An Unlikely Romance: Why Authoritarian States are Keen on Digital Assets
Digital assets are here, they are changing the world, and major political implications are about to materialise.
What once seemed like a thing of a distant future, has turned into a narrative du jour. While China is preparing for the launch of the blockchain-based Digital Yuan, BRICS, an association of five major emerging national economies, Brazil, Russia, India, China and South Africa, is calling on its members to create a common cryptocurrency for fostering cooperation. Likewise, Iran’s President Hassan Rouhani has recently emphasised the need to introduce a common digital asset for Islamic nations.
For an uninitiated observer, it might seem like these countries are at the forefront of digital asset adoption, the advocates of burgeoning technology and adherents of the Bitcoin concept. This is, by and large, an illusion as their keenness to adopt state-of-the-art money technology is not driven by consumer interest. Nor is it explicated by the desire to simplify the lives of their citizens. The aim is both different and grander: to defy the current world order, challenge the financial hegemony of the US and effectively create a new financial ecosystem.
How a libertarian project inspired authoritarianism
Arguably, no story about digital assets starts without the mention of bitcoin, the crypto space’s pioneer, which has brought the concept of digital money into the limelight.
Contrary to the persisting belief, bitcoin is not just some random invention that showcases its creator(s) mathematical skills. First and foremost, it is a medium of exchange, the inherent design of which is all about privacy, decentralisation and most importantly, defiance of authority. Its libertarian nature — supplemented with a touch of anarchism — is evident just like its aim to shake up the establishment and lay the groundwork for a new type of society. The kind of society that will be able to break the chain of the traditional financial market’s influence.
To that end, it is hardly a coincidence that the Bitcoin whitepaper appeared in 2009 as its nascence had been greatly precipitated by the 2008 financial meltdown and the subsequent collapse of Wall Street behemoths like Lehman Brothers.
To remind, the austerity measures that followed were deemed unjust by the public, who regarded reckless banks and hedge funds to be the culprits of the financial chaos. Consequently, the desire to challenge them had overtaken the minds of many. For instance, the Winklevoss brothers, who were involved in the early stages of Facebook development alongside Mark Zuckerberg, specifically cited the Cypriot government’s decision to take money from the owners of local bank accounts to bail out the failed system as their reason for entering the cryptocurrency scene.
Similarly, Nick Szabo, a prominent programmer, in a recent podcast elaborated on how his libertarian views influenced his involvement with bitcoin that emerged as a way of tackling the influence of the governmental and financial institutions on the life of the common man.
Yet, for a long time, the project had been largely overlooked by the regulators and the public, not least because of its complexity. The scene changed following Bitcoin price explosion in late 2017 (at one point it traded at $20,000). Immediately, the libertarian creation became the talk of the town and its true purpose, providing an alternative method of monetary transactions around the globe without governmental oversight, became conspicuous to many.
Predictably, a response followed. In the U.S., agencies like the U.S. Security and Exchange Commission and U.S. Commodity Futures Trading Commission stepped in, attempting to find a way to regulate the scene.
China, on the other hand, acted swiftly and banned the coin’s usage as it does not bode well for the country’s authoritarian appetites. Yet, ironic as it may be, prior to banning, Beijing had also seemingly realised the tangible benefits that Bitcoin has to offer, foremost, blockchain and speed of transactions.
Trade is the new tank
In a post-modern world, where trade is a tool as powerful as a military offence, this realisation was of a huge importance as it is a way to challenge the American and the European financial hegemony.
How exactly? By creating digital currencies that would effectively escape the scrutiny of the traditional financial system and allow the execution of international payments fast, easy and cheap — a clear competitive advantage in the world trading arena and a means of escaping the burdensome reliance on the U.S. dollar for cross-border payments. The latter has always been an obstacle to China’s ever-growing power appetites. The introduction of its own digital asset will help to partially tackle the problem, more so since the country seeks to denominate international trade credit in the Renminbi (another name for the official currency of China that slightly differs from the Yuan) rather than dollars.
Combined, these advantages pushed China to start exploring the Digital Yuan’s potential as early as 2014. Now, that it is close to launching it, the implications of this undertaking are slowly being realised by the prominent economists around the world. In a recent interview, Kenneth S Rogoff, Former Chief Economist at the International Monetary Fund pinpointed the problem’s crux, noting that the global market for China’s new currency will most definitely be present, especially taking into account that it is the largest economy in the world. Also adding, ‘The advanced countries can still regulate it, but there are a lot of the parts in the world, where China and the United States disagree over policies, starting with all the countries the United States has financial sanctions on.’
In other words, the Digital Yuan will allow China to foster cooperation with all countries that are at odds with the U.S. and are subject to financial sanctions, a tool deemed most powerful in a trade-dominated world and used against a number of countries, like, Russia. In spite of the fact that Moscow is continuously emphasising the opposite, the financial restrictions are taking their toll. To that end, the country’s president Vladimir Putin has recently admitted that the country fell short of $50 billion because of them and the country is looking to connect its financial messaging system SPFS to the Chinese cross-border interbank payment system CIPS.
Consequetnly, founding a way to circumvent these sanctions and reduce reliance on the U.S. Dollar by enhancing financial cooperation with Beijing, especially after being threatened to be cut off from the Swift payments system, is in Russia’s greatest interests and digital assets might be the answer to its prayers. Already in 2018, the Financial Times reported that the country is considering the introduction of the digital Ruble effectively for carrying out its contested foreign policy without financial ramifications like sanctions.
Other authoritarian players like Turkey are following suit. President Recep Tayyip Erdoğan’s plan to launch the digital Turkish Lira shows that he has also realised that the introduction of digital assets would allow the country to resort to the manoeuvres in the region that it deems fit. For example, most recently, Erdogan said that he will use the Russian S-400 defence system despite the US threat of sanctions.
Libra should not be a distraction
In spite of these developments, the U.S., particularly, seems to be surprisingly unperturbed by the looming outcome of the unlikely romance between authoritarianism and burgeoning technology.
Until recently, the regulators, both in the U.S. and in the EU, had been predominantly focusing on investors’ interests, particularly, protecting them from fraudulent Initial Coin Offerings and bitcoin price manipulations, disregarding the political and trade aspect of digital assets in general.
It is only with the unveiling of Facebook’s ambitious project Libra that the regulators around the globe, and in the U.S. foremost, paid heed to the world of digital assets. The prospect of FB, which has 2.45 billion monthly active users (September 2019), creating a privately controlled monetary exchange medium, has shaken up the regulatory nonchalance. Bruno Le Maire, French Minister for the Economy and Finance, has even qualified it as a threat of sovereignty.
It is thus not coincidental Eurocoin, a newly suggested digital asset initiative by the European Union, is being proposed as an alternative to Libra, which markets itself as a faster payment option serving the unbanked.
While the focus on private company’s endeavour to create an alternative money flow is understandably a serious concern, it should not divert the attention from the fact that China is on its way to becoming the single-handed economic mogul that is authoritarian to the bone. The type of economic power that inspires other countries who are searching for ways to erode the financial dominance of the liberal states and promoting its political agenda without financial repercussions.
Regrettably, this realisation seems not to have fully hit the U.S., in particular. While several congressmen have been promoting the introduction of the digital dollar as a counterweight to the Chinese initiative, their talk has largely fell on deaf ears. Thus, at the beginning of December, two key American figures, Secretary of the Treasury Steven Mnuchin and Federal Reserve Chairman Jerome Powell, once again stated that there is no need to move the US Dollar to the blockchain, shelving the hope for change.
That said, much depends on the outcome of the 2020 US Presidential elections. There is a slim chance that following it, the sentiments will have changed more so if the EU will have introduced a digital asset of its own. Otherwise, the world might soon find itself in a completely new environment, where countries with dubious ambitions and agendas are free to act on a whim.