n the lore of digital disruption, Eastman Kodak Co.’s downfall looms large.
Kodak was once one of the world’s most powerful companies. But it failed to act on digital cameras and online photo sharing, despite seeing the trends years before. (Kodak engineer Steve Sasson created the first digital camera in 1975.)
It’s an apt story to remember now as the digital money revolution rolls ahead at a time of momentous political transition. An incoming U.S. presidential administration faces an analogous situation: knowledge of what is happening but, currently, a lack of will to act.
Does China’s digital currency pose a threat to U.S. global economic leadership and the dollar’s dominance? Are U.S. leaders acting as Kodak’s were thought to have, with their heads rammed into the sand?
CoinDesk columnist JP Koning’s answer to that would be, “No. Relax.”
Last week, Koning wrote that because central banks enjoy a de facto monopoly in domestic currency usage, they need not fear disruption by China’s or any other country’s monetary innovations, which means central bankers can afford to wait and learn from the first-movers’ mistakes before launching their own digital currencies. The dollar is doubly safe, he wrote, because “what glues everyone to [it] is a combination of an incredibly powerful banking vortex in New York City and America’s massive economy, not the medium on which dollars are printed.”
This assumes global currency markets are the only gauge of the competitive advantage China gets from its Digital Currency Electronic Payments (DCEP) system. It would measure success solely by the unlikely event that masses of people outside China will replace their highly liquid, universally accepted, reliably legal dollars with the currency of a closed, single-party Communist state.
But as a deep-dive report into the DCEP by Indian think tank Policy 4.0 shows, the real competitive, disruptive power of the digital yuan’s lies in how its programmable features will enhance the Chinese economy.
As China integrates this unique, peer-to-peer form of software-based money into networks of interconnected digital devices, it will extract vast benefits in economic efficiency, monetary policy effectiveness and data-gathering capacity. Also, by allowing it to bypass that New York banking vortex, the DCEP will ultimately give China something money can’t buy: total autonomy.
All of that poses real challenges to the U.S.
Where does projected President-elect Joe Biden stand on this? It’s not clear.
In a Foreign Affairs essay this week that laid out his plans to restore U.S. leadership of a world facing a litany of challenges, Biden made no mention of China’s digital currency.
He’s not unique in his silence. No candidates in the presidential primaries made public statements about China’s forays into digital currencies and blockchain technology.
This is not to say people in power aren’t thinking about these issues. In a “currency war games” simulation at Harvard last year, Gary Gensler, a crypto-savvy former Commodity Futures Trading Commission chairman who was named this week as Biden’s head financial regulation adviser, joined former Treasury Secretary Lawrence Summers and others to explore the threat foreign digital currencies pose to U.S. interests.
Still, the topic doesn’t naturally foster political urgency. U.S. dominance of the global financial system, and the unique international gatekeeping powers that come with that, have been in place so long that most people in both government and business take it for granted as a given.
Many in the crypto community have their heads in the sand, too. It’s true China’s government-led DCEP and blockchain services network go against the decentralized principles of bitcoin. But so what? Whether we like it or not, China’s moves could massively transform the world of money. We must all sit up and take notice.
An economic growth engine
Does this sound familiar? In 1990, it was hard to imagine billions of camera-touting consumers would find a new filmless means of capturing images.
How might China, wielding the monetary equivalent of a digital camera, give the U.S. its “Kodak moment”?
Well, to start, the DCEP will give China a stronger, faster economic recovery from the COVID-19 crisis than the U.S, by allowing for targeted, programmable monetary stimulus, with cash disbursements directed to certain people for prescribed uses only and not, for example, to the shadow lending industry the authorities have struggled to contain. Although the history of Communism tells us that sustained, centrally planned credit ultimately leads to poor resource allocation, in the immediate term this targeted approach will be far more effective than the Federal Reserve’s blunt quantitative easing tool. This, in turn, means China’s future debt burden could be more manageable than that of the United States.
Inserting programmable money into an internet-of-things-powered decentralized economy will also give China a powerful economic advantage. It will facilitate distributed energy markets, smart cities, “industry 4.0” production plants and resource-efficient “circular economy” systems.
With DCEP, China’s supply chains will become hyper-efficient, giving it a big advantage over other countries’ production sectors. And as those models extend into China’s international One Belt One Road initiative, foreign dependency on its production processes could grow, giving Beijing geopolitical clout.
Out of this, China will forge financial autonomy. Its digital currency will eventually be interoperable with other tokens and blockchains, allowing its businesses and their foreign trading partners to move money across borders without using dollars as an intermediary. They’ll bypass New York, in other words.
Solution: Open money
This won’t happen overnight. But the effect on confidence in the U.S. could arise within the next four years.
How should Washington react? Christopher Giancarlo, former CFTC chairman and the founder of the Digital Dollar Foundation, is pushing for a digital dollar that would integrate constitutionally enshrined privacy protections, making it more appealing than the digital yuan, which many fear will become a Beijing surveillance tool.
But will people truly trust the U.S. not to monitor digital dollar transactions? After all, as Jennifer Zhu Scott, chair of the Commons Project, noted in this week’s Money Reimagined podcast, global finance is already subject to a comprehensive U.S.-led system of surveillance.
So, while we’re right to worry about a Chinese “panopticon” ingesting people’s identifying information, that’s not the data threat the U.S. can or should compete with. In the same podcast episode, Policy 4.0 CEO Tanvi Ratna said the bigger issue is how troves of DCEP-generated anonymized data will enable Chinese businesses to extract huge efficiencies and unlock innovation across decentralized economic systems.
There may be a way for the U.S. to compete here. But it will require a radical, disruptive solution.
The answer is that Washington must embrace and encourage an open money system, a world of interoperable, freely accessible open-source tokens and blockchains – everything from a digital dollar to bitcoin – and encourage innovators to use and build new products on top of them.
We know from the internet that open systems will beat closed systems in powering innovation.
And while this approach fits the traditional U.S. stance on competition, market liberalism and free trade, it represents an existential threat to China’s ruling Communist Party.
The problem is that if Kodak struggled to kill its then-lucrative film business in the nineties, it’s hard to imagine the U.S. giving up the drug of dollar supremacy.
Good luck, President Biden.
An event not to miss..
On Wednesday, Nov. 18, at 8:00 a.m. ET, I’ll be moderating a panel as part of a global virtual event in a CoinDesk partnership with Policy 4.0, whose report is mentioned above.
The topic: “China’s Digital Yuan and Currencies of the Future.”
Panelists are the Central Bank of the Bahamas Governor John Rolle, Policy 4.0 CEO Tanvi Ratna, OMFIF Advisory Council member and author David Birch, Belt and Road Blockchain Chief Architect Pindar Wong and Tommaso Mancini-Griffoli, the deputy division chief in the International Monetary Fund’s Monetary and Capital Markets Department.