By RYAN HEATH
Presented by CCIA
With help from Derek Robertson
Imagine a future flashpoint with China — perhaps a conflict over Taiwan — where Beijing is able to escape the pain of one of the most severe sanctions the West could levy: being blocked from the global SWIFT payments system.
China is building the infrastructure to do just that with a blockchain backbone for its central bank digital currency, the digital yuan. Were the digital yuan to be widely adopted Chinese organizations could transact around the world without touching the U.S. monetary system.
In Thursday’s Digital Future Daily, we asked if Bitcoin and other private cryptocurrencies could be put to authoritarian ends. How might authoritarian governments use central bank digital currencies to accumulate global power?
China is years ahead of the US in its thinking. When President Joe Biden issued a March executive order —“Ensuring Responsible Development of Digital Assets” — that created a series of 2022 deadlines for government agencies to assess the risks, opportunities and national security implications of creating a central bank digital currency, he was playing catchup.
Rep. Michael McCaul (R-TX) — the ranking member of the House Foreign Affairs Committee — worries about the head start the digital yuan has on any digital dollar that the Fed may eventually issue. He argues that the U.S., the SWIFT consortium and the central banks that oversee it need to plan for China's long-term challenge.
“It’s a bit too early to talk about a post-SWIFT world — it does millions of transactions per day,” McCaul said, but added “SWIFT needs to be thinking about evolving to match new technologies, and because China is thinking about the post-SWIFT world.”
The People's Bank of China says that as of January, 261 million Chinese citizens — one in five — have set up digital yuan wallets, which are available for download on Chinese mobile app stores.
In the U.S., meanwhile, many key players are unconvinced that a digital dollar is needed to supplement today’s reasonably efficient payments system.
For example, though the digital yuan may be widespread, it isn’t popular. There isn’t much day-to-day usage of the digital currency, despite a crackdown on private cryptocurrencies such as Bitcoin — a move that cleared the way for the digital yuan to own the space.
And the good old U.S. dollar has significant advantages over the yuan — whether paper or digital. U.S. rule of law and its deep and liquid capital markets contrast sharply with China’s restricted capital markets. Then there’s privacy: “A Chinese-dominated digital currency system would be at the whims of the Chinese Communist Party, and the ways they want to control and track everyone,” McCaul warned.
But there’s a risk that if Washington gets bogged down in technical debates about digital assets, the U.S. will leave itself politically exposed.
U.S. strategic interests may be challenged by any success Beijing has in efforts to bake digital yuan obligations into trillions of dollars of contracts for its Belt and Road infrastructure initiative, or contracts with OPEC countries.
While SWIFT dominates global payments today, and seven out of 10 SWIFT payments are transacted in U.S. dollars or euros, the lack of global norms around central bank digital currencies and any competition from the U.S. leaves China space to engage with any of the 100 or so governments that are piloting their own currencies — perhaps allowing them to build onto, or interact with, the Chinese digital yuan backbone.
Could China establish the world’s digital reserve currency? It’s possible “in the long run” Fariborz Ghadar, Schreyer Chair in Global Management, Policies and Planning, at Penn State University, told a CSIS event Thursday. “If other countries are innovating in a direction that could represent a big technological advance and the U.S. is not aware or prepared to meet the challenge, that puts the U.S. at a disadvantage,” he said.
One way to blunt China’s currency diplomacy would be for the U.S. to lead a global effort to foster norms for central bank digital currencies, around security, privacy and rule of law. Biden’s Executive Order gives Treasury until July 7 to come up with a “framework” for that engagement.
But before the U.S. can have global impact, it needs to figure out if it’s going to have its own central bank digital currency or not, and how it would even operate.
What is the U.S. doing? In addition to Biden’s Executive Order, The Federal Reserve Bank of Boston is collaborating with MIT’s Digital Currency Initiative to test technology options for a U.S.-issued digital currency. Fed HQ is also researching digital currency options.
There’s more than one way to nullify China’s competitive advantage. If the U.S. isn’t ready to speed up development of a digital dollar, it could apply tougher export licensing controls, choking China’s access to the tech that it is using to build out the digital yuan.
“The massive processing power that's required for a lot of this comes back to chips. So, yes, we definitely need tougher export controls on that,” McCaul said, frustrated that only around 2 percent of U.S. technology exports to China are controlled or restricted.
heavy meta
POLITICO’s sister site Protocol has an exclusive interview with Mark Zuckerberg, coming hot on the heels of its announcement that Meta will release a new, high-end VR headset later this year. Zuckerberg and Protocol’s Janko Roettgers talked metaverse, markets, and what it will take to deliver on the company’s hefty VR promises:
“We're also not a typical company. It's a controlled company, so I can make more of these decisions than most companies would. That gives us even more responsibility to push for it and do things that other people might not be able to do,” Zuckerberg said. “...You're going to keep on getting more immersive. Whether it looks like a big bet today or not, I just think it's inevitable that something like this needs to get invented.” — Derek Robertson
after the fall
The crypto market took a serious bath this week, including the all-but-total collapse of banner stablecoin Terra — which has taken a huge bite out of crypto-friendly hedge funds and small investors alike. To the many regulators in Washington looking for a high-profile example of the market’s equally high risk, this meltdown might just be the ever-elusive crisis they’ll be loath to waste.
POLITICO’s Sam Sutton reported today on the looming “reckoning” on the Hill as Bitcoin dipped to its lowest lows in years, wiping out billions of dollars of investor value: “the crash will likely put even more pressure on Congress to pass a law addressing [stablecoins], which underpin transactions involving other digital currencies like Bitcoin or Ether. Federal officials have warned that so-called traditional stablecoins could pose a systemic risk to financial markets if they continue to grow outside a standardized regulatory framework.”
Next week the crypto news site Blockworks is holding its “Permissionless” Web3 conference in West Palm Beach, at arguably one of the most crucial junctures for blockchain technology since its inception — Terra creator Do Kwon was scheduled to speak, but has now withdrawn from the conference. I, however, will be there — if you’d like to meet up and chat, or have any helpful tips, feel free to reach out at [email protected]. — Derek Robertson
Afternoon Snack
Another dispatch from the future-history department: This 1979 ad for Xerox’s Alto system, developed by the company’s PARC R&D office, features a way-ahead-of-its-time graphic user interface that helps a harried middle manager check his mail, make a few copies, and even remember his wedding anniversary. (Remarkably, the most dated thing about the ad is that note of “The Lockhorns”-style domestic humor.)
The Alto, conceived in 1972, was remarkably stylish for its time — its Smalltalk-designed overlapping windows predating, well, Windows; its removable hard disk predating the later Apples and Commodores; it even had a mouse. In a brief clip uploaded by the Computer History Museum, the Alto’s designer Chuck Thacker describes how the machine was built to prioritize human connection and experience, instead of the information processing computers were mainly used for at the time. The personal computer wouldn’t catch on for many more years, but it goes to show that the improbable can become the taken-for-granted in the relative blink of an eye. — Derek Robertson
The Future In 5 Links
Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]);and Heidi Vogt ([email protected]).
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