America’s digital Sputnik moment
When President Eisenhower was confronted with the Soviet Union’s launch of the first-ever artificial satellite in October of 1957, he faced furor on the part of other political leaders, defense officials, and the U.S. citizenry alike. Overnight, it seemed, the U.S. had fallen behind its chief rival in the contest for technological preeminence.
Yet the former commander of allied forces in Europe understood that mere hand-wringing and irrational panic would not address the challenge. Careful, methodical, and strategic decisions would have to be made. And that is what happened. Within four months, the U.S. responded to Sputnik with the launch of its own first manmade satellite. Within another year, DARPA and NASA had been established, cementing long-term U.S. leadership in space exploration and unleashing the fateful innovative potential of America’s best and brightest.
While China and the United States are not locked in a cold war like that of the 1950s, there is a vigorous competition underway between the two nations, both of which are staking claims to emerging technologies including artificial intelligence, robotics, and my main focus here: blockchain.
China’s tested the launch of the digital RMB (its currency) this month; its government-backed Blockchain Service Network (BSN) last month; and a new national blockchain committee, also established last month. It brought in top technical talent from China’s most creative and influential tech companies including Alibaba, Tencent, Baidu, and Ping An. One again, the U.S. once faces a moment in which it could be edged out of the driver’s seat.
Yet, as in 1957, so now the U.S. and its allies are well situated to co-determine the world’s rules of technological engagement. The problem is that they’re asleep at the switch. They are giving the game away — precisely what Eisenhower did not do in 1957. True, the COVID pandemic is presently an understandable distraction, but this pandemic struck China too and is still underway there, yet not slowing technical progress. It also, one hopes, won’t last forever.
The most important application of China’s new BSN in the immediate term will likely be the development of digital fiat currencies. China has already test-launched a digital yuan which, due to its ease of transfer on China’s new web, encourages other countries either to use the yuan too or to build their own currency on China’s unified platform. From replacing the dollar as a global reserve currency to reordering capital markets, the implications if left unchecked would amount to a global monetary “shock.” We would see the single largest change in the global financial order since Bretton Woods and attendant structural harm to the U.S. economy.
But what if America did not elect to “lead from behind” on this issue? What if we digitized our money and national payments infrastructure first? …
Well, for starters the 70 million Americans who have waited for weeks for their stimulus checks wouldn’t need to wait again. They could handle expenses immediately as disbursals traveled at literal light-speed to their digital wallets. But our “21st-century space race” has consequences well beyond faster payments.
By capitalizing on the underlying infrastructure of digital payments and currencies, we could develop many more transformative applications, including (non-abusive) “smart city” systems, manufacturing and distribution supply chain management, resource management, and many other applications that are foundational to modern productive and distributive — that is, economic — activity. This is the playbook the Chinese are playing by in pushing One, Belt One Road and “Made in China 2025.”
Adding a central bank digital currency (CBDC) like the e-yuan to these is simply the equivalent of adding Kevin Durant to the 73-9 Golden State Warriors. Not only is America losing the digital currency race, then, but in so doing it is leaving the innovation race too.
How, then, to respond? What shall we do?
Like 1957, this is no time to panic. It is time to re-channel the spirit of Eisenhower. As did he, so must we mobilize and lever the intellectual might of our universities and the innovative energies of our tech industries — still the world’s most dynamic — to build out an inclusive digital economy that transforms the way commerce and finance are conducted and opens new opportunities for all. What might this look like, and where should we start?
The answer, I think, is obvious. Because digital money and payments will be central to the digital economy as a whole, and because the technology underlying digital payments is as pervasive and systemically adaptable as was the internet in the 1990s, microchips in the 1980s, and transistors in the 1950s and 1960s, we should begin with a full US digital currency. Not only would this have been the lynchpin for systemic digital transformation apart from or before the present pandemic, but the pandemic itself lends it all the more impetus.
The social distancing measures that have been necessitated by the present pandemic have frozen both productive activity and the pay people earn through productive activity. “Knowledge workers” might be able to collaborate remotely, but production line workers and many delivery personnel can’t. Economies worldwide accordingly confront simultaneous supply-side and demand-side shocks. To mitigate, minimize, and reverse these shocks, action must be taken as quickly as possible. These actions, in turn, must include our capacities to store and to transfer value — to make and receive payments and disburse monies, and to speed up the payment process to seconds instead of weeks.
Digital currencies are optimal means to such optimization. The reasons are straightforward. A currency is “that which pays” in a payment system and “that which counts” in a system of value accounting. To design a digital currency is accordingly to design a digital payment platform. The sooner the United States can build out such a platform, the better. This is true for reasons not only of long-term commercial and financial inclusion and efficient transacting, hence growth but also, in this time of crisis response, of immediate need.
There are multiple ways to do this. One especially easy approach would simply add two functionalities to the Treasury’s already existing network of “Treasury Direct” accounts (TDAs), pursuant to which any citizen or legal resident of the US can already open a digital account through which to transact with Treasury any time night or day in its securities. To convert this already existing platform into a universal digital payment platform, all we’d need to do is (1) add “horizontal” peer-to-peer (P2P) connectivity between TDA digital wallets to the current “vertical” connectivity between Treasury itself and those wallets; and (2) confer legal tender status on the “Zero-Percent Certificates of Indebtedness” that Treasury already issues through TDAs — let’s call them “Treasury Dollars.”
Another way to proceed would be to do something much like the above but to do it through the Federal Reserve System. In the long run, this might be preferable, inasmuch as the Fed conducts most of our monetary policy. In the short-run, however, it might be more difficult because the Fed, unlike Treasury, has no preexisting network of wallet-convertible individual and small business accounts.
My own view is that whatever we can do most quickly is what we should do now, with optimization to be addressed later. If that means beginning with Treasury and later migrating to the Fed — as our nation’s first currency, the Treasury-administered “Greenback” of 1863, did in converting to Federal Reserve Notes 50 years later — then so be it.
Think of what it means if we do this well. Not only do we effectively address the economic consequences of the present pandemic, but we also set the stage for a requisite digital modernization of our entire economy ahead. And we become once again the model for the world. That is our answer to COVID — and to China’s new digital Sputnik.
Robert Hockett is Edward Cornell professor of law and Finance at Cornell University and on the Boards of the Digital Fiat Currency Institute and the Public Banking Institute. He regularly advises federal and state legislators on monetary and other financial initiatives and moonlights at Westwood Capital, a boutique Manhattan investment bank. He has previously worked at the Federal Reserve Bank of New York and the International Monetary Fund.
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