By Paul Vigna
THE NOT-TOO-DISTANT FUTURE -- The National Security Council
holds an emergency meeting. North Korea has launched a missile,
capable of carrying a nuclear warhead within range of U.S. forces
in Guam. At this rate, North Korea could land a nuke on the U.S.
mainland in less than a year.
The shocking advance in capability despite heavy trade sanctions
is due to a stream of money that the U.S. and its allies cannot
monitor -- a cryptocurrency. But it's not one of the risky ones
celebrated by overnight millionaires and largely avoided by serious
investors, it's a new one, with the stamp of legitimacy: the
digital yuan.
The scenario above is fiction, but it isn't fantasy. If China
digitizes its currency, as it plans to do, and the North Koreans
use it to finance their missile program, it's a flow of money that
circumvents U.S. sanctions. That would force the U.S. to grapple
with its own now-antiquated currency. If the U.S. follows suit,
digitizing the dollar in order to maintain its global economic
dominance, it would also find itself in possession of a potentially
powerful surveillance tool.
While bitcoin, the first successful cryptocurrency, was created
to maintain anonymity in transactions, future digital currencies
will be the opposite of anonymous.
And just as every transaction involving a digital yuan would be
trackable by China, every digital dollar changing hands would be
visible to the U.S., its issuing government. Banks might still
manage the flow of money, but they will no longer be the
record-keepers they once were.
"The fundamental nature of money is really changing," said Neha
Narula, the director of MIT Media Lab's Digital Currency
Initiative.
Dr. Narula played the president's "cyber czar" in an enactment
of the hypothetical North Korea scenario staged last month at
Harvard's Kennedy School. "Digital Currency Wars" also featured
former Treasury Secretary Lawrence Summers as well as Ash Carter
and Gary Gensler, all of whom have served in presidential
administrations. (The presentation can be seen in its entirety
here.)
We are moving rapidly into a new monetary era. Countries and
companies are looking at digital money as the new standard for
their monetary systems and a replacement for actual cash.
Some of the benefits include faster, cheaper payments, a greater
ability to root out money launderers, and a more open, inclusive
financial system. Digital money is also going to provide new
abilities to law enforcement and governments that will almost
certainly open up another front in the fight over privacy.
"Privacy is one of the defining problems of our times," said
Emin Gün Sirer, chief executive of blockchain-based startup Ava
Labs and a professor of computer science at Cornell University, and
it will be with money, too. In practice, he said, it's almost
impossible to create a form of digital money that doesn't identify
its users.
What we think of as "money" is actually an extraordinarily
complex network of thousands of commercial banks and central banks.
The system works, but is costly and relatively inefficient because
everybody is working off their own balance sheets. Digital money
would create a system where everybody using a particular currency
is working off the same balance sheet.
The idea of bitcoin, unveiled 11 years ago, was to compress the
cumbersome functions of the modern financial system to enable money
to move anywhere around the world, in minutes, for virtually no
cost. If you've ever tried to send even $10 across a border, you
can appreciate the allure in this.
But bitcoin was just Act One. Act Two began this summer, when
Facebook uncovered its proposed cryptocurrency, libra. This wasn't
some loose confederation of cypherpunks and antibankers. Suddenly,
one of the world's biggest, most powerful (and most controversial)
companies was saying it was going to make money.
A flurry of action followed. The U.S. Congress convened hearings
and wrote bills to stop libra from launching. Regulators leaned on
some of its original supporters to back out. The Bank of England's
Mark Carney suggested an international cryptocurrency should
replace the dollar as the world's new reserve currency. The Chinese
went further. They took their own efforts into overdrive, and are
widely expected to launch a digital version of the yuan in the
coming months.
"This is more than just Venmo, more than just PayPal," said
Aditi Kumar, executive director of Harvard's Belfer Center for
Science and International Affairs, and playwright of "Digital
Currency Wars." "This is an entirely new way for countries to
operate in the world," she added. "It will make one or two actors
all-powerful in the monetary system."
The digital yuan China is planning is in fact a complete
inversion of the bitcoin model. All of the data created would be
centrally housed and become part of China's surveillance state.
Money has always been a powerful, blunt instrument. It's an
imposition not just of will, but of values. After World War II, the
dollar became the foundation of the international monetary system.
That gave the U.S. government a special tool. The U.S. has used its
control over the dollar-based finance system to impose sanctions
such as the ones on North Korea.
As the U.S. share of the global economy shrinks and that of
countries like China and India expand, countries are actively
seeking alternatives to the dollar.
In the fictional North Korea missile crisis, China would be
tacitly allowing the financing of Pyongyang's nuclear program to go
through, because the government would be able to see where each
digital yuan goes. That's an extreme, and entirely hypothetical,
scenario, of course, but it's an example of the leverage China
would have over every transaction on its system. The only question
is how heavy-handed the Chinese would be in using it.
While the Chinese model might be the far end of the spectrum,
cryptocurrency has been moving in that direction. While bitcoin was
designed to mimic the anonymity of cash in a digital setting, all
its transactions are public, and therefore trackable. And
Facebook's libra would log transaction data, while recording user
identities in a separate database. A central concern in Congress is
what Facebook would do with that information.
Say the Federal Reserve digitized the U.S. currency. It could
track how every dollar in circulation is spent. That might give it
a great advantage in trying to figure out how the economy is
growing, and where stimulus efforts would best be directed. But say
people in government wanted to lock down some group or activity.
They could do that, too. The role of banks would likely change
considerably as well, though whether they gain or lose with a
digital dollar would depend on how the government issued it.
Whether the U.S. will feel pressure to shift to digital still
isn't clear. There are proponents and opponents of cryptocurrencies
in Congress. The Fed has examined the idea of creating a digital
dollar, but that's all it's done.
At Harvard, Mr. Summers and his fellow stage actors spent some
time debating this point. Some felt the U.S. should get in the
game, others believed all they needed to do was make improvements
to the existing system.
People need to start thinking about this now, Harvard's Ms.
Kumar said. China's digital yuan will be a real-world proof of
concept. The West will need to respond in some way. "Are we
prepared for that?" she said. "Not just technically, but legally?
Can we protect privacy in this new world?"
Write to Paul Vigna at paul.vigna@wsj.com
(END) Dow Jones Newswires
December 07, 2019 00:14 ET (05:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.