Meanwhile, the Chinese fintech company AliPay is using its private blockchain to push aggressively into Pakistan and the Philippines, where U.S. rivals PayPal or Coinbase have no operations.
Late last summer, the People’s Bank of China partnered with the central banks of Hong Kong, the United Arab Emirates and Thailand to facilitate 160 cross-border payments totaling over $12 million in value on the “mBridge Ledger,” a blockchain system that uses China’s own central bank digital currency for cross border payment.
The dollar’s influence on the digital future is at stake. Just as the dollar has projected U.S. economic power in the analog world, digital assets pegged to the dollar, called stablecoins, project the dollar into the digital economy.
But if, say, an Indonesian natural resource exporter can only get paid on China’s own closed network and cannot be paid in U.S.-dollar-denominated digital assets such as dollar-backed stablecoins, the U.S. financial system will suffer.
Just as capitalist and communist trade blocs squared off in the 20th century, companies wishing to export their goods to select markets will soon have to navigate competing trade blockchains. They’ll have to choose between permissionless — or interoperable — systems built on open blockchains versus firewalled, permissioned closed systems like those preferred by China. Given that China is becoming the largest trading partner for most of the world, many nations will be tempted to opt into its system. If U.S. regulators continue to antagonize open blockchain systems, economic participants will continue to view them as legally risky, making China’s closed alternative that much more appealing by comparison.
So far, the U.S. has not risen to the challenge.
The September release of the White House’s framework for digital asset development was a step in the right direction, but it was not enough. While the framework calls for U.S. agencies to “message U.S. values related to digital assets” in international forums, it otherwise remains vague on foreign policy.
At best, the United States merely endorses a nebulous paper-based exercise called the “G20 Roadmap for enhancing cross-border payments.” In reality, this amounts to innovation theater. The word “Web3” does not appear anywhere in the latest joint statement from State Department-organized U.S.-Japan “Internet Economy Dialogue.” On the economic policy side, the U.S. posture on digital assets is skewed to benefit domestically oriented financial sector incumbents at the expense of promising innovations. Risk-averse lawyers hold too much sway in the policy debate at the expense of technologists and informed foreign policy hands. Viewed from abroad, the signals from American policymakers suggest that the United States has turned anti-innovation. While digital assets pose real risks, those risks are currently being overemphasized while potential benefits get overlooked. The result is erratic “regulation by enforcement” and onerous tax policies that drive away commerce.
Take “staking.” Staking is a process by which the owners of blockchain tokens temporarily give up control of the tokens as part of a process called “proof-of-stake” that some blockchains use to ensure network reliability. To compensate people who pledge their tokens for staking, these networks provide stakers with fees paid in tokens, something vaguely akin to interest paid on a bond. Because staking requires some technical skill, investors often make use of services that stake the tokens on their behalf.
One benefit of staking is that it serves as a substitute for the energy-intensive “mining” process employed by Bitcoin. But, because nothing quite like staking has existed before, its exact regulatory status remains unresolved.
In February, the Security and Exchange Commission charged the U.S crypto exchange Kraken, saying it had failed to treat its staking service as an investment contract. As a result, the country’s second-largest crypto exchange has stopped offering this service to customers. This means that American investors have lost an important avenue for participating in, and benefitting from the governance of global blockchain networks.
