Policymakers dismiss blockchain while global powers embrace it
The United States of America, land of innovation and technological advancement, is overlooking a monumental opportunity within the realm of blockchain. As global financial regulators crack down on fraudulent activities in the cryptocurrency world, many policymakers have dismissed the underlying technology that powers these digital assets. This shortsightedness is evident even within the White House, as it urges caution and distance from blockchain. However, such an approach fails to grasp the true potential and significance of this decentralized ledger technology.
Blockchain represents a groundbreaking innovation that enables dynamic data verification and transmission across interconnected networks, transcending the limitations of traditional linear transmission methods. In an era where data and its management hold paramount importance for technological progress and strategic global competition, it would be unwise to disregard the potential of blockchain.
Meanwhile, other powerful nations are seizing the opportunity. China and Russia, driven by their ambition to challenge American economic dominance, are actively developing and implementing blockchain-based digital ecosystems. The European Commission, not to be left behind, has published a draft proposal for a digital euro—a central bank digital currency (CBDC) that could potentially be built on blockchain technology. The European Union has also taken proactive steps by approving a regulatory framework for crypto-assets and establishing a coordination body for blockchain infrastructure development among member states.
Moreover, the European Commission recently embraced a strategy to lead the charge in shaping Web 4.0, which envisions the integration of digital technologies like blockchain and artificial intelligence with real-world environments and objects. This strategic move underscores the pivotal moment we find ourselves in—a juncture that will define global financial transactions and the future of the internet.
Privacy concerns and the need for the U.S. to become a standard-bearer in digital finance
However, the convergence of data, money, and the internet of things poses significant challenges to personal privacy. As our real-world activities become increasingly digitized and interconnected with AI systems, it is essential to identify the technical and policy barriers that safeguard financial data from abuse by both the public and private sectors.
Preserving financial privacy within such a system is a formidable task. Therefore, the United States must step up and assume the role of the international standard-bearer for the digital financial system. Failure to do so will result in democratic nations that uphold privacy falling behind in the race to shape the future of finance.
Washington’s stance on blockchain appears inconsistent. While the White House Office of Science and Technology Policy acknowledged the importance of financial technology and emerging technologies in bolstering national security, the subsequent lack of prioritization raises concerns. Notably, blockchain was conspicuously absent from the U.S. National Strategy to Advance Privacy-Preserving Data Sharing and Analytics released earlier this year. Although the strategy correctly emphasizes the need for privacy safeguards, it fails to recognize the substantial progress made in financial privacy research within the crypto space.
Ironically, the transparency inherent in open blockchains has spurred the development of privacy-enhancing innovations. The exposure of transactions on public blockchains has catalyzed the creation of applications that aim to obscure the traces of cryptocurrency transactions and protect the identities of wallet holders. Policymakers, including national security experts, have long highlighted the illicit financing risks associated with such privacy tools. However, these tools now offer significant benefits in terms of social welfare and national security.
Emerging technologies that enhance privacy, like zero-knowledge proofs (ZKPs), play a vital role in safeguarding personal identity data while ensuring compliance with legal and national security requirements. Dozens of software firms are integrating ZKPs into blockchain services, enabling transactions that prioritize privacy and adhere to specific rules or conditions.
The United States should actively encourage the research and development of advanced cryptography techniques, such as ZKPs, as they will play a strategic role in an internet-based, data-driven economy. For instance, the U.S. government could implement a ZKP system that satisfies federal labor requirements. Prospective employees could demonstrate their eligibility to work in the country without disclosing their social security numbers during the initial application process. Through a separate authentication body, the social security card’s data would be encrypted, and employers could verify work eligibility by checking the cryptographic proof. This approach minimizes the unnecessary distribution and storage of social security numbers among multiple organizations.
Encouraging privacy-enhancing technologies for a secure and transparent financial system
By supporting privacy-enhancing technologies, the United States can build a digital financial system that safeguards essential personal privacy rights. Striking a balance between anti-money laundering measures and unnecessary data collection should be a guiding principle. Only data crucial to a transaction or required by law should be shared with other parties, promoting data minimization. For example, confirming a consumer’s age during a transaction does not necessitate collecting their full date of birth.
Transparency regarding data collection practices is another fundamental principle that digital platforms should adhere to. Users should have a comprehensive understanding of the data points being collected and who can access their information. Platforms should empower users to withhold their data from third parties unless legally mandated. For instance, U.S. Customs and Border Patrol may require a social security number from a U.S. importer receiving foreign goods for commercial purposes, but digital platforms should provide options to limit data sharing in other cases.
A digital financial ecosystem in the United States and worldwide built on these principles would not only prevent corporate abuse but also curb government overreach—an issue that other nations are already grappling with. Brazil, for instance, encountered concerns during the source code audit of its CBDC pilot program, as the programmability of the CBDC could grant excessive power to manipulate and freeze users’ funds.
Establishing well-thought-out rules and regulations is paramount to guide digital financial innovation. Rather than dismissing an entire technology, the United States should embrace the potential of crypto to reinforce democratic principles within the international order. As other countries race ahead to advance digital financial technologies, Washington’s role as a global finance leader hangs in the balance. To maintain this position, the United States must not succumb to hype but instead implement smart, reasonable regulations that allow for industry innovation within defined boundaries. By doing so, Washington can leverage crypto to bolster national security and shape a global financial system that aligns with its core values.
