Approach with caution: blockchain experimentation in the Indo-Pacific
Approach with caution: blockchain experimentation in the Indo-Pacific
WRITTEN BY MALCOLM CAMPBELL-VERDUYN AND FRANCESCO GIUMELLI
26 April 2022
Blockchains are databases of digital transactions undertaken directly between users. Originally intended as the monetary databases underpinning cryptocurrencies, blockchains are an evolving set of technologies that have underpinned worldwide techno-experimentation since the 2009 advent of Bitcoin. Beginning in finance, these experiments have bridged sectors from art to sports. They have typically promised more inclusive participation and prosperity. Yet, while initially blockchains were largely “permissionless” — enabling anyone to participate — more recent “permissioned” forms of blockchains have gatekeepers limiting the range of network access.
In a report published in late 2021, the Financial Times noted that it is developing countries that are providing the most “fertile ground” for experiments with this evolving set of technologies. The Indo-Pacific region, in particular, has become a key site for both informal attempts to create “crypto-utopias” in island nations such as Tonga and Vanuatu, as well as formal pilots of so-called Central Bank Digital Currencies (CBDCs) from South Africa to Japan. India and Vietnam led blockchain intelligence firm Chainalysis’s 2021 Global Crypto Adoption Index.
This techno-experimentation has been driven, and greeted, by strong hopes and fears. Some claim blockchains to be a “liberation technology” fulfilling a longstanding "desire for financial autonomy" across the Global South. Others worry that blockchain applications perpetuate North-South inequalities and earlier forms of “crypto-colonialism”. Academic analysis tends to echo these hopes and fears. Some identify blockchain applications as key tools for autonomous development. Others have found the technology to be merely extending “imperialism in the Pacific”.
Like other digital technologies, blockchain needs to be recognised as a double-edged sword slicing in multiple different directions at once. The technology’s potential both to extend exclusions and to facilitate inclusions thereby needs to be carefully (re-)considered.
Our research on global blockchain experimentation stresses how this technology facilitates both aspirations for autonomy and extends colonial legacies. We illustrate the “double-edged” sword that blockchains pose for the Indo-Pacific region in attempts to draw on this technology for both escaping and for enforcing international sanctions. Sanctions are attempts to exclude individuals, firms, or entire jurisdictions from international trade and credit. They are longstanding practices that, as recently highlighted in responses to the Russian invasion of Ukraine, “weaponise” international finance.
Two major countries subject to international sanctions, Russia and China, have turned to blockchains. We can trace parallel efforts to draw on blockchains by the world’s leading sanctioner: the United States. This global push-and-pull of blockchain experimentation in sanctioned and sanctioning states entails that Indo-Pacific nations must navigate between bifurcated claims of the technology, either enabling autonomous development or colonial legacies. Like all technology, blockchain is a double-edged sword slicing in multiple, different directions at once, and therefore requires a cautious and internationally-minded approach.
Building blocks of financial autonomy?
Russian efforts to develop autonomous financial systems in response to escalating international sanctions gained worldwide attention following its invasion of Ukraine in early 2022. Yet, blockchain-based experiments in Russia have been ongoing for more than a half-decade. In 2017, Russia had what one analyst at the CIA called a “Sputnik moment”: scientists tested a blockchain that could withstand hacking from quantum computers. Over the following half-decade, Russia enhanced efforts to become a blockchain “global leader” specifically to “withstand America’s economic sanctions”.
Masterchain, an intra-bank information exchange platform that involved a few countries from the Eurasian Economic Union, was formed by the Russian FinTech Association in 2018. That same year a digital version of the country’s currency was initiated to “settle accounts with our [Russia’s] counterparties all over the world with no regard for sanctions”. The e-ruble began trials between Russian banks only in 2021, with an adviser to President Putin noting its aim to become an “integral part of national settlements by 2023 or 2024”.
Further Russian proposals have been made to draw on blockchain to “connect some of the most promising emerging market economies, stretching across Asia, Eastern Europe, Africa and South America, via blockchain”. A 2021 proposal hinted at a blockchain-based alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the organisation that announced plans in March 2022 to expel seven Russian banks.
It is China, however, that has developed what is widely regarded as the closest SWIFT competitor, the Cross-Border International Payments System (CIPS). China also has the world’s largest circulating CBDC — the Digital Currency/Electric Payment (DCEP), more commonly known as the digital yuan. Controlled by the People’s Bank of China (PBoC), the digital yuan is typically regarded as a Chinese attempt to achieve “financial sovereignty”. As of October 2021, the equivalent of USD 9.5 billion in transactions had been conducted amongst 140 million users in Shanghai and Hong Kong.
Plans for internationalising the digital yuan were laid out with the 2021 announcement of a “Universal Digital Payments Network” (UDPN) intended for enabling “international transfers and payments with and between central bank digital currencies”. A Multiple Central Bank Digital Currency Bridge (m-CBDC) links Hong Kong, Thailand, and the United Arab Emirates together in a wider plan to establish the digital yuan within a pan-Asian payments infrastructure. Digital yuan adoption in Africa is also being enabled through smartphones that have hardware wallets configured to facilitate digital yuan usage.
Whether China or other (Indo-Pacific) countries subject to sanctions and other exclusions, will seek to deepen blockchain-based collaboration amongst one another remains uncertain. The Ukrainian war may hinder or catalyse Russian efforts to advance technological ties with states such as China. Key to consider, however, are parallel blockchain experiments evolving in the Global North.
The empire strikes back
Chinese and Russian efforts to achieve autonomy via blockchain experimentation have provoked growing interest in the technology across the Global North and specifically in the leading sanctioning state, the US. In 2018, the US Office of Foreign Assets Control (OFAC) sanctioned two Iranians for alleged involvement with cryptocurrency ransomware. In 2021 the cryptocurrency exchange Suex was sanctioned following reports that its Russian branches facilitated USD 160 million in Bitcoin ransomware payments.
Such reports are produced by a blockchain “forensics” industry whose rapid growth has been spurred by clients including OFAC and other US security agencies. This “trusted informant” industry has enabled further sanctions enforcement in the wake of Russia’s invasion of Ukraine, including by the likes of New York State’s Department of Financial Services.
Other blockchain intelligence providers include cryptocurrency exchanges. The US firm Coinbase, for instance, undertook "proactive investigations" that blocked some 25,000 Russian-linked accounts shared with the US government. As in Russia, blockchain experimentation in the US is being led by multinational firms. The consultancy Accenture is for instance undertaking a Digital Dollar Project. Also, like in Russia, the US has been slower to coordinate such experiments with key allies, such as the European Union, where the European Central Bank completed an initial public consultation for a digital euro in 2021. In addition to China, it is micro-states like the Bahamas and a grouping of Eastern Caribbean countries that have led international trials of CBDCs.
Situating implications for the Indo-Pacific
Neither Chinese and Russian efforts to achieve autonomy via blockchain, nor the parallel US attempts to enforce exclusions via this set of technologies are evolving in pre-determined manners. Global blockchain-based experimentation is emerging in an ongoing push-and-pull between sanctioned and sanctioning countries, whose outcomes for fraught relations between the Global North and Global South remain uncertain.
What is certain is that blockchain experimentation across the Indo-Pacific needs to be approached cautiously. Like other digital technologies, blockchain needs to be recognised as a double-edged sword slicing in multiple different directions at once. The technology’s potential both to extend exclusions and to facilitate inclusions thereby needs to be carefully (re-)considered. We are seeing this more nuanced approach to blockchain experimentation beginning to emerge from India to the Philippines, where previous policies are being recalibrated. Indo-Pacific nations need to both individually and collectively navigate between wholesale embrace or rejection of the technology.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Malcolm Campbell-Verduyn is Assistant Professor in international political economy at the University of Groningen. He studies the ongoing and varying implications of big data and blockchain technologies at the intersections of global environmental, financial and security governance. He has also edited Bitcoin and Beyond: Cryptocurrencies, Blockchains and Global Governance.
Francesco Giumelli is Associate Professor in international political economy at the University of Groningen. He is co-organiser of the Summer & Winter Schools on Illicit Trade. Image credit: Flickr/Nelson Wang.