Issues & Insights

The U.S. Risks Losing Out to China on Cryptocurrencies

The rollercoaster trade negotiations conducted with China over the last few months coupled with mounting concerns over emerging technologies have underscored the looming presence the Asian superpower plays on the global stage of international relations and in the development of new technology. 

Let’s hope President Donald Trump gets America the better deal he promised. And let’s hope he hangs tough on the critical issue of telecommunications. The tensions between the U.S. and China over trade have escalated and, because of the race to 5G and the role played by Huawei, the Asian telecom conglomerate closely tied to the Chinese military and security services, things will get worse before they get better. 

The deployment of Huawei’s equipment, as the British recently discovered to their great misfortune, invites the possibility of serious breaches in the security of critical systems. The president was right to take decisive action to prevent it from occurring here and American lawmakers should follow up with additional consumer protections as the fate of entire industries are at stake. 

That’s not the only issue. One that’s just as serious, even if it hasn’t captured the public’s attention yet, involves the future of cryptocurrencies. From rapidly enhancing the speed and security of financial transactions to lowering barriers of entry for historically unbanked communities, the growth of the digital asset market is a distinctly American brand of progress. 

At least that’s the way it’s been since the concept took root. But China is making steady advancements of its own toward building a crypto ecosystem. In the same way that Huawei staked out for itself a defining role in the buildout of next-generation telecommunications, Chinese companies could come to control the development of cryptocurrencies. 

This would be an unwelcome development, should it come to pass. Regrettably, the U.S. has thus far failed to develop a regulatory framework to guide the development of cryptocurrencies and nurture their best aspects. Until it does, America will continue to trail the Chinese as Beijing and Shanghai become the dominant hubs of activity when it should be New York and Silicon Valley.

By most accounts, China has put intense focus on cryptocurrencies and the broader development of blockchain applications. As a recent Knowledge@Wharton post points out, this has manifested itself across many fronts, including China’s having filed the most patents related to blockchain of any nation in the world.

The Chinese State Council included blockchain development in its 13th Five-Year Plan. President Xi Jinping has stated he aims to have his country lead in innovation worldwide, citing blockchain among other goals. Other signposts present a patchwork of decisions, rules, and approaches to cryptocurrencies, which continue to occupy a gray legal area. 

Earlier this month, it was announced that owning bitcoin in China is legal – but trading cryptocurrencies is not. And Chinese mobile messaging giant WeChat recently banned merchants on the platform from engaging in cryptocurrency trading. That, however, has not stopped rampant speculation among investors. 

One of the largest commercial crypto banks in Beijing has reported a significant increase in recent weeks in speculative borrowing, almost doubling its volume of loans in the last eight weeks alone. That increase serves as a timely reminder of large crypto holders in China and their ability to attack the system at large. The U.S., meanwhile, has a haphazard ecosystem of its own to reckon with. 

American regulatory agencies such as the Securities and Exchange Commission and Commodity Futures Trading Commission have yet to issue any overarching framework that clarifies how cryptocurrencies are classified by the federal government. Entrepreneurs developing new applications in the space face enormous uncertainty as to which regulator might have authority over their technology or what the path toward market adoption might look like.

Cryptocurrencies hold so much potential. Unforeseen applications continue to emerge each day. America cannot yield a competitive edge to China and allow them to define the future of this space. If we do, we may be confronted with a similar situation as we see right now with Huawei and 5G, in which a Chinese company is exerting immense influence over entire industries and even governments.  

While it’s anyone’s guess as to how the trade wars and Huawei tensions will turn out, we can still do our part to protect American consumers and innovation. In order to ensure that the U.S. remains at the forefront of cryptocurrency development, lawmakers must clearly define a regulatory space in which these companies can thrive.

Peter Roff is a senior fellow at Frontiers of Freedom and a former U.S. News and World Report contributing editor who appears regularly as a commentator on the One America News network.

He can be reached by email at Follow him on Twitter @PeterRoff.

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