Q&A: Fanusie on How China’s Blockchain Ambitions May Challenge the Global Internet Status Quo


March 7, 2022


Mikk Raud

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Mikk Raud


March 7, 2022

Yaya Fanusie is an Adjunct Senior Fellow at the Center for a New American Security (CNAS) and Chief Strategist at Cryptocurrency AML Strategies. Having testified multiple times before the U.S. Congress, Fanusie is a leading expert on the impact of blockchain technology and cryptocurrencies on geopolitics and the global financial system. In the following interview with DigiChina, he discusses what he views as Chinese ambitions to build a new, blockchain-based yet centrally controlled Internet. Fanusie suggests that in order to counter China’s ambitions in blockchain, the United States needs to shift from its current reactive and defensive approach to a more proactive engagement with emerging technologies. For this to succeed, the United States should leverage its existing advantages, including its private sector and world class university system. 

The interview was conducted on May 21, 2021. Some of the content has been updated before publication to reflect recent developments.

DigiChina: How would you explain what the BSN is and what it aims to achieve to someone who’s never heard about it before, but should know about it, such as a U.S. policymaker?

Yaya Fanusie: You could sum it up by saying that the Blockchain-based Service Network, or BSN, is really the Chinese government’s attempt to develop new internet infrastructure. This is a decades-long project and something that they plan to implement over the next 10-plus years. 

So what does it do? I think the aim is to create internet infrastructure that would allow data to be transmitted in a more dynamic way. The way the BSN people describe it is the following: The way the internet currently works is linear transmission—you send information or data from point A to point B. What they are trying to do is make use of more decentralized technology, so that you can transmit data, not linearly, but you can broadcast it. You can create data, you can send data, so that multiple nodes can confirm that data and it can be accessible to multiple parties. So they’re trying to create an internet that is more dynamic. And that’s generally it, without being too technical. 

The BSN and the accompanying development of blockchain solutions was set forth by President Xi Jinping in his October 2019 speech. Is there a chance that China may be overemphasizing the importance and usefulness of blockchain without critically analyzing its actual application? Most other parts of the world have not been doing anything comparable so far.

No, I don’t think that they are jumping the gun or rushing too fast. I actually think there’s a different way to look at it. I think it’s interesting that China is jumping on blockchain after many have looked at it and dismissed it here [in the United States] or in other places. The apex of blockchain hype was 2016–2017, and it's interesting to note that the executive director of the BSN, a computer scientist named Mr. He Yifan, said that he only started looking at blockchain technology in 2018—after the hype. I actually think that China's strategic interest in blockchain technology shows a mature approach, compared to what you saw a few years back.

The problem with a lot of the blockchain hype from a few years ago was that you had a lot of blockchain ideas, a lot of blockchain startups, and a lot of attention. But a lot of those efforts failed, because there was no interoperability between blockchain systems. There was not an incentive to get different blockchain projects to work together. Blockchain companies are ventures—you have a lot of different people trying to create different solutions, but there's not one platform or language. 

What China seems to be doing is trying to develop that foundational infrastructure, so that blockchain development can happen not like it had been a few years ago, with just a bunch of different people creating things, but to actually lay a foundation. Now blockchain startups can come up and build new decentralized applications, but there is a common infrastructure for these new applications, and that is actually, in many ways, ingenious. They're developing something that just did not exist in the environment a few years ago, so they're actually fulfilling, I think, a need. And because of state power, they’re even providing the cost reduction that could enable cost savings with a lot of these startups.

Would you say the BSN is here to stay? Do you think China’s efforts in developing the BSN may be a blueprint for what other countries try to do in the future?

It has that potential. I'm not saying that it's going to be successful, but that's the aim and they're doing something that other countries are not doing. It shows a more strategic approach to blockchain technology development. It is interesting that even the executive director of the BSN, Mr. He, in an interview said he hates the term blockchain. It's almost like it's been inherited with all the negative connotations. They actually say they like this idea of “broadcast” transmission. They're trying to get away from the term blockchain, but I guess the term is here to stay.

While most of the talk around BSN relates to fintech and financial markets, are there other areas or industries where the BSN could be applied? It seems like using the BSN to support the entirety of the Chinese economy would be the eventual goal.

I think the intention is for it to be pervasive throughout the economy, not just in the finance sector, and not just within the economy, but within the civil infrastructure. A good example is when the secretary general of the BSN [Tan Min] described how BSN could help. She pointed to paying the water bill. Today, the system is very siloed, with multiple financial companies, multiple entities, and “requires at least seven business systems.” She described the BSN as a way to have one system for paying your water bill that also makes the relevant data accessible to all the parties.

So in what she's describing, only one part of that, the payment, is necessarily finance. The other part of it is the data that all the other parties would have access to—from the power company, from the water company, from the citizen, etc. So we're talking here not just about finance, even though it's fintech; we're talking here about data.

Some analysts say the digital yuan and BSN are entirely different things. You argue in your testimony to the U.S. Congress, also using the water bill example, that one shouldn’t overlook the two sides of the same coin they fit into. Can you explain how these two developments fit into the same framework?

The way I would describe it is that, for all of the BSN applications that are being considered, or any application in China that requires a payment, it only makes sense that such payment would be via the digital yuan, or e-CNY. So, even though it is true that these are being discussed separately, and the BSN is not under the People’s Bank of China, by logic, the way e-CNY is being built indicates that it would be applied to other parts of the Chinese economy. I think it’s just a matter of time, but remember that all of this is very long-term. BSN is a long-term project, and they're just laying the infrastructure. They're not even saying that it is this one precise application that they’re building. They’re just saying, “Let’s build the infrastructure,” so that all these decentralized applications could work.

And will there be cryptocurrencies? Not bitcoin, domestically. They've said that they're not going to have permissionless cryptocurrencies, but they would have permissioned digital currencies, which would be e-CNY. Even if they haven't said it, that is by logic what we would assume.

We need to remain conscious about the fact that a lot of the analysis that we can do right now is based on speculation. They may have those ambitions, but we don't know if they're going to succeed, or exactly which direction they will take.

Yeah, we don’t know that. Everyone is looking at e-CNY as though it is going to be successful, but the jury is still out. Beijing shows it does plan to give preference to the e-CNY over other payment instruments. During the Beijing Winter Olympics in February, China allowed only physical cash, Visa, and e-CNY as payment options inside the Olympic village. Visa was allowed because it was a sponsor of the Olympics, but conventional payments by WeChat and AliPay were not accepted by merchants. This does not tell us yet how popular the e-CNY will be with the domestic population, but it does show us that the Chinese state can put its thumb on the scale to make e-CNY a preferred option. It is unclear how users will respond as the trials continue, but the government is certainly laying the groundwork for wide-scale adoption of e-CNY throughout the economy. 

This really relates to my first question on how the major policy directions in China are often determined by a leader’s speech, like that in October 2019. Maybe in a couple years’ time, Xi will give another speech and completely change the direction.

Here's an interesting thing to consider about the pilots. Everyone is thinking of those in terms of what does it mean for you, what does it mean generally, about surveillance, etc. But all these pilots are also data research projects, allowing China, I think, to not only collect data, but assess how this is being used. And the policy around launching e-CNY is going to be based on the actual results—this data. To sum it up, the pilot trials may also inform the leadership's speech next time. They will see how well this worked, what did not work, and they will probably iterate on e-CNY based on that.

The BSN has attracted engagement by many foreign blockchain firms. You caution such firms against doing so, given that it enables China to build a version of internet infrastructure that they control. What would you tell the companies already engaging, such as Ethereum, EOSIO, etc.? What could be the alternatives for such companies who are eager to expand their operations and implement their technologies? 

Good question. The U.S.–China Economic and Security Review Commission has also asked a similar question for the record and an additional one that I’m responding to now [in May 2021 –Ed.]. Basically, the question is, how do you stop these companies from doing business with the BSN? I’m thinking a lot about this, and I don't know if I have a good enough answer. Those companies, I think, should tell the U.S. government what is lacking for a flourishing blockchain development environment in the United States, and I think they should think a little bit more creatively, beyond that there are too many regulations, right? That's sort of the knee-jerk reaction. I know there are regulatory hurdles, particularly with securities, and I don't discount that, so I think most of these companies are concerned. “Stop regulating us, stop saying this is a security, so that we can develop.” So that's an old argument. I think these companies should maybe think a little bit more creatively, because the Chinese strategy is 10 years-plus. 

Also, I may be so bold as to say that there’s also a bit of naivete among some of the private tech space that is underestimating the geopolitical dimensions of helping China build “the next internet.” The firms might think they’re not getting involved in geopolitics, but helping the Chinese Communist Party (CCP) build its data infrastructure is a move that expands the Chinese government’s authoritarian power. There’s certainly short-term profit to be made, but I imagine tension up ahead, especially as the CCP uses data technology as a form of state power and control and as a lever for international influence. I would actually say these companies need to think 10 years-plus ahead, even though that's difficult, about what needs to happen, so that the United States can maybe develop the type of internet innovation that it did in the 1980s and 1990s. What sort of environment is needed? 

One thing I'm thinking about is: How do you leverage the university system? When I first used email, I was a sophomore at UC Berkeley. That was my first email in 1993, or maybe 1992 as a freshman, I don't remember. That's when I first got an email, then several years later I got Hotmail, AOL, etc. The point I'm making is, are there ways that we can develop some of this infrastructure—maybe on the university level through university research and other university experimentation—so that we can develop that infrastructure among our up-and-coming tech folks.

My general sense is that U.S. investment in Chinese technology should be allowed generally, but that the U.S. may need to restrict US investment or participation in technologies which directly support the CCP’s authoritarian activities. A case could be made that the BSN falls under that category. The private sector should consider that possibility even though there may be no current restrictions. And the U.S. private sector should also tread carefully, given the CCP’s current trend of forcing foreign firms to hand over data acquired on firms’ platforms in China to the government. Companies are likely to face more pressure from the government to support the CCP’s goals for data centralization. 

Relating to my point about increasing our universities’ involvement, the National Science Foundation (NSF) should fund what I call a Decentralized Internet Sandbox for Colleges and Universities (DISCU). The NSF should fund the development of an interoperable blockchain ecosystem where university students and faculty in the U.S. can build decentralized applications. I talk about that in more detail in my testimony to the Senate Finance Committee, which you should check out. In addition, the Small Business Administration, through its Small Business Innovation Research (SBIR) program, should offer grants to U.S. businesses for fintech R&D that supports both privacy and national security concerns. Such competitive, private-sector-focused award systems would be a great way to incentivize small businesses to take on this important digital challenge.

I think it's a great answer. There’s no silver bullet but I guess the onus is on me and my peers, as we’re at Stanford with all the resources. 

Yeah, you all tell us. If China is doing this, what should we do here? It's a tough question, because it's not like you can say the U.S. government creates a BSN. I'm not sure I want a federal internet, but I do know the strength of the U.S. private sector. What are the ways that we could help facilitate the creation or the innovation on the Internet with private companies? What are the incentives? The private companies should tell the U.S. government that.

What is the worst thing the United States can do or not do to really fall behind in all of this?

Months ago, I was against the idea of banning U.S. companies from involvement in the BSN. My views are shifting. I think it may be possible to target a specific technology output, like the U.S. has done with the executive order process to prevent U.S. firms from investing in Chinese surveillance technology.  This does not have to stop U.S. investment into China. Perhaps it would help the private sector be more discerning about what projects to support. As I’ve said, there’s a geopolitical dimension to investing in Chinese technology. The private sector can’t shut its eyes to that fact. But it would be a big mistake if the U.S. only focused on banning certain U.S. tech activity in China and not addressing the broader competitiveness and innovation that must be spurred at home. Offensive strategy means: Internally, domestically, what is the United States going to do? 

I think we have to balance that, and be very proactive, so that we don't restrict the tech sector internally.