The Growing Threat of China in our Digital Economy

U.S. Leadership in Digital Technology Now at Risk, Says New Hoover Institution Report

You all know about our Federal Reserve and our U.S. Treasury - they produce money in paper format. There isn't anything we do that is done on paper anymore. We live in a digital world. The question becomes, should we go to digital money? This is a huge debate, a big conversation. And now there is a massive 227 page report issued by the Hoover Institution. The foreword of the report was written by Condoleezza Rice, and she wrote the following.

“China has the world's second largest economy, a large and increasingly sophisticated military and the most pervasive system of domestic surveillance. It's the world's largest exporter, the second largest importer and the biggest provider of infrastructure development and digital commerce. China has become the leader. And building on that success, China has developed a central bank digital currency. It poses stark challenges for the United States and the world, a staggering enhancement of authoritarian control. China's first mover advantage consolidates its lead in online payment. Technology will elevate authoritarian norms and undermine principles of transparency, accountability and human rights.

It even threatens the dominance of the dollar as the world's reserve currency. Us authorities should move energetically to develop a US bank digital currency, a CBDC key technology and standards to counter this growing Chinese influence. In short, for the executive branch, the Federal Reserve, Congress and the American people, this is an urgent task. Now is the time to accelerate research, development, planning and preparation to ensure US global leadership and competitiveness in digital financial technology with an all of government and an all of society approach.”

Wow. That was the foreword from Condoleezza Rice of a new report on digital currency published by the Hoover Institution. And I'm reading this to you because it's profound and you need to be aware of what's coming. There are tremendous investment opportunities that I don't want you to miss and vital policy implications for our country.

The report's executive summary says the following:

“More than 90 central banks are researching, piloting or deploying CBDCs, central bank digital currencies. Several are already testing cross-border transactions. China is the first major country to deploy a CBDC widely within its economy, and its central bank is dominant in a cross-border payments development project. China's emergence as a source of geoeconomic and strategic influence. China's government asserts that its CBDC will yield greater efficiencies within China's domestic payment systems, enable more Chinese people to access the banking system, and allow for greater government oversight and control of business and individual financial transactions.

However, the People's Republic of China views digital currency as one of several areas where it can exert a leadership role in setting global norms and rules around both digital policy and technical standards. To this end, China's central bank, the People's Bank of China, has already begun to propose international principles for cross-border digital currency transactions, while Chinese officials present a benign view of their engagement with digital currency on the global stage.

Some Chinese analysts emphasize rivalry with other powers, describing digital currencies as ‘a new battlefield for competition’ in which China can win through its first mover advantage. The US administration and the Federal Reserve have yet to put forward their own visions for the integration of digital currencies into global payment systems, and they've not yet set norms governing the use of public and private digital currencies domestically or internationally. For the United States to remain competitive and a leader in global finance and financial technologies and to ensure the continued strategic influence of the US dollar, Washington should adopt a far more proactive strategy.”

That was the executive summary of a new report on digital currency by the Hoover Institution. I'm reading this to you because it's showing us the future. If our government blows it, we risk losing our position as the world's number one economic leader.

China’s Fintech Threat

The report's major findings are the following: “China is the global leader in fintech innovation and adoption, building on technological advances that largely originated in the United States. Alipay and WeChat pay are the most dynamic and successful fintech payment services in the world. China's CBDC harnesses this technological dynamism for a set of government directive objectives that include supporting China's transition away from paper money, providing more efficient payment services both commercial and governmental, including social welfare programs, expanding access to payment systems through the ability to make offline CBDC payments in areas without cellular or internet services and reducing corruption.

The Chinese digital currency also enables the People's Bank of China to respond more quickly to changes in macroeconomic conditions, with adjustments to its monetary policy, including more flexible and targeted forms of liquidity. Accordingly, China's central bank digital currency has the potential to save China more than $24 billion a year in costs associated with producing and distributing physical money. China's digital currency also increases Beijing's ability to enforce political control over Chinese society.

The Rise of Big Brother and the Demise of Personal Freedoms in China

It'll provide state-owned banks with a more direct window into personal financial transactions, letting the People's Bank of China directly trace money flows via bank accounts, ID cards and phone numbers. Transactions can be tracked, accounts frozen, balances adjusted. With this power, the Chinese digital currency could become an important tool for punishing Chinese citizens for their social or political activism or criticism of the government could also be linked to other programs like the social credit system that aim to reward or punish Chinese citizens, as well as Chinese and multinational corporations for their adherence to or defiance of government regulations and Chinese Communist Party norms of behavior. 

But the international implications are significant given China's heft in global trade and investment. Its digital currency may become a currency of choice for transactions between a significant number of foreign governments and businesses and their Chinese counterparts. In addition, China has a robust domestic digital technology infrastructure and a suite of technology products that it exports. More than 60% of smartphones sold in Africa are made in China, for instance, and new phones like the Mate 40 come with CBDC wallets.

China's CBDC also adds to Beijing's ability to weaken the US led financial sanctions program. China is asserting leadership in shaping global norms and institutions for multicurrency cross-border payments. Those were the major findings of a new report on digital currency by the Hoover Institution. I'm reading this to you because it's showing us the future. Our government has to maintain its leadership to maintain our position as the world's number one economic leader. And we are currently running the risk of losing that leadership. 

So finally, I want to share with you the report's recommendations. I strongly encourage the White House, Congress and the Federal Reserve to act on these recommendations immediately with their full force and resources of the federal government. The Hoover Institution's recommendations are as follows:

“The United States should embrace the opportunity to shape the future digital economy. It should move quickly to determine the appropriate nature and role of digital currencies within the US economy, prevent the Chinese CBDC from undermining US geoeconomic and strategic influence, and prevent China's CBDC from threatening individual freedoms and human rights. A top US priority should be to initiate a well-resourced CBDC research and development effort that engages the innovative strength of the private sector and the intellectual capital of US universities.

It is crucial that the United States develop CBDC technology. More broadly, the United States should establish a strategic plan for the role of payment systems in the US digital economy. The United States should also position itself as a global leader in the digital currency space, especially in the development of a global framework of regulatory principles that's consistent with US expectations concerning consumer protection, privacy, financial anti-crime compliance, financial stability and the protection of monetary sovereignty.

The United States should ensure high standards for cross-border uses of CBDCs and other payment instruments such as Stablecoins. In particular, the United States and other democracies should make clear that international adoption of Chinese e-payment platforms should give the Chinese government significant coercive leverage over other countries, companies and individuals outside of China.

These democracies should move expeditiously to coordinate standards for privacy and for the protection of monetary sovereignty in relation to the use of CBDCs and private cryptocurrencies. Such coordination can counter the potential proliferation of standards being set by China's government that are not consistent with the norms of market democracies.

The United States should be vocal in its leadership given China's dominance in global trade, its CBDC technology and the lack of privacy norms are likely to proliferate rapidly unless compelling alternatives are available.”

What I've just read to you are key parts of the 227 page report by the Hoover Institution on digital money. Anyone who thinks this whole crypto thing is a fad or a fraud or something just for teens or Gen X. Wow, you're really missing the point. This represents the greatest innovation in global finance you will ever see in your lifetime. And there are profound investment opportunities to help you create wealth and financial security for your family and fundamentally, vitally important for the safety and security and leadership of our own nation. Please don't miss this. To learn more, I recommend you read two things. Read the report. It's available for free at Hoover.org and read my new book, The Truth About Crypto.