Foreign Policy Research Institute A Nation Must Think Before it Acts How China Seized the Initiative on Blockchain and Digital Currency
How China Seized the Initiative on Blockchain and Digital Currency

How China Seized the Initiative on Blockchain and Digital Currency

Global information networks are undergoing unprecedented innovation, driven in large part by the emergence of disruptive technologies such as artificial intelligence, the internet of things, and 5G. Unfortunately for the United States, two other critical, but underappreciated, components of tomorrow’s internet—blockchain and digital currency—are at risk of being controlled largely outside of the West’s influence. Over the past year, the People’s Republic of China has positioned itself to become the global leader in these closely intertwined, linchpin technologies that will be fundamental to tomorrow’s financial and information infrastructures.

Since late 2019, Beijing’s senior leadership has promoted the advancement of blockchain and digital currency in China, and the government has been moving aggressively to make its vision a reality. In October 2019, a call by General Secretary Xi Jinping for intensified blockchain research triggered a 30% surge in the price of bitcoin, which is based on blockchain technology’s original concept.

Several months later, the Chinese government launched two major initiatives: the Blockchain-based Service Network (BSN) and the digital yuan. The BSN will, in part, support the global adoption and distribution of the digital yuan, and together, they could centralize financial network infrastructures within China’s technological ecosystem. U.S. soft power has long benefitted from its dominance of the world’s financial and technological infrastructure, and a successful BSN could threaten U.S. dominance in these areas.

China’s Blockchain Internet

The BSN is an effort to create a “global infrastructure network” of blockchains—essentially a blockchain internet available to anyone in the world, thereby catalyzing the innovation and development of the technology using Chinese infrastructure. The BSN’s stated goal “is to lower the cost barrier of blockchain technologies to anyone” enabling “blockchains with millions of dapps, all deployed, managed, and interoperable on the BSN.” (“Dapps” are decentralized apps that run on blockchain.)

The BSN offers cutting-edge networking infrastructure, including for digital payments, cloud computing, and communications, among other services, nearly free for developers and entrepreneurs. For a few hundred dollars per year, developers can obtain services from the BSN that would cost tens of thousands of dollars from private firms like Amazon Web Services or Microsoft’s Azure. The BSN is not limited to giving only Chinese technology companies a leg up; Beijing is aggressively pursuing global ambitions for the network. The United States has the means to marginalize the BSN’s global spread—just as it has with 5G—which could limit the BSN to rogue states like North Korea and Iran. But so far, there is little evidence that Washington is paying sufficient attention to the BSN and its spread.

In under a year, the BSN has expanded to at least 108 nodes in 80 Chinese cities, where it provides infrastructure for smart city technologies. It has also been installed in at least 8 cities abroad, and attracted cooperation from Google, Microsoft, and Amazon Web Services, although most of the BSN infrastructure is believed to be hosted on China-based cloud providers. The network is integrated with some of the largest public blockchain networks—including Ethereum, EOS, Tezos, Hyperledger, and JP Morgan’s ConsenSys Quorum. The BSN is working towards getting different blockchains to communicate, the way computer networks interact using internet protocol.

Just like the internet, the BSN operates differently within China. There, it is “permissioned”—meaning the government can vet the users and uses. Internationally, the network is “permissionless” and freely available to anyone who “complies with BSN requirements and standards,” according to the BSN User Manual. Of course, the terms could change at Beijing’s discretion.

If the BSN catches on globally, then Beijing would exercise explicit control over blockchain domestically and implicit control internationally. Such a development would give it the type of de facto dominance that the United States has exercised over the internet. Another possibility would be for China to share the BSN model with autocratic governments around the world that are frustrated by the all-or-nothing proposition of turning off the internet when faced with political vulnerability. This more modest outcome would be more difficult for the West to block.

For blockchain users outside of China, the BSN presents a Faustian bargain: cheap access to blockchain infrastructure in exchange for Chinese-style governance. Given how willing people and governments are to sacrifice their privacy for free services on the internet, it’s likely that at least some, and perhaps many, will accept that bargain.

Blockchain and the Digital Yuan

Hegemony over the burgeoning blockchain infrastructure supports another key Chinese strategic initiative: the digital yuan. Launched by the People’s Bank of China as a live beta project, the digital yuan has accumulated users across most of China’s major cities, with over $1.1 billion digital yuan publicly issued to date. Beijing has publicly signaled its intent to expand the digital yuan internationally—likely via the BSN, Chinese expats holding digital yuan-capable e-wallets, and government-to-government linkages to the Belt and Road Initiative (BRI). If successful over the long term, the digital yuan could threaten the economic and strategic interests of the United Statesenabling Beijing to:

  • internationalize the yuan while maintaining its coveted capital controls, promoting it as a rival and alternative to the U.S. dollar;
  • export clone/surrogate digital currencies to client states and organizations as both turnkey surveillance toolkits and “leapfrog” economic management systems for developing countries;
  • expand economic and security surveillance at home and abroad, due to the trackable nature of the digital yuan and its surrogate currencies;
  • circumvent sanctions, arms embargos, and money laundering regulations by providing an alternative to Western international payments systems such as SWIFT.

The digital yuan is positioned to serve as the lifeblood of Beijing’s international economic agenda, which is underpinned by the expansion of a China-centric digital ecosystem that encompasses game-changing technology such as 5G, Industry 4.0, economic and social surveillance, global satellite navigation, and autonomous machine-to-machine communications and payments. The perniciousness of the digital yuan is the speed and stickiness with which it will enable Beijing to lock in gains in international economic influence with those that adopt it. The digital yuan and its surrogate currency systems are likely to expand internationally by becoming the mandated means of payment for China’s international economic ecosystem, e.g., supply chains, BRI debt service, remittances, and autonomous technologies; filling currency vacuums created by collapsing economies, such as in Venezuela, Somalia, and Syria; and seducing ambitious autocracies such as Sudan and Turkey to adopt its economic management methods, technologies and surveillance capabilities—and to leapfrog into China’s well-marketed brand of 21st century centralized governance.

A digital yuan in global circulation and a China-dominated blockchain infrastructure would go a long way toward cementing Beijing’s economic influence and soft power around the world.

How Washington Should Respond

While development in blockchain and cryptocurrency is inherently global and generally aligns with fundamental free enterprise and democratic values, the state-sponsored, monopolistic control of the technologies presents a dangerous threat to those values. The United States and its partners can successfully mitigate this threat by continuing aggressive diplomatic and economic policies and adopting new, effective informational and military strategies.

On the diplomatic front, Washington should extend its demarche campaign of spurning nations’ adoption of Chinese technologies to include the BSN. The leading decentralized blockchain technologies, such as Ethereum and Cardano, are not only better blockchain alternatives technologically, but they also ensure data transparency and security.

From an information perspective, the United States should articulate a broad, coherent vision for an open internet anchored on core human rights and democratic values, including the right to digital privacy, as embodied in the California Consumer Privacy Act (CCPA) and the European Union’s General Data Protection Regulation (GDPR). In doing so, it should aim to publicly reframe the U.S. approach to internet policy in more concrete and realistic terms. That will mean leading a coordinated response to competitors’ strategic manipulation of the internet, with the goal of reinvigorating alignment in favor of interoperability and digital freedom. The effort should emphasize that human rights and democratic values are core to U.S. national security and should therefore guide digital policy.

On the economic front, a continuation of the robust policy around containing the PRC’s economic agenda is in order. Effective policy tools include: denying access to capital markets; aggressively blocking trade of key strategic materials, such as high-performance semiconductors; and sanctioning companies acting as instruments of PRC foreign policy. In addition, a renewed, comprehensive effort to check Beijing’s expansionist agenda via the BRI should be pursued. To support these efforts, a National Economic Defense Center should be established in line with that recommended by Anthony Vinci of the Center for a New American Security.

Obstructing Chinese expansionism will likely have limited impact if viable economic development alternatives are not also made available to nations seeking to grow and modernize. The United States should therefore actively support public and private investment in entrepreneurial projects abroad, such as those in the technology and infrastructure sectors, which support long-term, organically driven economic growth. One promising mechanism for this is the BUILD Act passed under the Trump administration. The Biden administration should seek to expand and strengthen its reach and capacity for delivering investment.

Finally, on the military front, the Department of Defense should, in concert with the Department of Treasury and others, develop a comprehensive platform to monitor, study, and run simulations against the digital yuan and BSN. Such a platform could consist of digital twin technology, which is currently in use in the commercial blockchain and cryptocurrency world by de novo crypto “central banks” to monitor, govern, and conduct market operations in highly complex macroeconomic ecosystems. Through such a platform, national security decision makers would have a digital economy proving ground able to fully model and provide predictive analysis of digital yuan (and other key digital currency) usage patterns, critical supply chains, international capital flows, and pricing and money supply dynamics. Such a platform would ultimately inform the development of future opportunistic U.S. policy and technical solutions to counter the threat, model a wide variety of impact scenarios for asymmetric counter-threat responses, and quantify risk to U.S. military and other critical supply chains.

Beijing has clearly seized the initiative on harnessing blockchain and deploying digital currency. China’s key first-mover advantages lie in being “first to market” in influencing governments that lack viable alternatives to modernize and grow and seizing heretofore uncharted territory in its efforts to firmly establish technology standards in blockchain and central bank digital currencies. Others may be compelled to adopt these standards, and their use may gain a level of widespread stickiness among participants, creating a network effect that could prove resistant to future technology challengers.

The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.