J Soedradjad Djiwandono: Digital Silk Road, A Potent PRC Weapon

J Soedradjad Djiwandono: Digital Silk Road, A Potent PRC Weapon

by: J Soedradjad Djiwandono

Emeritus Professor of Economics, Faculty of Economics and Business, University of Indonesia

In the intensifying superpower competition between the US and the People’s Republic of China there seems to be a more subtle development that has not been much in evidence until very recently. This regards what some call a “digital new silk road”. It is different from, but in fact part of, the New Silk Road or Belt and Road Initiative (BRI) that has recently been a subject of intense discussion.

Indeed, there is a new development in information and communication technology or ICT, which China introduced recently. It is the blockchain service network or BSN. I would like to discuss here what this is it all about and its significance in the ongoing competition between the two super powers.

New technology links blockchain platforms

It is always intriguing when ever we discuss the competition between the US and China to query which is superior in technology development, a phenomenon that will certainly influence the future of our lives. We note fierce debates – even quarrels – about Huawei, chip production and others. The latest episode concerns Byte Dance owner of video sharing platform Tik-Tok, which has been pressured by the US government to let Microsoft take it over.

But there has been a more subtle theme, i.e., China’s decision to establish a system of interconnecting blockchain technology across government institutions, including local governments, businesses all over China, and Chinese companies abroad. It is called Blockchain Service Network (BSN).

I will not pretend to understand in detail what it is. My understanding is only illuminated by perusing a paper written by Tatiana Koffman “China’s Checkmate: The Technology Weapon You Didn’t See Coming” in Forbes, August 20, 2020.

Blockchain technology is a ledger – like bookkeeping in an accounting system of filing records – of a digital asset in its details (provenance), distributed to a computer network, instead of being centralized in a single location. A crypto currency like Bitcoin is created using blockchain technology, indexed to a sophisticated algorithm in comput￾er language that can be read by others who know how to decipher it; thus, the term “distributed” or “decentralised”. The term “block￾chain”, written in lower case, is a generic term for the technology to create a crypto currency, and includes all other digital currencies, like Ethereum, Dash, and hundreds more.

This technology imbues digital currency with superior features, compared to a legacy currency issued by a centralized institution, such as a central bank or national treasury. It is claimed to be superior for its characteristics: transparent and secured, with very little risk of being hacked. No problem of counterfeiting in digital currencies, as everyone can read what is being recorded in the distributed ledger, so that in a Bitcoin transaction the buyer can check out items, including the move of the Bitcoin he or she pur chased from the wallet of the seller to his or her own wallet. This technology solves what is called “double spending” in a trade. You no longer even need the convention in trading of caveat emptor, that a buyer bears risk of the quality of the item he or she buys, since both sides have identical information about the item traded from the outset.

Blockchain technology is very powerful: all the digital currencies and digital payments created using this technology are currently viewed as strong competitors of traditional currency and legacy payment systems. This is, I pre￾sume, the basis for Tatiana Koff -man’s argument that “BSN will be the backbone infrastructure of interconnectivity through mainland China, city governments, private businesses, and individuals, in both China and abroad. This network will form a new Digital Silk Road to create a link to China and its trading partners globally”.

Digital decentralised currencies, like Bitcoin, Ethereum, Dash, as well as digital payments like PayPal, Alipay, GoPay, Amazon pay and many others have been flourishing for quite some time now. In addition, other PBOC have been conducting a trial run of digital central bank currency to replace its current version, the digital Renminbi or eRMB. What these are has been widely discussed, as well as their impacts on legacy currencies and means of payment, as well as the exchange system.

There have also been discussions that relate to the development to the relationship between the US and China, which is my focus here. This regards the introduction of the eRMB as a Central Bank Digital Currency (CBDC). The eRMB has been tried out in several cities in China (see my column “Digital Renminbi and the US-China Competition”, Independent Observer, June 5-11, 2020). In terms of any potential competitive edge, many suggest that the eRMB will succeed in replacing current global payment protocol and exchanges, which is historically dominated by the US dollar. My view is that it will still take time for this to come to pass, judging from the massively strong USD position in commodity trad￾ing and reserve holdings globally.

However, the introduction of the BSN by China alluded to above seems to be different. This one looks to be a more potent means for China to exert a strong influence globally and potentially over take the US in their competition.

The easy way to visualize the BSN is to imagine it like all of us using the internet and benefitting tremendously from the World Wide Web (WWW), often just known as the Web. According to Wikipedia, this is an information system where documents and other web resources are identified by Uniform Resource Locators (URLs), which may be interlinked by hypertext and are accessible over the Internet. In the case of BSN, the user of any blockchain platform can access other, similar, users; thus, they are interconnected. The Web has been making our lives much easier as we all experience it.

Now, we could imagine that those well-versed in operating any application platform, like a miner in performing a Bitcoin transaction for example, can communicate digitally with others. Thus, the argument cited above, holding that this is a digital silk road that will be able to connect institutions in all of China and then others globally.

The advantage to China

I think that in terms of US-China relations and the competition between two superpowers or between an established and a new-ly-emerging one, I must say that the establishment of the BSN can be a tipping point for the latter, to take the lead. If Tatiana Koffman relies on an analogy from chess, I will posit one from the game of tennis to describe how I view the development. I subscribe to the idea, but a bit less than ending in a checkmate, an event that implies capitulation. I think this is a deuce game in tennis and as a referee my call is “advantage China”; the game is not yet over, let alone the set, but for sure it is currently in China’s favor.

The relationship between these two superpowers has seen its ups and downs since the political rapprochement after WWII sensation ally displayed by the visit of Pres￾ident Nixon to the PRC in 1972. From the outset of the Trump administration, proclaiming an “America-first” policy dramatically reversing that of his predecessor and characterized by strategies often difficult to interpret, there has been a trade war, a currency war and lately a technology war, in addition to the emotional blame game pointing to the origin of the Covid-19 pandemic (see my “Digital Renminbi” op-ed referenced above).

In terms of competition and rivalry – in contrast to cooperation – the trade and currency war look very much like an almost classic case of the “Thucydides trap”, elucidated by Prof. Graham Allison in his Destined for War. However, I argue in my previous writings that this rivalry and tension may not in fact degenerate into a shooting war. I see the escalation of tensions as more a part of the presidential election politics in the US that will reset, after a new president is elected in November. I opine that if the former VP Joe Biden wins the election, it is more likely that he will embark upon a reconciliatory move, in line with the previous Obama administration in which he served. But even if President Trump is to be awarded a second term, he will most likely soften current tensions.

In terms of a potential Thucydides trap, I notice that recently complications seem to appear, as the European position in the rivalry between the two super powers moves in a new direction: Germany seems to be shifting its policy, distancing itself from Chi￾na with a rationale that human right violations – the treatment of the Moslems in Uighur – and the Hong Kong security law will affect relations. Germany re-joined France and others in taking a position of possibly banning Huawei in 5G development.

The above developments have led me to think that the establishment of a BSN has allowed China to potentially leapfrog the US. The BRI, which has not been as successful as promised at its inception, seems to be more than compensated for by the introduction of the digital Renminbi and most recently the BSN. In the language of Thucydides trap what is suspected is that the US, as the established legacy superpower, feels threatened by what China has accomplished in its economy, physical infrastructure, finance and technological advancements.

In the meantime, for countries in the crossfire, including Indonesia, the challenges to face and possibly exploit opportunities, remain open. We must however keep our guard up, ready for any adverse impacts from the tensions and competitions, while welcoming any opportunity they present. (hjtp)

Source: Independent Observer. Edition: Friday, October 2-8, 2020. Rubric Opinion. Page 7.