China Seizes the Blockchain Opportunity. How Should the US Respond?

The Chinese government is not in the habit of making speculative “what if” announcements. Typically, before anything about its plans goes public, a significant amount of preparation and thought has gone into it.

So, although Xi Jinping’s passing statement about China needing to “seize the opportunity” posed by blockchain technology was thin on details, it’s unwise to assume nothing will come of it. In fact, as CoinDesk’s David Pan will report on Monday, there’s already a massive amount of blockchain development going on in China.

How should the U.S. react to this? Definitely not with complacency.

The news out of China affirms Facebook CEO Mark Zuckerberg’s warning to Congress during last week’s contentious testimony over his company’s plans for the Libra cryptocurrency that the U.S. is at risk of falling behind the innovation curve. China is powering ahead, while the U.S. is bickering over a project that will be stalled in prototype testing phase for a long time and is throwing regulatory roadblocks in the way of countless other cryptocurrency ideas.

There is some there there

To be sure, many in the crypto community are dismissive of China’s blockchain strategy. That’s because it is most certainly based on a permissioned framework that implies significant centralization, with distributed ledgers managed by regulated trusted entities (if not directly controlled by the government, by consortia and other organizations subject to heavy oversight and Beijing’s intervention threats.

In that sense, China’s blockchain architecture will likely be a long way from the decentralized, trustless principles upon which bitcoin, ethereum and other public blockchains are based.

An exasperated Nic Carter took to Twitter Friday to state why he thought Xi’s “blockchain” reference was meaningless and why arguments attributing bitcoin’s massive rally to the Chinese leader’s comments were, in his mind, bunk.

So just because xi jinping said “blockchain” were all gonna pretend that it means something?

— nic carter (@nic__carter) October 25, 2019

But Xi’s comments did amount to “something.”

Just because China’s approach to distributed ledgers falls short of the ideals of cryptocurrency and likely involves use cases that could be just as well managed with a SQL database doesn’t mean we can walk away and ignore what’s happening there.

We must consider these moves in the context of other advances China is making in related fields. It is secretly developing a central bank digital currency, for one, and just passed a new cryptography law to enable the development of powerful new mathematical tools for managing information (potentially for the worse, if these tools are put in the hands of Beijing’s surveillance apparatus.)

Integrating a stablecoin and future cryptographic tools such as zero-knowledge proofs, and other forms of homomorphic encryption such as MPC wallets into China’s “Blockchain +” framework for related technologies could unlock efficiencies that give China’s economy real competitive advantages. Perhaps it enables the smart contract-based approach to foreign exchange risk that I flagged last month.

Or maybe it results in new compliance solutions for regulated entities such as banks to identify and onboard people and businesses. Or could it lead to more efficient Chinese customs procedures to speed up supply chains within China’s multinational Belt and Road project?

Response?

All these could give China a competitive economic advantage. And the more it develops them, the deeper its learning and capabilities will become.

Again, how should the U.S. respond?

Ideally, it would embrace the kind of approach to technological development that China simply can’t afford to take: the open, permissionless, decentralized one preferred by the crypto critics of closed, permissioned, centralized blockchain solutions.

Permissionlessness, as it pertains to blockchain technology, means an open architecture in which anyone can use or develop applications on a designated protocol and that there are no centralized gatekeepers saying yay or nay to actors or transactions on the network. And while that spooks the hell out of U.S. financial regulators who are used to monitoring payments for anti-money laundering and illicit finance enforcement, it’s more or less consistent with what long has been the U.S. stance on economic principles. It’s part of a long tradition in U.S. economic thinking that sees economic outcomes as positive-sum phenomena, where the more transactional activity that’s allowed, the more value and wealth is created.

Sadly, openness is much less of an American economic priority now, mostly in the international sphere, but also domestically. The Trump Administration’s protectionist approach to trade – marked by its brutal tariff war with China – and the President’s proclivity to reward or punish favorite industries and treat every negotiation as a winner-take-all “Art of the Deal” reflects the inward, closed mindset of zero-sum game thinking.

Yet the U.S. has a long history of beating its foes by being more open than them. That’s what the Cold War victory, largely engineered by a Republican president, Ronald Reagan, was all about. The same tradition continued under a Democrat administration during the post-Cold War era of Bill Clinton. Back then, amid a wave of free trade agreements and neoliberal reforms around the world, American diplomacy laid the foundation for the open Internet.

Having set the example of the Telecommunications Act of 1996, which forced the Baby Bells to accept competition, the U.S. used carrot and stick tactics to get other countries to follow suit. Creaking old government-owned telcos were privatized in developing countries, foreign competitors were allowed in, and investment flowed into the fiberoptic cable and switching technologies that would let the Internet grow.

A new chance to open up

Those were the days. The question is: can they be relived?

Well, the international to and fro that’s defining the regulatory and technical framework for cryptocurrency and blockchain technology may offer an opening. If the goal here is to ensure that Western models of business and government outcompete the state-led business titans of China, then a move to promote an open, permissionless approach to this vital technology may be the way to pressure Beijing.

China’s closed system of government simply can’t abide a permissionless structure over which it can have no control. But, in theory, the U.S., which its open innovation and competition model, can be more comfortable within it. It can take heart from the lesson of the 1990s, which was that open models of development will beat closed ones: the online world was won by the TCP/IP-founded open Internet, not by closed-loop intranet networks such as AOL and France’s Minitel. Ergo, an America that embraces permissionless innovation and open blockchain models has a chance to outcompete China.

I’m not holding my breath for such a policy stance in Washington, one that would mean removing roadblocks to bitcoin and other cryptocurrencies, including Libra and other stablecoins. For one, even tacitly encouraging their adoption could ultimately entail abandoning the dollar as the world’s reserve currency. Although that’s the right thing to do, it’s almost unfathomable as a policy decision.

And secondly, as I mentioned, Donald Trump is a closed-loop, zero-sum-game politician. He’s already made his disdain for bitcoin clear.

But America is still a democracy. The political environment could change. Let’s hope that whoever next leads it can see the opportunity to take on China with openness rather than tit-for-tat retribution.