Like it or not, the U.S. is already fighting an economic and technological cold war against China. While we should aim to eventually return to the optimism and promise of a broad China/U.S. partnership, the time for that is not now. This is a major challenge to our country, and we must do everything we can to avoid losing our economic leadership.
By now, we all know the rivalry in 5G and AI, part of China’s $1.4 trillion technology commitment. Less attention has been given to an equally consequential struggle: who will control our future global financial systems.
The power and privilege Americans enjoy from the dollar being the world’s reserve currency cannot be overstated. While the U.S. makes up 21 percent of global GDP, the dollar accounts for over 88 percent of global trade. Part of this privilege comes from America’s stewardship of the world’s financial infrastructure, giving the U.S. enormous power in international relations and advancing a global economic system based on American values of economic freedom and open access. The world, including China, has also benefited enormously from American stewardship.
But a moment of fundamental change is upon us. Much of the world’s financial infrastructure is based on antiquated technology from the 1970’s and faces dramatic change from digital wallets, blockchain technology, cryptocurrencies and interoperability protocols. For China, this is a once-in-a-century opportunity to wrest away American stewardship of the global financial system, including its ultimate goal of replacing the dollar with a digital yuan.
While far from a household name, these technologies are gaining popular traction. At a high level, cryptocurrencies are digital assets or currencies enabled by distributed ledgers called blockchains where there’s no single system controller — different from traditional fiat money that is issued and backed by governments. Blockchains are essentially public databases that anyone can access and that allow you to move value without a central counterparty.
China is playing the long game with a series of strategic moves that should make the U.S. paranoid about maintaining our lead. It has already achieved near universal use of digital payments domestically through financial tech giants such as Alipay and WeChat, and it’s on the cusp of issuing a state-controlled digital currency — the digital Yuan. The Chinese government is also subsidizing the vast amounts of energy needed to fuel cryptocurrency “miners” in the country. Mining is one way to verify blockchain transactions where individuals or companies solve complex mathematical problems for crypto in return. At least 65 percent of cryptocurrency mining is concentrated in China, which means the Chinese government has the majority needed to wield control over those protocols and can effectively block or reverse transactions.
In addition to these technological achievements, China has also been smart about building leverage to deploy them. Consider its Belt and Road Initiative, a powerful multinational effort to spread these technologies cross-border, including to key U.S. allies. With expanded security powers in Hong Kong, China is now the only country in the world that controls two global financial centers (Shanghai is their other).
Unfortunately, the U.S. is woefully behind. As co-founder and executive chairman of Ripple, a San Francisco-based company that uses blockchain technology in international financial transactions, I understand that the consequences of losing our financial lead are dire. U.S. domestic digital payments are still playing catch up — cash and debit cards still dominate. There is still no digital dollar initiative, despite thoughtful advocacy from the likes of former CFTC commissioner J. Christopher Giancarlo. U.S. regulators have blessed only two blockchain protocols, both controlled by miners in China, which puts American blockchain companies at a huge disadvantage.
Even if one assumes there’s only a small chance of the U.S. losing financial stewardship, that should be enough for an all-hands-on-deck response. It's not hard to imagine a dystopian future. A U.S. defense payment to an ally could be blocked or reversed. A U.S. company’s payments to a Vietnamese manufacturer could be stalled. U.S. banks could have their payments restricted if they run afoul of Chinese policy goals. We’ve already seen China pressure major wealth managers in Hong Kong to restrict access to financial services for clients with pro-democracy leanings.
The U.S. must recognize that strong American financial technology companies are in our national security interest. It starts with a digital dollar initiative to keep up with the digital Yuan. The next step is viewing Silicon Valley as a global financial technology powerhouse, and even moving some of our federal regulators to the West Coast. There’s no reason Silicon Valley can’t be one of the global financial centers of the future, which, along with New York City, would level the playing field with China.
And perhaps most importantly, we must adopt a far more supportive regulatory approach to blockchain and cryptocurrencies, especially those technologies developed and used by American companies.
Unfortunately, the U.S. has taken a mostly hostile approach to these new technologies, establishing policy either through enforcement actions or blanket pardons to specific assets. Our current anti-blockchain regulatory approach is in response to the alarming Initial Coin Offering (ICO) craze of 2017-18, in which some investors fell victim to fraudulent offerings. While the response was appropriate at the time, now the lack of clarification of what “good” looks like is stifling U.S. innovation and sending homegrown companies overseas.
Just as the U.S. set clear, consistent policies that won the internet revolution, it must do the same with financial technology and blockchain.
China is currently winning the financial battle of the technological cold war. As a result, it's more likely China will dictate important parts of a new global financial system, an unnecessary loss that we had all the tools to win.
Chris Larsen is co-founder and executive chairman of Ripple, a payments network provider using digital assets and blockchain technology to solve problems with global payments.