Both the U.S. and its adversaries are wrong to focus on “national digital currencies”
On Friday Foreign Policy published two articles that caught my eye. The first one, Iran Has a Bitcoin Strategy to Beat Trump, points out that Iran’s regime (like many others) is exploring how digital currencies could help it evade U.S. sanctions. But notice how the author couches the threat (emphasis added):
The Iranian government has long had an interest in using cryptocurrencies to support international trade outside of the traditional banking system. In July 2018, President Hassan Rouhani’s administration declared its intention of launching a national cryptocurrency; one month later, a news agency affiliated with the Central Bank of Iran outlined multiple features of the national cryptocurrency, stating that it would be backed by the rial—Iran’s national currency.
The second article, The Greenback Needs a Digital Makeover by Tim Morrison, sounds the same alarm but focused on China (emphasis added):
Almost immediately after [Xi’s] statement, the National People’s Congress dutifully enacted a new cryptocurrency law to establish the framework for a regulatory regime for a Chinese national digital currency. This Chinese digital currency, a so-called “digital yuan,” is now ready for trial, according to the People’s Bank of China. While Washington focuses on whether to allow digital currency in the U.S. financial system, in other words, China is moving ahead in earnest. The prospect of the Chinese Communist Party (CCP) dominating this emerging financial technology should be alarming.
The upshot of Morrison’s article is that, given the interest in digital currency by adversary nations, the U.S. should embrace rather than stifle digital currencies. That’s great, but as the article’s title implies, national security thinking about digital currency seems to be stuck in a state-focused box—on both sides.
On the side of the dollar-competitors, digitizing one’s existing currency will do little if anything to create more global demand for it. I’ve explained this at length about the digital yuan, and it’s evident in Venezuela’s issuance of the Petro. Sure, Venezuela can issue a “national digital currency,” but it’s digitalness does nothing about the fact that there is no demand for currency backed by the Maduro regime. I suspect the same will be the case of a digital rial.
So if digitizing one’s national currency won’t do much to challenge the dollar’s global reserve status, will it nonetheless facilitate evading sanctions? I don’t see why it would do so any better than existing alternatives. We already have cryptocurrency networks that anyone can use for permissionless transfers of value. If exchange rate risk is the issue, then a dollar-backed stablecoin would be a better design for sanctions evaders to pursue.
On the U.S. side, I’m afraid Americans concerned about national security seem to be making the same mistake as adversary regimes by seemingly ignoring or rejecting the inherent stateless quality of cryptocurrencies. Rep. Mike Gallagher, one of the smarter members of Congress, tweeted out Morrison’s article and here’s the lesson he took from it:
Just like we cannot let the CCP build the world's telecommunications networks, we cannot let the CCP build the digital currency of the future either. We need all hands on deck to ensure American cryptocurrencies become the global standard. https://t.co/6XLaKVg3yK— Rep. Mike Gallagher (@RepGallagher) January 24, 2020
What the heck is an American cryptocurrency?
Both Gallagher and Morrison have the right instinct: the U.S. should welcome innovation and open its financial sector to cryptocurrencies. But the way the U.S. wins is not by imitating its state-focused adversaries like China, Venezula, and Iran, but by running its own tried-and-true playbook: embracing open and permissionless networks, just like it did with the Internet. Given its culture, political system, and legal tradition, there is no country better positioned to benefit from an “Internet of value” just as it did from an open data network. Such open systems are a threat not to liberal open societies, but to authoritarian regimes.