Why Blockchain Innovation Matters: US vs China

With the Chinese government set to launch a digital yuan to challenge American global financial hegemony, China is outpacing the United States in blockchain innovation. Indeed, the United States has demonstrated regulatory ambiguity and material incompetence toward blockchain and cryptocurrencies as a whole. The next financial hegemon must be the leader in the new digital currency space. Dollar hegemony has provided an unprecedented level of political and economic prosperity for the American state and consumers. The stakes of blockchain innovation could not be higher.  

A non-market-oriented country outpacing a capitalist nation in innovation may go against conventional logic. János Kornai’s innovation model in “Innovation and Dynamism: Interaction between Systems and Technical Progress” outlines how different political systems tend to foster innovation. Kornai states that capitalist countries outpace their socialist counterparts in producing revolutionary inventions due to structural features that spur competition. However, there is an exception to this rule: Innovation can occur in a socialist state when it falls under the narrow scope of centralization, bureaucratic commands and a permissioned framework.  For example, in the Chinese context, blockchain has been identified as a key national interest in tightening domestic control and increasing regional and global influence. President Xi announced the creation of a “Blockchain+” national strategy and hailed it as “a core technological breakthrough,” thus prompting national action toward blockchain-related innovation.

Evaluating the number of blockchain patent applications, China’s patent office significantly outperforms its American counterpart in patent quantity. Alibaba comprehensively leads the list of patent applications as 49 out of the top 100 companies in absolute patent applications were Chinese, while only 23 were American. Subsequently, Alibaba’s success in blockchain and its founder’s connection to the Chinese state cannot be ignored. Jack Ma, the founder of Alibaba and the richest man in China, was recently outed as a member of the Chinese Communist Party. The Chinese state has an efficient blockchain developer in Alibaba and Ma. Tencent, a large Chinese firm that owns WeChat, holds the second most patent applications. Tencent’s relationship with the Chinese government is unambiguous: It cooperates and proactively implements policies that benefit the State. Researchers find that Tencent’s foreign and domestic influence has managed to extend beyond the global reach of China's surveillance and censorship methods. Experts claim that WeChat’s collaboration with the Chinese government surpasses the efficiency and scope of tactics utilized by American intelligence agencies, like the National Security Agency. As such, there is strong evidence to suggest that Tencent will comply, participate, and collaborate with the Chinese state in any digital currency initiative. Between Alibaba, Tencent, and others, the Chinese government has no shortage of avenues to exercise blockchain policies in the name of national security.

Economic literature from Cheryl Xiaoning Long and other researchers contest the quality of Chinese patents. By observing the number of Chinese patent applications in the United States and the number of American patents in China, we may judge the quality of a patent provided by a given company. Surprisingly, Chinese companies trounce the United States in patents throughout each other’s countries, with Alibaba leading. In utilizing this methodology, we can reject the notion that Chinese blockchain patent applications are inferior in quality to American patents.

Kornai’s innovation framework suggests that blockchain is a predefined state interest for the Chinese. The country already uses a social credit score to rate its citizens. With the People’s Bank of China set to issue a Central Bank Digital Currency leveraging blockchain, a digital currency combined with China’s social score and a WeChat app type will give an unprecedented level of transaction data to the state. Essentially, a digital Chinese currency provides the State with an even tighter grip on domestic economic transactions, ultimately allocating more federal control in the social and political sphere as well.

 Harvard Kennedy School recently hosted a crisis simulation that maps out American national security risks of a Chinese digital currency. The simulation, in the year 2021, presents a scenario in which a digital yuan has upended the global financial system. In this timeline, the digital yuan dominates the Chinese domestic payments space. Additionally, it increases the influence of the Chinese Belt and Road Initiative and is rapidly adopted across South East Asia. This serves as a catalyst for dethroning the dollar as the global reserve currency. Most notably, the digital yuan allows China’s ally, North Korea, to better finance and thereby accelerate its nuclear operations, increasing Chinese geopolitical clout and checking the United States’ influence in Asia. 

The next global financial hegemon will be the nation that successfully develops a digital currency. China is currently outperforming the United States in blockchain development as the technology falls under the narrow purview of Chinese national security. Coronavirus-induced economic conditions and general global volatility has sparked dislocation; such chaos provides a unique opportunity for the United States to improve its financial system. For example, Congress is discussing deploying a digital dollar and digital wallet framework to implement future stimulus payments. Ultimately, the United States should capitalize on this prospect and develop public-private partnerships to create a digital currency that combats the digital yuan.

Note: This post was summary of the project, Blockchain Innovation: America and China