Cryptopolitics can protect the dominance of the dollar

If the United States is to maintain its economic and political leadership in the 21st century, one thing it cannot do is lose control of the international arena.

That was the overarching message that came out of a Sept. 20 House Financial Services Committee hearing on the national security implications of the growing use of alternative payment systems.

Rep. Josh Gottheimer (DN.J.), Chairman of the Subcommittee on National Security, International Development, and Monetary Policy, called payment systems the “lifeblood of the financial sector,” warned that “allies and adversaries are taking critical steps to -dollarize their economies, develop new methods to facilitating cross-border money transfers and controlling the plumbing of global finance.”

As a result, he added, “In the years ahead, global leadership in the 21st century will be determined in part by the oversight and influence of the payments sector.”

The hearing was dominated by the discussion of central bank digital currencies (CBDCs) – particularly China’s e-CNY, or digital yuan, and the US digital dollar – and cryptocurrencies.

APE is growing

But it’s a mistake to think of these as the only alternative payment ecosystems (APEs), said Scott Dueweke, a fellow focused on the issue at the Wilson Center, a quasi-government think tank.

Along with well-known systems such as PayPal and Western Union, there are Russia-favored alternatives such as WebMoney and Perfect Money, China’s WeChat Pay and AliPay plus $45 trillion, mobile payment systems, payment systems and stored value card systems.

“Focusing only on cryptocurrency risks misunderstanding this global thriving ecosystem,” Dueweke said. “I define this as an ecosystem because they are all connected through hundreds of virtual currency exchanges, converting one alternative payment system for another and another, or to and from fiat,” often with anonymity, or poorly to non-existent know your customer (KYC) security measures.

APEs have “exploded in popularity and viability, becoming woven into the global social fabric… [providing] a growing and capable set of interconnected non-bank financing channels that may or may not touch the traditional financial system, Dueweke said.

The bank-centric financial system is seeing the ground shift beneath it, he added, “as Chinese and Russian new payment systems bypass SWIFT and other Western-dominated financial backbones [that are] no longer the domain of FinTech startups nor just limited to cryptocurrencies,” allowing nation-states to play “the big game on this new terrain.”

Related: House bill would ban algorithmic stablecoins for 2 years

The central question

Even so, Dueweke still called CBDCs the biggest threat to America’s financial power.

“If China, alone or with [Brazil, Russia and India]are able to combine their non-crypto virtual currencies with a viable CBDC,” he told the subcommittee, it will soon “be a real economic and national security issue beyond your ability to regulate.”

For the United States, progress on a CBDC is “particularly important” because it is where China can “undermine the dominance of the dollar,” said Carla Norrlöf, a senior fellow at the Atlantic Council who studies the role of economics in geopolitics.

At the same time, she added, that doesn’t mean the U.S. needs a digital dollar at this point, since China isn’t yet in a position to compete.

“However, for the Chinese, having a central bank digital currency is pretty crucial to get anywhere near where the US is today,” Norrlöf said.

Part of the solution

Far from being part of the problem, cryptocurrencies can be part of the solution, Jonathan Levin, co-founder of blockchain computing firm Chainalysis, told the hearing.

Levin said China has made “enormous progress” in this arena over the past 15 years and is now moving to export these domestic payment systems through investments in foreign FinTech firms and its upcoming CBDC, arguing that “cryptocurrencies actually mark the first the innovation that is consistent with American values ​​and poses a real competitive threat to China’s financial innovation strategy and their attempt to own the financial rails for the 21st century.”

While bitcoin and its successors are considered anonymous, they are more accurately pseudonymous, with each transaction immutably recorded on a publicly accessible blockchain.

See also: DOJ seeks to double prison time for money transfer crimes

Levin said that in many cases it is easier to investigate “illegal use of cryptocurrencies than other traditional means of payment or some of the alternative payment systems,” pointing to the firm’s recent assistance in a government investigation that seized $30 million worth of stolen cryptocurrency from North Korean hackers.

“The same characteristics that make blockchain such a force for good – permissionless, decentralized, cross-border value transfer at the speed of the internet – also make it attractive to illegal actors looking to move funds quickly across national borders,” added Ari Redbord, a former prosecutor and head of legal and government affairs at TRM Labs, a blockchain intelligence firm.

“But the reality is that we’ve never had more visibility into financial flows,” he said. “In many cases, it is actually easier to investigate cases involving the illegal use of cryptocurrencies than other traditional means of payment or some of the alternative payment systems we are talking about.”

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