name of an obscure king in the Bible who blesses Abram in Genesis 14 and is later referenced by St. Paul in the Epistle of Hebrews. Neither is relevant here, other than to suggest that at least one of the Pedleys must have paid attention in Sunday School, albeit to the wrong sort of lessons.

The nation of Melchizedek that they created featured a website, a flag, and a plethora of official documents. The founders established a detailed backstory and governmental structure to give their creation a semblance of legitimacy. They even got “citizens” by selling passports to individuals seeking to escape the law or taxes in other countries.

The early internet, with its relative anonymity and lack of regulatory oversight, provided fertile ground for the Pedleys’ craft. Melchizedek’s founders sought and, in some cases, obtained recognition from several small and unsuspecting countries and were even granted provisional statutes at the UN for a brief period. These recognitions bolstered their claims of legitimacy and attracted more clients to their fraudulent schemes. They appointed ambassadors and opened consulates worldwide, further enhancing their façade of sovereignty.

But the Pedleys were just getting started. Within months, the Dominion of Melchizedek opened its own Central Bank…

THE SOVEREIGN BANK OF MELCHIZEDEK

The Central Bank of Melchizedek conveniently had the highest level of bank secrecy laws in the world. The founders were able to acquire a provisional license, granting entry to international global banking networks. They promptly expanded their scheme by issuing fake banking licenses which were sold to other fraudsters who used them to create phony banks globally.

These banks then attracted deposits from unsuspecting investors with promises of high returns and confidentiality. The deposited funds were often siphoned off and laundered through a complex web of transactions, never to be found again.

By the late 1990s, the Bank of Melchizedek had sold nearly 300 banking licenses globally and were known to have earned at least $500M.

It was a breathtaking endeavor whose full scope and impact remains unknown. By the late 1990s, Melchizedek had sold nearly 300 banking licenses globally and were known to have earned at least $500M. Officials believe they may have made far more. It is unknown how many billions of dollars were laundered through the network.

Not too bad for two guys and a Windows PC.

When authorities finally arrested the Pedleys, police discovered that the Sovereign Bank of Melchizedek did not in fact maintain strict privacy for their clients’ bank records. They never kept records at all.

The story of Melchizedek, unique in its scale and audacity, is simply a preview to tech-enabled fraud.

FRAUD IN THE AGE OF AI

Technology and global crime have become an enormous industry. The principles that allowed Melchizedek to thrive - exploiting regulatory gaps, leveraging innovative technology, and exploiting online identity - underpin many modern fraud schemes. And as technology has advanced, the sophistication and scale of cybercrime have exploded.

Cybercrime in the United States is estimated to be as much as $521 billion per year. For comparison, the annual budget for the entire U.S. Department of Defense for Fiscal Year 2024 is $842 billion.

Today, the financial impact of cybercrime in the United States is staggering. The Government Accountability Office (GAO) estimates annual fraud losses are currently between $233 billion and $521 billion. According to Statista, these costs will grow to nearly $2 trillion before the end of this decade. Somewhere, someone is getting very, very, rich. And it’s probably not someone we would like very much.

For comparison, the annual budget for the entire U.S. Department of Defense for Fiscal Year 2024 is $842 billion. The 2024 budget for the entire FBI, the primary federal agency responsible for investigating and combating cybercrime, is only $11.8 billion. If cyber criminals seem to be acting without fear, it’s probably because there is very little for them to worry about.

Estimated annual cost of cybercrime in the US from 2017 to 2028
(in billion U.S. dollars)

SCORING ON OUR OWN GOAL

Where the billions of stolen funds end up is less widely understood. This ignorance is partially because the nature of cybercrimes make them difficult to track; and partially because acknowledging successful hacks and pointing fingers at other countries are not without other complications. Sometimes the most awkward questions are the ones that everyone already knows the answers to.

What is known is chilling. A significant amount of the money stolen in the US is likely funneled to China, Russia, North Korea, Iran, and non-state terror organizations where the funds are used to support cyber warfare, arms and/or human trafficking, the financing of terrorist operations, and more.

The Director of National Intelligence’s most recent Annual Threat Assessment cited state-sponsored malicious cyber actors, and China in particular, as one of the greatest and most persistent threats to U.S. national security.

The report noted that “PRC state-sponsored cyber actors are seeking to pre-position themselves on information technology networks for disruptive or destructive cyberattacks against U.S. critical infrastructure in the event of a major crisis or conflict with the United States.”

THE FUTURE OF AI IN COMBATING FRAUD

We invest into cyber security and artificial intelligence as part of our thesis pursuing societal resilience. As we look at macro trends, the need to leverage AI to ensure more effective fraud protection has become crucial. Traditional forensic and security methods face limitations in handling complex financial data and the high cost of investigations. AI offers hope through its ability to rapidly process large data volumes, improve analysis, and streamline investigations. As criminals evolve, so must our defenses. Artificial intelligence and machine learning offer an arsenal of advanced capabilities in this digital arms race.

The scale of this problem is one of the reasons we love Valid8, a forensic AI company whose Verified Financial Intelligence (VFI) software leverages AI to collect and analyze data from various sources, including bank statements, invoices, transaction records, and other sources. The software has been used in multiple large scale forensic projects, employing AI to rapidly identify anomalies and discrepancies that might indicate fraudulent activities.

The company’s suite of machine learning capabilities cross-verifies data points and validates the authenticity of financial documents, confirming the legitimacy of transactions and identifying any forged or altered documents in real-time.

Investing in advanced technologies is a strategic imperative for building a resilient society. AI and machine learning applications in fraud detection and cybersecurity are crucial for staying ahead of adversaries who are constantly evolving their tactics.

RETHINKING NATIONAL SECURITY

Thirty years ago, two men with a basic computer created a fictitious country that exposed glaring vulnerabilities in global financial systems. Today, state-sponsored actors wield far more sophisticated tools, aiming not just to exploit systems but to establish dominions of digital control.

Much has been made over the cost asymmetries of the conflict in Ukraine as inexpensive drones destroy ten million dollar tanks. But the cost asymmetries of cybercrime are even more dramatic and could potentially cause even more challenges.

The lines between cybercrime, economic warfare, and traditional national security threats have blurred beyond recognition.

The lines between cybercrime, economic warfare, and traditional national security threats have blurred beyond recognition. As we stand on the precipice of a new era of conflict, we must radically rethink our approach to national defense. In a world where a single line of code can do more damage than a squadron of fighter jets, our very survival depends on our ability to adapt.

The legacy of Melchizedek serves as both a warning and a call to action. As we face this brave new world of digital threats, one thing is clear: the next war won't just be fought with bullets and bombs, but with bits and bytes. And that digital conflict has already started.

As always, our mission is to fund, build, and scale critical technology companies. Don’t hesitate to reach out.

Let’s build a better future.

Peter & Maggie