The crypto community is once again reeling from a Chinese crackdown and trying to read the tea leaves on Beijing's next move.
China's policymaking is far from transparent, so one can only speculate how long the new restrictions on bitcoin exchanges and token sales might last.
Still, if we view China's actions in the context of its broader geopolitical intentions, we can at least gain a useful picture of what's at stake and the longer-term challenges and opportunities they create for the cryptocurrency and blockchain industry.
Consider the following:
The People's Bank of China appears to be closer to issuing a digital fiat currency than pretty much any other central bank on the planet. It has launched its own digital currency research institute with a director who openly talks about its design possibilities with publications such as CoinDesk.
China's desire to end the U.S. dollar's global dominance has grown more strident, as with other members of the BRICS (Brazil-Russia-India-China-South Africa) international group. Russian President Putin, speaking after the BRICS gathering in the Chinese city of Xiamen this month, said the group would work together "to overcome the excessive domination of the limited number of reserve currencies."
Quite apart from its wariness toward bitcoin, China is committed to distributed ledger technology. A variety of high-level consortia have been formed by government and business institutions to develop and implement DLT. China's own IT Ministry is backing a new blockchain lab, announced just days after the crackdown on bitcoin trading.
With its "Belt and Road Initiative," estimated to entail investments of $900 billion across land and sea routes encompassing 65 different countries, China is spearheading the world's most comprehensive international trade and infrastructure development plan, a Marshall Plan-like model for projecting economic and political influence overseas.
Cutting the (U.S.) middleman
In short, it's clear the Chinese government wants to foster international trade under its own terms and end the financial, economic and political hegemony of the U.S.
With President Donald Trump embracing "America First" protectionism and a disdain for diplomacy that angers U.S. allies, Beijing sees an opportunity to seize the mantle of global leadership. (Whether it can or not is a question we'll address later.)
Given its investments in this space, it seems clear that Chinese authorities see blockchain technology as a potentially useful, disintermediating tool for advancing its regional interests, especially in trade. Much work is being done, for example, to incorporate smart contacts, tokens and other aspects of blockchain technology into supply-chain management systems that enhance information-sharing and efficiency.
This month's launch of the Hong Kong-based Belt and Road Blockchain Consortium offers an international framework for tying the technology to China's larger ambitions.
High-tech Chinese-backed upgrades to supply-chain logistics will only make those blockchain solutions more viable. One such upgrade, announced at the Xiamen summit, is the BRICS "E-Port network," which the group described as "an integrated electronic platform to process and monitor cross-border movement of merchandise and transportation vessels at a port level."
More aggressively, China could use this technology to directly go after U.S. interests and the dominance of the dollar. We know that China and Russia are already collaborating on blockchain-based securities settlement.
It's not a stretch to imagine these two powers exploring blockchain solutions – perhaps a combination of smart contracts and multi-signature escrow accounts – that would let their respective importers and exporters settle trade debts with direct cross-currency swaps.
This could end the dollar's role as the intermediating currency when exporters or importers wish to protect themselves from adverse moves in their local currencies. It would cut out Wall Street's middleman correspondent banks, slash transaction costs and undermine a triangulating system that has given the U.S. great influence on trade.
It's far from the only reason China and Russia are exploring a digital currency, but it's fair to say that fiat digital currencies would make bilateral swap solutions far more viable.
For the U.S., the fallout could be intense.
If Chinese and Russian businesses no longer needed to make trade payments in dollars, their governments might not have to hold greenbacks as a reserve currency, either. Meanwhile, if this disintermediated trade solution worked, most other countries would surely follow it.
Americans cannot afford to be complacent about the dominance of the dollar and the advantages – lower interest rates, for starters – that has afforded them over the past 70 years.
China's challenge
So, does this mean China will ascend to dominant superpower status? Not necessarily.
The main reason to bet against such an outcome is that China's current, closed economic system limits its capacity to innovate. Chinese companies are excellent at copying others' ideas, but in general, they aren't great inventors (with the exception of cutting-edge advances in solar technology and payments).
Closed, planned economies don't encourage open innovation; you can't order creativity into existence through government diktat.
This is where China's moves against ICOs and bitcoin could backfire. Both phenomena are part of an emerging global system of permissionless innovation – an anything-goes, chaotic soup of ideas. In that system, developers can monetize new decentralized applications and profit from collaboration rather than rely on restrictive, litigated intellectual property protection.
It's understandable that China's central planners are unnerved by this seemingly anarchic world of crowdfunded ideas, one over which they have no control. It's also why most China-based blockchain research is likely focused on permissioned ledgers over which the government can exert control.
Yet, by curtailing the power of unfettered, open-source innovation, China is cutting itself off from the new ideas and dynamic solutions that it needs to stay ahead of the West.
The Communist Party's survival depends, paradoxically, on relentless, continued economic growth on the one hand and control of information, money flows and ideas on the other. But you can't achieve the former if you're practicing the latter. Ultimately, China will be powerless to compete against bitcoin and its successors, since they directly enable a decentralized, censorship-resistant system of exchange that levels the playing field and fosters a global, self-perpetuating pool of unbeatable innovation.
Given the current policy priorities of the Trump administration, the U.S. won't likely be the winner in this. But neither will China if it continues on its present course.
The age of cryptocurrency will deliver the spoils to countries, businesses and individuals that operate within a system of open access, property rights and free trade – the principles upon which U.S. hegemony was originally built.