Why the US is in danger of losing the global blockchain race
It’s been two months since David Marcus was called before Congress to defend Facebook’s nascent Libra project. In the face of withering criticism from several members of Congress, the fragile consensus following the two-day marathon was that Marcus had done well and that the crypto economy’s highest-profile brush yet with Congress was, at worst, a stalemate. However, in the two months since Marcus’s hearings, there have been several developments that should take the spotlight away from Libra to a broader examination of the regulation of blockchain networks and which countries will win out in the race to develop networks using the technology.
One important area of divergence will be the development of open blockchain networks vs. closed systems controlled by state powers. Libra fits somewhere in between, and it’s the looming battle between these two systems that should concern U.S. regulators and lawmakers.
State-controlled cryptocurrencies could modernize money, but could also enable a surveillance state
Let’s laugh at the Marshall Islands, they said. When the tiny Pacific nation announced plans in 2018 to issue its own cryptocurrency (called the Marshallese sovereign; SOV for short), the plan was widely ridiculed. The U.S. warned of serious concerns it had with the project. Others said that the Marshall Islands would be ostracized from the international financial system. Nevertheless, the SOV is on the verge of introduction, though the Marshall Islands is a unique example: a relatively impoverished, remote, and rapidly sinking island nation that needed a quick way to raise capital. However, the SOV will surely not be the last sovereign-issued digital asset. Other, more advanced and important economies are taking steps to issue their own tokens.
China’s plans for a state-issued digital asset is another example. Rumored to be based loosely on Libra’s infrastructure, China’s sovereign coin will reportedly be able to be used across the already-ubiquitous payment platforms WePay and Alipay. Regardless of the reasons for this issuance (a deputy director of the People’s Bank of China’s payments department notes the digital asset will help “to protect our monetary sovereignty and legal currency status…”), it seems likely that the currency will remain under firm control of the central government, in stark contrast to Bitcoin and other true cryptocurrencies. The model may be attractive to other countries, supporting more detailed methods of state control and surveillance of monetary supply and consumer behavior. It is also meaningful when heads of other central banks agree that a digital currency should be introduced to counter the weight of the dollar. From Mark Carney, the Bank of England governor: “A digital currency ‘could dampen the domineering influence of the US dollar on global trade.”’
Political considerations aside, the question of these projects remains: is the best path for the development of large-scale blockchain-based financial systems through state control? Or should those systems be state-regulated, with the development and implementation pioneered by technologists, entrepreneurs, and investors? Jerome Powell, U.S. Federal Reserve chairman, seemed to place his chips on the latter outcome this month (or at least that’s one logical conclusion if the U.S. is not planning to issue and maintain its own digital currency). He noted that the U.S. was keeping an eye on sovereign-issued digital currencies, but that it wasn’t something he was “actively considering.” It is unclear whether this should make Trump happy.
For open blockchain systems to thrive, the US needs a regulatory framework that supports innovation
In keeping with the entrepreneurial spirit of some of the United States’ most heralded private companies, it’s our hope that the U.S. government’s approach to supporting the growth of the crypto economy will be smart, informed regulation that protects consumers and investors. There are many green shoots sprouting on the regulatory landscape (as well as residual challenges) and some signs in Congress that Members are coming around to the real and potential benefits of open blockchain technology.
Those positive signs notwithstanding, American leadership in this emerging arena is under threat because the United States has, to this point, failed to produce a clear, comprehensive framework for the regulation of digital assets. What’s at stake is not just the future of “crypto” — it’s the technology that will drive innovation in financial services and technology more broadly in the coming decades. Singapore, Switzerland, France, the United Kingdom, and other international jurisdictions have laid out clear regulatory frameworks that protect consumers while allowing for innovation to flourish. As such, top technical talent is fleeing the United States and many of the most promising projects are only accessible to consumers overseas.
We need clear regulation to reverse this troubling trend and re-assert the United States’ incumbent position as the world’s leader in financial services and technology. The United States has the chance to show the world how to cultivate a thriving open blockchain economy, the benefits of which will be available to vast numbers of global citizens.
Open blockchain technology has the potential to be the next 100-year growth industry. By hauling Facebook’s David Marcus in front of two committees in July to great fanfare, members of Congress have openly acknowledged the potential of this technology. And while bashing Facebook is good politics, neglecting the traditional role of the United States in welcoming the growth of innovative technology is not. Congress should focus on nurturing open blockchain networks before the United States loses out in this global technology race.