XRP and China

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On Feb. 6th, Ripple published an article on their Insights page that asked the question, Can the U.S. and China Attain a State of Competitive Coexistence? I don’t remember seeing any other articles on the Insights page that have dealt with geopolitical issues of this kind before. This could be indicative of an upcoming push by Ripple into China (more on that below). There have been posts on political issues before, mostly of a regulatory nature, and remittance is a political issue of sorts – but this latest post deals specifically with the ratcheting up of rhetoric and sanctions between tech firms in the United States and China, and it makes reference to an American strategy of technological “containment.” In the article, the term is put forward by Singapore’s ambassador to the United States and refers specifically to the policies of exclusion that are springing up around the western world directed at the Chinese tech firm Huawei.

In recent news, Huawei has been publicly accused by American government officials of implementing backdoors in Huawei networking infrastructure that would give surreptitious access to any communications that take place on these networks – something that Huawei vehemently denies.

Something similar happened to the Russian anti-virus firm Kaspersky, when it found itself excluded as policy from American government systems after officials accused the firm of feeding data to the Russian government. American officials toyed with a retaliatory ban shortly after state-sponsored Russian hackers were accused of meddling in the 2016 election in the United States, with a formal ban implemented the following year by Trump administration officials.

In a statement found on ZDNet Kaspersky indicates that it considers the ban political. These bans, on both Kaspersky and Huawei, are indicative of the use of American soft power as a means of sanction or retaliation towards nation-states that carry out adversarial operations against American interests. The ambassador has a point about the risks of implementing technological containment policy. With Kaspersky, it seems very likely that the ban was retaliatory and it was not necessarily the case that the Russian anti-virus firm was actively and deliberately engaged in spying. As such, it wouldn’t be without precedent that American government officials are baselessly punishing a firm for the sins of their host country. However, there are some important differences between Kaspersky and Huawei, the latter of which was built upon the skeleton of stolen Nortel technology. The concerns that the Americans have about Huawei are not without merit.

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The article on Ripple Insights takes a soft stance towards Huawei and Chinese interests, arguing for cooperation and coexistence rather than the rolling back of the intertwined economic and production systems that link American and Chinese manufacturing and economic interests. This stance makes sense for a firm positioning itself to sell its blockchain products and services to Chinese firms. The article explicitly mentions the creation of a digital Renminbi as a means of bypassing the USD as a global reserve currency, which it states is a consequence of American exclusionary containment policies towards China. Ambassador Chang Heng Chee stated that the digital Renminbi could be used for settlement between nation-states, but if you look at the explosion of fear and rhetoric over implementing Huawei networking equipment in western national telecom networks, it would seem that a digital currency owned by China would be met with the same sort of suspicion, at least in the West. Whether this leads to closed digital currency blocks or a fragmented national token network, there would be a need for some form of decentralized intermediary like XRP.

There are severe security and trust implications to using another nation-state backed closed-source digital asset. One of the major concerns would be that the transactions can be rolled back once a good or service is delivered as a means of sanction or retaliation. The move towards digitization of national currencies may very well eliminate the need for a global reserve currency, like the USD, as the speed of transaction times, and the various technologies like Ripple’s ODL can create seamless bridges between the various central bank backed digital assets. This may be the reason that the Chinese are driving towards the adoption of digital currency technologies. Ripple’s article states that the Chinese merely wish to bypass the current global reserve currency to avoid sanction, but I suspect their reasoning may be to eliminate the need for such a concept entirely. To be clear, the Americans will most likely fight this. The positional power of being a global reserve currency is not one any nation-state would give up lightly.

As I covered in a previous article, Dr. Rajan indicated at Swell 2019 that even if central banks begin issuing digital currencies, there will still be a need for a neutral settlement system. Brad Garlinghouse echoed these comments during a recent interview with Julia Chatterley. Garlinghouse argued that XRP’s efficiency and low transaction cost would give it an edge versus other settlement mechanisms in use as an intermediary.

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Once the Renminbi goes digital, and other countries begin issuing digital currencies, Ripple may try to position itself as a trusted intermediary between firms and nations that wish to transact using their own central bank issued digital currencies. Beyond breaking into the Chinese remittance market, the hope for Ripple and other digital asset companies is that some form of decentralized and open-source blockchain technology will wind up becoming the bridge between national digital currencies.

These two prerequisites, that a digital asset be decentralized and open-source, are very important for an intermediary currency. They ensure that no central figure or authority can control or rollback transactions, and they ensure that the code that runs the network can be audited by their own security professionals. Even a digitized USD would be looked at with suspicion by any power outside of the American sphere of influence for many of the reasons listed above: security, privacy, and the increased ease of applying sanctions via digital currency control mechanisms.

Another important characteristic would be the difficulty with which any power can manipulate the miners or validators. With the majority of the hash rate of BTC concentrated in China, coupled with the current low speed of BTC transactions, I do not believe that Bitcoin, in its current state, could be used as a bridge currency between competing powers like China and the United States. For XRP, I would imagine that the validators would need to be distributed in such a way as to make coercion by one power, or any single sphere of influence, unlikely. I’m not certain XRP would be used as a bridge asset between national currencies in nation-states competing with western power structures if the majority of the XRP validators were located in the West. But it should be possible to distribute the validators in such a way that makes any sanction or collusion by a single power difficult. That being said, there would be a strong incentive not to pollute a global bridge-asset with geopolitical muscle-flexing, as that would destroy the mechanism of trust in a similar manner as attacking a diplomat would lead to a breakdown in communication between nation-states. On territories that find themselves split between East and West, the ambassador states, “Don’t make us choose.” Nevertheless, choosing seems to be the direction that the world is heading, especially with the spectre of economic retaliation and backdoors found in American, Chinese, and Russian tech. In a world of isolationist digital currency blocks, the intermediary would be paramount. If Ripple can position itself as such, it could be very lucrative for investors, and the company itself.

Follow me on Twitter @MacroPolo707

Header photo by Johannes Plenio

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