by Scott Nelson
From a global monetary perspective, the emergence of cryptocurrency as a functioning measure of value globally will have broad implications for the Bretton Woods system. The past twelve months have proven to be a banner year for blockchain and cryptocurrencies. The technology became a household name and the subject of breathless news coverage. Capital formation through so-called initial coin offerings (ICOs) approached $16 billion, surpassing traditional venture capital. A rogue nation-state created its own cryptocurrency to avoid sanctions, and the price of Bitcoin increased by nearly 1,000 percent to become arguably the largest financial bubble in the history of human civilization.
This Cambrian explosion of activity is an indication that these inventions, though still in their early and frothy stages, hold far-reaching implications for the global financial system and the United States’ standing as a global economic and innovation powerhouse.
On the national security front, the actors that control these technologies will have substantial hard- and soft-power leverage at their disposal in a future where conflicts are waged in cyberspace and through the use of economic technology.
From an international monetary perspective, the emergence of cryptocurrency as a functioning measure of value globally will have broad implications for the Bretton Woods system, where the dollar’s status as primary reserve currency has afforded the United States no shortage of geopolitical leverage. Global financial institutions and organizations such as the International Monetary Fund (IMF), the G20, the Bank of International Settlements (BIS) and the Organization for Economic Cooperation and Development are closely tracking these trends and moving deliberately to understand the consequences.
Competitor nations are also keenly monitoring these developments, eyeing an enhanced role for themselves on the global stage and investing in their own proprietary versions of the technology. China, for instance, is investing billions of dollars into blockchain development and leads the world in blockchain patent filings. Russia has been quite candid in that it sees blockchain as a means of dethroning the United States from its financial and economic pedestal.
What’s definite is that a new digital monetary era is on the horizon; what’s uncertain is what role America will play in this system.
While the United States successfully employed a magic formula of light-touch regulation and targeted government support to spur the growth of the Internet two decades ago, it has taken a less visionary approach this time around. Instead, misconceptions, misunderstandings and a lack of regulatory clarity and applicability are inadvertently stifling innovation and forcing homegrown entrepreneurs to go elsewhere to build and test their products. These mistakes could result in the United States effectively ceding leadership in this area to other nations.
To date, the United States’ official stance toward blockchain and cryptocurrencies has largely centered on money laundering concerns, even though documented Bitcoin usage by bad actors—while a threat—is actually quite rare. In January 2018, the Foundation for Defense of Democracies found that just 0.61 percent of all transactions on the Bitcoin blockchain from 2013 to 2016 originated from an illicit entity. These concerns also frequently overlook the fact that blockchains are not inherently anonymous and can be programmed with Anti-Money Laundering (AML) and Know Your Customer provisions baked in, something that many good actors are actively trying to do.
The application of Industrial Era–regulatory taxonomy to new blockchain-fueled capital formation methods has also been a recurring theme. This reached a fever pitch in June when a Securities and Exchange Commission official remarked that ether, the native cryptocurrency of the Ethereum blockchain, is not a security in its current state—but didn’t offer concrete guide rails to similar projects looking to follow suit.
Such comments have obfuscated the role that crypto-tokens will soon play in economic activity and the true potential these systems offer—particularly in conjunction with other emerging technologies like artificial intelligence, the Internet of Things and robotic process automation. They also take for granted the question of the United States’ status as a leader in innovation, and fail to consider the steps it must take to spearhead the next technological revolution in the same way it led the last one.
At the crux of the problem is a regulatory logjam that applies yesterday’s rules to tomorrow’s economy. Numerous federal agencies have asserted jurisdiction over cryptocurrencies and issued confusing and even contradictory regulatory guidance, bogging innovators down with compliance costs and legal risk. States individually have their own diverse rules and regulations governing securities and money service businesses, complicating matters even further.
Such labyrinthine and non-malleable structures are a liability in a rapidly evolving state of play. In a 2016 essay about the onsetting Fourth Industrial Revolution, Klaus Schwab, founder and executive chairman of the World Economic Forum, argued that the ability of governmental systems to be nimble and adapt in the face of new technologies that redistribute and decentralize power will ultimately determine their survival.
As it currently stands, the United States is playing from behind in this emerging Distributed Era—in which business models and governance structures will be global, decentralized and mediated by technologies such as blockchains. There will be far-reaching implications if it is unable to regain a leadership position, as both technological and financial hegemony are at play this time around. Jobs, talent, capital formation and economic opportunity could be lost in the short term; technological dominance in the medium term; and a hastened phasing out of the dollar’s status as the global reserve currency in the long term. This development that would have unpredictable effects on both the United States and global economies.
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