How Central Banks are Wielding Blockchain in Soft Power Competition

China’s crypto ban is part of a global battle over freedom and ideology, writes Michael B. Greenwald. How can the US lead the world in a different path?

Last week, the People’s Bank of China (PBoC) took another firm step toward limiting the use of decentralized digital assets, “vow(ing) to end illegal mining and stop offshore exchanges from conducting business with its citizens.” From their latest moves, they have made any transaction in cryptocurrencies other than the digital yuan, illegal. Though Chinese regulators have forced banks to abstain from offering services in exchanging or storing cryptocurrency since 2013, the latest decisions and regulations coming out of the PBoC show a determination to crackdown on untracked financial operations and mining still operating unchecked in the country. Internationally, these actions show a country that is nervous about the potential of democratized financial applications of cryptocurrency, especially in the way that it could remove consumer transaction data from their authoritarian toolbox.

What is the motive?

In recent months, we have explored the power of a digital yuan, officially known as e-CNY, and the desire of Beijing to have domestic access to citizen consumer data. We have also discussed the potential internationalization of a digital yuan and the ranging implications that could come from such an event. These latest developments in the world of cryptocurrency regulation in China have driven these predictions even further — Beijing is seeking to severely limit consumer choice in financial services and transactions. Their motivations for limiting selection appear to lie primarily in the ability to funnel and analyze data from consumers and competitors. Since the future of national security relies on the ability of actors to harness “big data” and utilize it to leverage their own priorities, access to a centralized ledger of financial transactions would be critical to retaining control within an authoritarian state. But does it have to be this way?

If cryptocurrencies and decentralized finance exist, the PBoC has no opportunity to collect on transactions, which inherently poses a threat to their authoritarian posturing and control. As a result, a whole new digital asset foreign policy is forming where countries like Russia, Iran and Belarus (and a growing list of others) follow China in using digital assets for control of the consumer. When thinking about this on a larger scale, we can imagine how this leads to the complete and utter weaponization of central banks.

The American soft power opportunity

The recent moves of the Chinese government have left the U.S. with an unparalleled opportunity to put its flag in the ground, leading with values of innovation, equity, privacy, choice and inclusion. The Western lifestyle is based on capitalist, free-market ideals that are fundamentally rooted in the idea of competition. While the Chinese government and other authoritarian regimes fear a diversity of choices for consumers that may limit their control over data and individual thought, the U.S. has an opportunity to champion the economic ideals that have stood the test of time — open competition. Rather than exercising a “digital asset crackdown” that completely weaponizes finance, American policymakers have an opportunity to uphold traditional U.S. values and offer choice to consumers. Instead of central banks acting as arms of the state or arms of defense that are employed for control, the U.S. can leverage recent Chinese policies to promote long term soft power principles. This is essential to embracing a long-term view of blockchain-based economies that can leverage technology to promulgate innovative solutions.

The authoritarian bill of ‘rights’ in emerging tech

Authoritarian governments offer centralized control, the limitation of privacy and the limitation of choice, in a grand bargain with citizens, in exchange for security. This leads to obvious societal fragmentation between more traditional regimes and those that champion individualization, choice and relative freedom. These remarkably different sets of values and principles are divergent at their very foundation, leading to remarkably different goals. As China and the United States continue to near a critical point in their evolving relationship, these value sets persist and restrain cooperation. While China seeks to partner with states in the international community and impart guidance to emerging countries, their relational contracts look far different than those crafted with Western partners.

In the case of the digital yuan and outlawing of cryptocurrencies, this is especially clear. The PBoC is driving pilot programs of their central bank digital currency (CBDC), while concurrently limiting consumer choice domestically — but this influence will inevitably spread to other like-minded countries. The digital asset conversation is a microcosm of a far greater problem in emerging technologies of the 21st century — ethics and principles are at the center of understanding their use, and there is an increasing fragmentation between traditional and modern societal ideals. The irony of this section title is that there are not any inherent “rights” for a user of centralized platforms that inhibit privacy, individualization or choice. Instead, for the average citizen, there is only acceptance that the state knows best without a second thought — dissent is stamped out.

Opportunity in crisis

Many believe the United States has a select opportunity to define the emerging world of digital assets. While it will have to do this on many other occasions as technology advances and innovates, the stage is set to create international forums for discussion and to provide an alternative to the authoritarian bill of “rights” that is currently being proposed on the world stage. Standing by long term American economic values and developing a framework for digital asset use is central to long term American soft power.

Michael B. Greenwald is Director at Tiedemann Advisors and Director for Digital Asset Education. He was the first US Treasury attaché to Qatar and Kuwait, acting as the principal liaison to the banking sector in those nations, while serving in two presidential administrations and under three treasury secretaries from 2010-2017. He is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs, a Senior Fellow at the Atlantic Council Geoeconomics Center, and Adjunct Senior Fellow at Center for New American Security. 

This article is supported by research advisor Logan Weber. Weber is a graduate of Harvard University and graduate student at Texas A&M University studying International Affairs.