In prior blog posts, I have highlighted the speed at which targets of US economic sanctions have been able to create (albeit to date an imperfect) insular economic infrastructure. Specifically, the Donbass Decentralized Autonomous Organization created with the specific goal of pulling out of economic isolation the Eastern region of Ukraine, occupied by Russian loyalists. (McCalmont Economic Sanctions). This was attempted in 2016 and did not succeed. That said, blockchain (distributed ledger) technology was relatively new and as the technology matures, could be a very credible relief option for regions targeted by economic sanctions. This post will focus on the larger crypto/blockchain play, specifically as it relates to China’s Belt and Road Initiative (BRI). A program designed to expand Chinese economic, social, and (potentially) military influence far beyond China’s sovereign borders. I will argue in this post that one of the primary success drivers behind this initiative is blockchain technology and specifically, cryptocurrencies.
The idea for this post grew out of a Thomson Reuters Webinar (Thomson Reuters Sanctions Webinar) I was involved in producing a few months ago. The topic was economic sanctions and a question came in asking if I thought the US should impose economic sanctions on China in response to their BRI. I was somewhat taken back by this question and pointed out that China was doing what it thought was best for its own population. I responded to the question by saying “who is the US to force a change in behavior as a result of a sovereign country operating in the best (legal) interest of its citizenry.” Significant portions of the geographic areas that will be impacted most by the BRI are regions in the US that have historically lacked significant interests. That said, as I began to consider the far-reaching implications, concerns began to surface. This post took on new urgency for me in light of the decision made last week by the current US administration to impose sanctions on entities within Hong Kong and Mainland China as a result of China’s crackdown on pro-democracy events taking place in Hong Kong.
A little bit of background surrounding the BRI. The BRI, also known as the New Silk Road will have extensive maritime routes in addition to 65 countries receiving significant infrastructure overhauls. One of those countries borders China to the West, Kazakhstan. Khorgos is a border town that exists within the Xinjiang Uyghur Autonomous Region of China as well as Kazakhstan. This area stands to benefit tremendously if China’s plan fully matures. Visa’s for the Chinese to visit the Kazak side are not required, and vice versa. Kazak officials plan to turn Khorgos into the “next Dubai.”
The Indian Ocean is a very strategic location to be potentially used by the Chinese Military. Chinese companies and state-owned enterprises have entered into agreements with over 30 countries in relation to their ports. One of those countries is Sri Lanka off the coast of southeast India. For purposes of the BRI those agreements cover commercial trade, but as mentioned above, the potential exists for military operations to also take place in those locations. In response to damage from the 2004 tsunami, Sri Lanka reached out to China for help in funding a new commercial port in the fishing village of Hambantota. China responded with an investment of $1.5 billion. As a result of Sri Lanka’s inability to pay off the debt, they offered the Chinese a 99-year lease to the port, directly across the Laccadive Sea from China’s arch-enemy India. This is an example of the String of Pearl's theory that posits China is intentionally using this economic tactic to acquire shipping ports throughout South Asia and Africa. Similar projects are underway in Pakistan and many other developing economies.
Why did I spend the first portion of this post detailing physical infrastructure developments initiated by China? Theoretically, nothing new here as nation-states throughout history have used manipulative debt tactics to make other sovereign nations subservient. The difference this time around is the fact that these “areas under Chinese influence” will be “supercharged” by China’s utilization of blockchain technology and specifically, cryptographic currencies.
Role of blockchain technology
In 2014, the Eurasian Economic Union was established by countries that will play a key role in China’s BRI (Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan). Russia is orchestrating a multinational digital currency initiative that could easily fold into the coming digital currency “anointed” by China for the purpose of trade within the overall BRI. A memorandum of understanding signed in March 2020, stands at 138 countries throughout Sub-Saharan Africa, North Africa, Europe, Central Asia, East Asia, South Asia, Latin America, the Caribbean, and the Middle East. Here we see the maturing of attempts similar to earlier initiatives (such as Eastern Ukraine mentioned above) to create an insular self-sufficient parallel economy.
Enter the Digital Currency Electronic Payment (DCEP). The DCEP is the digital version of the Chinese Renminbi issued by the People’s Bank of China. This new digital currency (to be clear is a cryptographic currency but is not decentralized), will be the common currency that extends to all of the BRI member countries. The financial infrastructure is already in place thanks to mobile and online payment platforms such as Alipay and WeChat. The DCEP will require an electronic wallet but will not need to be linked to a bank account. Commercial banks will issue the digital wallets. One of the primary differences between the DCEP and decentralized cryptographic currencies such as bitcoin is the People’s Central Bank’s ability to view in detail the spending habits of all of those who hold DCEP. Pseudo-anonymity (such as that capability within the Bitcoin Blockchain) will not be an option. The US Dollar (USD) is the world’s dominant currency primarily due to the strength of the US economy and is therefore the basis of settlement throughout most of the world. The DCEP combined with the BRI will provide a major challenge to the USD in its effort to maintain global dominance.
The dominance of the USD has also made it possible for the US and Allied Nations to use economic sanctions when attempting to force a change in the behavior in a sovereign nation, corporate entity or individual (as displayed by the US Administration last week in action taken against China). To put all of this in perspective, these actions represent the physical international expansion of China through the BRI in conjunction with the creation of a frictionless non-legacy financial infrastructure. This facilitates a fully functional (enhanced) economic commerce completely independent of USD-backed entities and influence. China will soon maintain a powerful and insular global (parallel) economy to challenge all things US.
In addition to the DCEP, China will be leading the way with overall blockchain technology applications. The Chinese Government has created a Blockchain-based Service Network (BSN). The idea is to integrate six public blockchains (Tezos, NEO, Nervos, EOS, IRISnet, Ethereum). This will enable developers to build decentralized applications that fully exploit data storage and bandwidth provided by the BSN. This effort to consolidate multiple blockchains through a single Chinese-based platform flies in the face of Satoshi Nakamoto’s initial goal of the bitcoin blockchain, that of a completely decentralized ecosystem. This seems like another attempt to consolidate control of an extraordinarily powerful tool on the part of China.
With ever-growing tensions between China and Western-allied powers (specifically the US and UK), at a time when sanctions will be much less of a strategic option (due to the insular economic nature of the BRI), political strategists countering moves made by China need to decide how to implement alternative tools when disagreements of a geopolitical nature arise. These disagreements seem to be coming at a rapid rate recently with not only the pro-democracy crackdown in Hong Kong but the humanitarian crisis involving the Uyghur minority in China’s West. Also, in the decision on the part of the US and UK to terminate their relationship with Huawei in the implementation of 5G technology in those two countries.
I want to make it noticeably clear, I am not anti-China or anti-BRI, as I said before, I cannot fault a country for making a better life for their citizenry or improving the economy within developing nations. That said, I am afraid the lack of understanding of blockchain technology’s true power by countries “checking” China’s activities on the global stage could become a liability. The Chinese plan to implement the technology within their spheres of influence in addition to the creation of their own parallel economy based upon the DCEP will eliminate a step (economic sanctions) that protects all of us from full-blown military confrontation. To quote the great Lithuanian political writer Emma Goldman, “the most violent element in society is ignorance.” The time is now to view geopolitics through the lens of blockchain technology.