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Wednesday, January 20, 2021

ANALYSIS/OPINION:

Last September, the People’s Bank of China made it explicitly clear that the communist country is focused on dominating the emerging technology of cryptocurrencies. 

Issuing and controlling a state digital currency is the “new battlefield” among the great powers, and China had to roll out a new payment system network to break the dollar “monopoly,” declared the central bank’s official journal.


Looking broadly, 2020 will of course be remembered as the year of the pandemic but also the beginning of China’s inclusion of cryptocurrency in its strategy of asymmetric, hybrid warfare to gain global dominance. The U.S. began to fall dramatically behind largely at the hands of its own government, while China made another “great leap forward.” The implications for national security will only increase over time.

The pronouncements came as Beijing was piloting the rollout of its digital yuan, issued by the central bank, the only legal token for users in the People’s Republic of China. This move followed China’s usual model of recognizing a technological innovation’s power early, co-opting it, banning any developmental iterations or modifications of it beyond an “official” version, and scaling it in its domestic economy for eventual export.

Along the way, the fully integrated mechanisms of the Communist Party throughout the country’s economy would ensure the Chinese brands allow for increased monitoring and control of its users by the party and the state. This has proven effective in fostering social media and e-commerce platforms as well as fifth-generation (5G) cellphone technology that support the country’s geopolitical goals.

China’s efforts to dominate cryptocurrencies was clearly evident years ago, when they took advantage of cheaply-powered electrical grids in Mongolia to gather the majority of the control of the bitcoin and ethereum “mining power.” This gives them the ability to alter and reject transactions on the ledgers of the two most important cryptocurrencies in the world. Experts in Britain have found that close to 70% of bitcoin’s hash rate distribution is inside China. The next closest distribution at 7% is the United States. Hash rate is a measure of the security of the bitcoin network. The higher the hash rate, the higher the security.

The digital yuan is a peculiar version of a digital asset, befitting Chinese technology characteristics. It sidesteps core blockchain elements like a decentralized ledger depending on cryptographic verification in order to preserve the feature of centralized control and tracking. Its ledger is neither anonymous nor open source. Of course it is; nothing in China is anonymous or open source. China is all about control. That’s why China’s march into cryptocurrency is somewhat surprising, but not at all surprising in how they are doing it.

But it aims to replace currency in circulation and make transactions cheaper, faster and more secure — all the economic benefits that U.S. crypto developers are working to provide the global marketplace. In short, it puts China in a position to develop fintech products tied to the digital duan that could be market-tested at a large scale in its own domestic economy. This would put them well ahead of western developers who are racing for mass adoption of products that require billions of dollars in research and development and regulatory headwinds that serve the status quo players.

Indeed, the U.S. tech industry has been the innovation hub of applying blockchain technology to consumer and B2B payment systems as well as smart contracting and supply chain management. Finding big new efficiencies that could fuel and sustain economic expansion has been the impetus behind much of the interest in investing in the technology in much of the world. Major global markets like London and Tokyo successfully prevailed on their national governments to implement regulatory frameworks that embrace the technology and provide a safe harbor for developers. There has been no such luck in the United States, and the effect has stymied and eroded the country’s competitiveness in the space.

Without a clear set of rules, the cost of developing these innovations has escalated in Silicon Valley. U.S. regulators have leaned on a hodgepodge of outdated laws intended for commodities, securities, currencies and other asset classes to impose rules on these unique new entrants into the technology sphere. The result has been a squandering of our technological and innovative superiority, along with billions of dollars in investments, that has restrained bringing products to the marketplace while China’s own digital currency project has rolled out on schedule.

The contrast was dramatic in the waning days of 2020 as the U.S. Securities and Exchange Commission (SEC) filed a sweeping lawsuit against the San Francisco-based fintech company Ripple — an industry leader in developing new payment systems — while China was completing its second lottery of digital yuan to test among millions of consumers and retail companies. The Ripple case sent shockwaves through the crypto industry, bringing greater focus to the unclear and confusing U.S. legal environment they face. 

The company had already struggled to comply with multiple enforcement actions from different agencies competing to define the digital token, XRP, that it uses to power its software solutions for rapid settlement of international payments at little to no cost, bypassing slow and expensive bank wires. The SEC action, which alleged XRP was an unregistered security, sent the token’s value plunging and led many crypto exchanges and companies to delist or drop the token and its open source ledger. 

On the same day, China was piloting consumer and retail applications that could instantly settle digital yuan payments in locations without internet or cellular connections, a crucial step in ensuring its mass adoption.

Vested interests in the United States may seek to exploit the federal government’s neglect of crypto’s potential in order to keep consumers and businesses dependent on their more costly and less efficient systems. This plays directly into China’s strategy. Other countries, particularly in the developing world, already opt for cheaper technology made in China, leaving the U.S. back-footed by making geopolitical and national security arguments that these countries care little about. American policymakers had better wake up soon to the losses they are inflicting on their own side before this conflict is lost.

• James “Spider” Marks is a retired U.S. Army major general, a CNN national security contributor and head of geopolitical strategy of Academy Securities.


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