Blockchain is being co-opted by governments as an unlikely source of hard power.
by Edmund Yong
“With new blockchain technology, we would be able to introduce a united cryptocurrency to Muslim states with the cooperation of our central banks… The benefit of cryptocurrency is that it can cut through bureaucratic and market fluctuations.”
And with that, President Hassan Rouhani of Iran, a U.S. sanctioned country extraordinaire, set tongues wagging during the recent Kuala Lumpur Summit. His idea received open support from other leaders of the Muslim world, which represent a quarter of the world’s population, its fastest growing and mind us all, more than half of global oil reserves. You can already imagine media headlines baiting moral panic in the West.
Lest we get too alarmed, Russia and its band of brothers in the Eurasian Economic Union (EAEU) had announced plans for a digital currency earlier this year; and even mooted an oil-backed crypto, which would replace U.S. dollar as the main price unit in the global oil market. It “allows oil producing countries to avoid any financial and trade restrictions that have become excessive in recent years” (read sanctions) and is “inevitable”, Russian officials explained. First oil, then expand to other tradable commodities.
And of course, there’s the 800-pound panda otherwise known as China launching its own digital currency (more on her later). Or India, despite facing a legal impasse with crypto, had recently called out blockchain as having “revolutionized” the character of modern warfare and is readying defenses.
If you’re a fan of geopolitics theory, it appears that almost all the ‘Rimland’ territories on the map are harboring their own crypto ambitions.
The Unipolar World has a Problem – Dollar Dependency.
The U.S. dollar is still as important today as it was during the Bretton Woods era when the dollar replaced the gold standard and major foreign currencies were pegged to it. This system collapsed some 50 years ago when there was not enough U.S. gold supply to cover the total dollars in circulation.
Take a look at this:
Source: Bank of England
Back in the autumn, Mark Carney (Bank of England governor) gave a lovely speech over lunch with Jerome Powell (US Federal Reserve chairman) in the audience. This was at the Jackson Hole Symposium, one of the most closely watched and influential meeting of minds for monetary policy makers: the US subprime crisis and Europe’s QE measures were foreboded there.
And off Carney went:
The over-dominance of dollar pricing in global trade is “reducing the shock-absorbing properties of flexible exchange rates” and is becoming “a destabilizing (force) at the heart of the international monetary and financial system”! There are spillover effects even on countries with relatively little direct exposure to the U.S. economy. This increases the risks of a “global liquidity trap” in a climate of ultra-low interest rates and weak growth which will render policy responses useless.
The rest of the world are forced to “play the hand they’ve been dealt”. He then went on to propose for the medium term, a “network of digital currencies” that will constitute a “synthetic hegemonic currency”. (Applause sound effects in background)
Coming from our industry, one can’t ask for a better narrative arc. This is the head of a leading G20 central bank who went from famously bashing crypto a year earlier to being open about issuing crypto now! Well perhaps considering that Jackson Hole is in Wyoming, the most crypto-progressive state in all of U.S. “Hi Carney, come meet Caitlin!”
The Currency War is Not Moving to a Crypto Front But…
A dollarized world economy is a sore point for the Chinese. US prints its own dollars at ease, borrows in dollars, repays in dollars, exports its inflation, and devalues its own debt (back to the Chinese) in dollars. Dedollarization will take decades to achieve if ever.
Meanwhile the Yuan remains extremely under-internationalized: it accounts for 2.2% of global payments market, and 1.9% of all reserve assets held by central banks, even though China produced 27.2% of total global GDP in 2018 alone.
The literature from the West is fascinating, amid the trade war, on plans to displace the dollar. We read about how One Belt One Road (OBOR) policies will coalesce China’s maritime influence along the “string of pearls” to build roads, railways, ports, and airports – in Yuan-denominated loans and trade invoices – in the name of collective prosperity. Or how Chinese protectionism created the world’s largest cashless macroeconomy (courtesy of Wechat and Alipay), more than the total global volumes of MasterCard and Visa combined.
This led the World Economic Forum (WEF) op-ed to put out a headline: “Is China about to launch its own cryptocurrency?”
As if crypto is going to be the panacea of global imbalances, the new countervailing gravity for our financial order. It sets up a Jim Rickards-style endgame of “Paper, Gold or Chaos” envisioned in his Currency Wars book. Dystopian stuff.
Then came one fine October day. President Xi announced, “We must take the blockchain as an important breakthrough for independent innovation of core technologies”, surprising his countrymen and breaking the internet. His directive: “Seize the opportunity”!
The conversation has shifted; and with it, the chessboard.
China Just Ignited a New Tech Arms Race on Blockchain.
China has found a way to assert its tech supremacy in blockchain.
Chinese strategic thinking and foreign policies since the 1980s, when its market reforms took form, has been largely influenced by classical geopolitical theory. And its rise as challenger and next superpower has attuned it to the importance of tech advances i.e. that power is conceptualized not merely in spatial terms, but in this Internet era, information flows and networks.
With the emergence of Web 3.0, powered by the blockchain, the Internet will enable direct point-to-point transfers not just of information content, but also valuable transactions and economic assets, across the globe. We’re not talking about emails, texts, posts and vids anymore, but your entire life’s inventory of possessions on the web: your house and car, your titles and securities, your personal vault.
Hence the new episteme of power, in blockchain speak, will seek control of nodes rather than corridors, hashrate rather than chokepoints. The new theatre of operations will probably be staged on a fleet of high performance computers. The new powers that be will not need to be physically destructive, it will only have to surveil traffic and setup tolls (Great Firewall) or fire up some malicious bugs (Great Cannon); but you either won’t know it or can’t stop it.
[Click here for Part 2]