In a speech late last month, Chinese leader Xi Jinping declared blockchain “an important breakthrough,” and promised that China would “seize the opportunity.” He detailed the ways the Chinese government would support blockchain research, development, and standardization. The significance shouldn’t be underestimated. Xi is the first major world leader to issue such a strong endorsement of the much-hyped, and much-maligned, distributed ledger technology. His words are already having a major impact. Like the internet, blockchain is a powerful tool that can nurture freedom and competitive innovation, or reinforce concentrations of power. Those who favor the former vision cannot take it for granted. The United States’ leaders are doing just that.
Kevin Werbach is a professor of legal studies and business ethics at the Wharton School, University of Pennsylvania, and the author of The Blockchain and the New Architecture of Trust.
Xi’s speech unleashed a cascade of activity. Propaganda organs such as People’s Daily and Study the Great Nation, the mobile app that teaches “Xi Jinping thought” to Communist Party members, immediately launched a wave of educational content. Cities marshaled funds for subsidy programs. Censors declared that calling blockchain a scam on social media was henceforth forbidden. Chinese investors rushed to buy any stock vaguely associated with blockchain, reminiscent of the mini-bubbles in Long Island Blockchain and Kodak during the initial coin offering frenzy of 2017. The price of bitcoin shot up 12 percent in the day following the speech.
China’s already significant blockchain activity will be supercharged. Over 500 blockchain projects, from many of China’s most powerful companies, have already registered since last year with China’s Cyberspace Administration. The People’s Bank of China (PBOC) is stepping up efforts to launch a Digital Currency Electronic Payment System (DCEP), which could replace cash with a blockchain-based solution. It would make China the first major economy to adopt a native digital currency. China could then use DCEP to manage funding for its Belt and Road program of overseas infrastructure investments, extending its monetary sphere of influence.
Across the Pacific, the picture is quite different. Two days before Xi’s remarks, Mark Zuckerberg faced a hail of criticism on Capitol Hill for Facebook’s proposed Libra digital currency. Several partners in the venture had already pulled out after threatening letters from Democratic senators and sharp criticism from Federal Reserve Board chair Jerome Powell. And the skepticism isn’t limited to Libra. This summer, President Trump declared himself “not a fan” of cryptocurrencies, which he described as “based on thin air” and likely to “facilitate unlawful behavior.” The Securities and Exchange Commission is stepping up enforcement actions in the area. In October it blocked messaging platform Telegram from issuing $1.7 billion in cryptocurrency tokens over compliance with securities laws.
Zuckerberg and cryptocurrency enthusiasts chastise the US for resisting business innovation that China is embracing. They argue that unless cryptocurrency creators have free rein to deploy their systems at mass scale, Chinese alternatives will prevail. This analysis is over-simplistic. Regulators are right to be concerned about the impacts Libra and initial coin offerings may have on monetary policy and global financial stability. Cryptocurrencies can indeed be used for money laundering, terrorist financing, fraud, and other illegal conduct. Giving platforms like Facebook too much power over payment systems could further cement their dominance and erode privacy protections. The real danger is that China recognizes blockchain as a strategic technological innovation, which the US government is ignoring.
China, the world’s biggest censor, has no love for “censorship-resistant” permissionless cryptocurrencies. It understands the threat that stateless money poses to capital controls and other mechanisms of power over a national economy, as well as the prevalence of illegal activity. Initial coin offerings such as Telegram’s are banned in China, as are exchanges to trade cryptocurrencies for yuan. The PBOC’s digital currency is far from a vote of confidence in Bitcoin. It is designed to supplant Bitcoin and its brethren with a system controlled by government authorities. Xi’s speech was entirely about blockchain, not cryptocurrencies.
China appreciates that the global financial system is approaching a technological transition. Record-keeping systems based on database technologies originally developed in the 1960s and confined by national borders cannot keep pace with a globalized, automated, increasingly AI-driven world. All of finance is turning into fintech. This shift demands new infrastructures and payment instruments. Outgoing Bank of England governor Mark Carney recently called for a synthetic hegemonic currency that, like Libra, would use a basket of national currencies for backing. Last year, then-IMF managing director Christine Lagarde described a “historic turning point” toward digital currencies. Here in the US, the Fed has been working for years to replace its Fedwire platform with a faster digital payments system.
Blockchain will enable this fintech revolution, in concert with artificial intelligence, the internet of things, and other innovations. The political implications depend on who designs and implements the technologies. With the internet, the US recognized that startups such as Google and Amazon.com would generate more innovation than incumbent telecommunications and media providers who sought to exercise control. What we failed to anticipate was how effectively China could separate the economic benefits of internet connectivity from the political benefits of free expression. Now we are making the same mistake with blockchain. Only now China is a far more formidable financial and technological competitor than it was 20 years ago.
China’s blockchain push serves two of its strategic goals: ending the hegemony of the dollar, and reducing technological dependence on the US for foundational technologies. A digital currency that China can extend globally will be synergistic with significant domestic blockchain development. Blockchain’s decentralized trust offers significant economic and social benefits in a chronically low-trust country such as China. In Xi’s words, China will “take the leading position … occupy the commanding heights of innovation, and gain new industrial advantages.”
The US should approach blockchain like it approaches AI and other major technologies that raise significant public policy questions. The White House should convene policymakers, executives, technologists, and other experts to develop a coordinated blockchain strategy. Agencies such as the SEC should continue their efforts to adapt financial regulatory frameworks to cryptocurrencies, tokenized assets, and novel platforms such as Libra. However, the bigger emphasis should be on real-world barriers to adoption, and on making blockchain systems consistent with the rule of law while still open to innovation. This is where the US and China differ. Chinese courts and legislatures are ultimately subordinate to the Communist Party; there is always a limit to the technologically mediated trust that blockchain systems can provide. One of the first Chinese blockchain initiatives announced after Xi’s speech was for party members to pledge their loyalty, immutably recorded on a blockchain ledger.
The dominant power in the emergent global economic system shouldn’t be China, any more than it should be Facebook. But if US policymakers and companies aren’t in the game, blockchain with Chinese characteristics will become more of the norm.