CIA, IBM, China and Blockchain
After the end of the Cold War, the Central Intelligence Agency found itself in a weird, new place. This new place consisted of the CIA having to defend its existence and influence that had emerged, in large part, from the threat of the Soviet Union, which had just been dissolved.
“If we spy for military security, why shouldn’t we spy for economic security?” These are the words of former CIA director, Stansfield Turner, who in 1992 began transforming the agency that didn’t have a communist Soviet enemy any longer. This transformation consisted of more reliance on the NSA and broadened electronic eavesdropping of not only international government officials, but corporate executives around the world. Many years later, after the Snowden leak, we found out the vast extent to which the American intelligence community could reach due to top-secret projects like Prism.
Enter China. When the Soviet Union fell in December of 1991, China was in the midst of ongoing economic reforms to boost its economy from its Twentieth Century slump brought on by wars, revolutions and famine. These economic reforms consisted of playing more ball with the West and adopting its more-capitalist economic system. With its communist roots from the mid-Twentieth century, China pursued a “dual track” economy, doing new things like privatizing its agricultural industry and health care systems, while keeping much of the banking system state-owned. In former U.S. Treasury Secretary Hank Paulson’s 2015 book Dealing With China, Paulson writes a great deal about the great degree to which the American government and investment banks worked to apply soft touches, along with tremendous capital, to westernize the Chinese financial system. In a nutshell: By opening up China as the country became closer to becoming the largest economy in the world, the United States could only benefit with the right kind of free capital markets in the East. Free capital markets granted the West the right to grow with China, increase economic co-dependence to help prevent possible military conflicts, and increase Western influence.
In turn, the Chinese government has pursued policies of controlling Western influence, both socially and economically. Two popular American platforms you may have heard of, Facebook and Twitter, which certainly helped fuel American-influenced revolutions during the Arab Spring in the early 2010s, are banned there. China has enacted a law recently which requires all online payments in the country to be processed thorough a Chinese state-owned clearinghouse by June, 2018. The clearinghouse also determines which companies can and cannot process electronic payments in its rapidly growing $4 trillion e-payments market. These sorts of policies don’t do much to serve Western interests.
Enter Bitcoin in the late 2000s. Bitcoin’s creator, Satoshi Nakamoto, introduced blockchain to the world as a means of circumventing central authorities to conduct financial transactions. Nakamoto is a clandestine person or group of people whose name doesn’t sound Western but whose writing style and working hours certainly do. While little is known about the creator, there are some with access to intelligence communities, such Russian parliament member Andrei Svintsov, who has stated that Bitcoin and other cryptocurrencies were “ created by US intelligence agencies just to finance terrorism and revolutions.” Conspiracy theories abound. For instance, “Satoshi” (敏), in Japanese Kanji, means “wise” or “intelligent”. While, “Naka” (中) can mean “center”, among other things. Some believe this is a nod to the term “central intelligence”, while others write this notion off as buffoonery. Either way, the creator is well enough off financially that they (or she, or he, or it) have not touched the nearly one million BTC (or $4 billion in today’s prices) in bitcoin which they have owned since the beginning of the project.
The relationship between the Chinese government and Bitcoin, along with its unregulated cryptocurrency brethren, has been a fascinating one. With the fast-rising wealth among the growing middle and upper-middle classes in China, there has arisen frictions around capital flight fuelled by blockchain technology. One of the Beijing’s major initiatives has been in limitations on how much its citizens can transfer and invest abroad, with the view that this will further grow the Chinese economy in a more sustainable way. While most countries took a wait-and-see approach to cryptocurrencies as Bitcoin rose to fame, China banned all bitcoin activities in the early 2010s. These bans were later lifted; however, the Chinese government has regularly worked to stunt the growth of cryptocurrencies in a number of ways. This growth stunting has ranged from abruptly halting crypto-exchange activities across the country earlier this year, to banning blockchain-based initial coin offerings a few weeks ago. As discussed in a previous post, the bans cannot actually block or stop cryptocurrency activity or capital flight, especially as more open-source, self-regulated, anonymous and decentralized platforms emerge for investments and trade, such as Proof’s forthcoming AMP solution.
Enter IBM. IBM has a long-standing history with the Chinese government and the American intelligence community. Additionally, IBM has been the greatest Blue Chip supporter of blockchain, championing the technology and providing solutions to both top Chinese banks and US government agencies. While IBM stays away from cryptocurrency messaging in its marketing, cryptocurrencies can be implemented via smart contracts in its Hyplerledger blockchain solution, and blockchains within their private networks can optionally be connected to other chains by participants to form semi-public chains. One of IBM’s big focuses with its blockchain initiatives is to decrease friction in international trade via its homegrown technology.
One major problem that IBM faces in China is a crisis of faith. This stems from a few areas. One area is IBM’s participation in the U.S. government’s Prism program, which helped American intelligence agency intercept private communications and other kinds of data transfers within the Chinese government and civilian population. This was unveiled in the Snowden leaks. Much of IBM’s technology and services were abandoned after the Prism revelations, leading to IBM share price declines and even lawsuits from its shareholders. Following this bad press, the CIA began to more aggressively invest in other technology providers through its VC firm, In-Q-Tel, to further its capabilities. Furthermore, the CIA stripped systematically important contracts from IBM, awarding them to competitors like Amazon and other firms. IBM sued the CIA over this. A U.S. judge dismissed the case, calling IBM “manipulative” and inferior. Another area that IBM has suffered from comes via its historic willingness to bribe government officials in China to attain contracts. The SEC even had to step in and fined IBM $10m for these scandalous activities in 2011.
The CIA has a long history of planting NOCs (or non-official cover personnel at IBM, among other American corporations operating outside of the U.S., to uncover trade secrets and gain other forms of intelligence for the benefit of American interests. With all of this, the fact remains, as IBM CEO Ginny Rommety stated in a recent interview with Bloomberg: “I think people forget we run the banks of the world, the railroads of the world, the airlines of the world, ya know, it’s 9 out of 10… 10 out of 10.” In that statement, she is referring to IBM’s underlying technology that powers these industries’ processes. IBM certainly maintains a monopoly on the transaction rails of modern finance. As China shifts away from American technology providers and transitions to its homegrown companies, while developing its own protocols for banking and other industries, there is left a void in how the protocol linkage with the rest of the world will evolve. Other voids include boiler-plate policies for sustainable economic growth, with dampening sentiment by Chinese policy makers of American economic practices exasperated by 2008’s mortgage bond debacle that led to the Great Recession and the Federal Reserve’s subsequent, questionable quantitative easing strategies. Beijing, as one of the largest purchasers of U.S. currency and debt, has vocally critiqued American economic policies and the Western-baked theories that guide it. This has occurred more and more, while becoming more pronounced, as China’s economy has widened the gap between itself and Japan as the world’s second largest economy in recent years. Meanwhile, the U.S. isn’t without its own grievances. In 2013, President Obama leveraged some of the closest Sino-American economic dialogue with President Xi Jinping to stress the grave threat to bilateral trade brought on by pervasive Chinese-sponsored cyberattacks. Those talks didn’t go too far. One can only imagine that this might have something to do with U.S. intelligence’s and American companies’, like IBM’s, secretive digital activities aimed at China over the years.
All of this mistrust sets the stage for the next phase of blockchain technology. Blockchain, as Satoshi developed it, is inherently trustless. Its un-gameable nature makes the technology incredibly adequate for financial transactions. This year, blockchain-based initial coin offerings (ICOs), or token sales, funding exceeded the amount of funding from early-stage venture capital groups. Much of the sources of capital and the investors participating in these ICOs are as anonymous as the Bitcoin creator himself, without the need to register an accurate identity to invest in or trade these newly emerging cryptocurrencies. Within a market that today exceeds $140 billion, there is massive capability within the decentralized blockchain space, driven by its vast capital and talent, to usurp historic payment rails through decentralized mechanisms that can stymie today’s concerns of governments around cybersecurity and technological espionage. This is because the vast majority of the successful cryptocurrency projects are open-sourced and lack vested interests of particular governments. Meanwhile, while there exists a clear resolution via blockchain technology to the cyber-espionage issues riddled with closed-source technology and trade secrets, for China, there still exists domestic capital control problems, that are exasperated by the rise of decentralized cryptocurrency. For the West, dealing with a seemingly unstoppable force that frees capital markets is not so much of an issue as it has the potential of propelling modern Western interests and ideals of openness in China.
Whether this was by design or not, both Western interests and China are barreling towards a similar predicament as the CIA faced in 1992: finding their places in a freshly minted order of the world that they created.