The U.S. intelligence community is raising concerns about the Chinese Communist Party’s influence over digital currencies with the Securities and Exchange Commission.
Cryptocurrency, central bank digital currency, and e-cash are all being drawn into a multifront global competition against Beijing for leadership of the world’s economy, prompting pushback from the Trump administration reminiscent of how the government reacted to Chinese telecom giant Huawei managing to dominate much of the fifth-generation wireless technology market worldwide. Meanwhile, experts and industry leaders are worried that China is leaving the United States behind in the digital currency race.
The Washington Examiner has learned that Director of National Intelligence John Ratcliffe wrote a letter to SEC Chairman Jay Clayton earlier this month, pointing to concerns the U.S. has about China’s sway over digital currency, as more than half the world's cryptocurrency “mining” operations are located in that country, and how the Chinese government is mulling its own state-controlled digital currency that would make it tough for U.S.-based companies and innovations to compete.
Ratcliffe offered to have the senior economic intelligence officials brief Clayton on the matter. The SEC did not immediately return a request for comment about what came of the offer.
The letter, which has not been previously reported, signals a push by President Trump's spy chief to convince the SEC to implement rules that make it easier for U.S.-owned cryptocurrency companies to compete against those based in and controlled by China. Attached was a copy of a letter Sen. Tom Cotton sent Clayton over the summer.
Cotton, an Arkansas Republican who has been heavily critical of China, first sent a letter to Clayton in December 2018, asserting that there is a need for the SEC to “develop a clearer articulation of policy and, ultimately, formal Commission guidance addressing digital currencies” to ensure U.S. companies had the chance to lead. The senator broached the same topic in a follow-up July 2020 letter to Ratcliffe and White House national security adviser Robert O’Brien, lamenting how “so far the Commission has concluded that only two digital assets should be considered non-securities — Chinese-controlled Bitcoin and Ether.” Cotton also argued that “the continued lack of regulatory clarity not only hurts U.S.-developed digital assets, it puts American national and economic security gravely at risk.”
Earlier this month, Trump issued an executive order prohibiting transactions between anyone in the U.S. and a host of companies linked to China’s People’s Liberation Army, warning that “the PRC exploits United States investors to finance the development and modernization of its military.” It is possible that executive order could apply to Chinese-linked digital currency companies.
“There are serious national security concerns about China’s control over Bitcoin and Ether,” a senior intelligence official told the Washington Examiner, referring to the two of the most dominant cryptocurrencies. “The president’s recent executive order made abundantly clear the threat posed by securities investments that finance Communist Chinese military companies. Digital currency controlled by the CCP could certainly fall into that category, but the bottom line is that we cannot allow China to dominate the technologies and innovations that are going to decide who runs the world for decades to come — from artificial intelligence to digital currency, and everything in between.”
Cryptocurrency is any currency that exists only in digital form and typically sits outside of a central issuing authority, such as the Federal Reserve or the European Central Bank. Instead, it uses decentralized computer systems to record financial transactions and to manage the creation and issuance of new monetary units, and blockchain is the system where records of cryptocurrency transactions are maintained across linked peer-to-peer computer networks.
Cryptocurrency relies on cryptography, or code solving, to determine and maintain ownership.
Bitcoin, which is a popular type of cryptocurrency, was first released over a decade ago in 2009. The total combined value of cryptocurrencies worldwide is now estimated to be more than $250 billion.
Ripple, one of the largest cryptocurrency companies in the U.S., directed the Washington Examiner to comments made by its general counsel, Stuart Alderoty, who warned about China’s influence.
“The data doesn't lie. Vast majority of BTC’s [Bitcoin's] network / infrastructure — chips, mining pools, software — are all located in China or created by Chinese companies. This is not decentralization. The CCP wields absolute control in China,” Alderoty said last week.
Alderoty wrote in August that “the Chinese government subsidizes the vast amounts of energy needed to fuel Bitcoin and Ether miners” and that “at least 65% of Bitcoin mining is concentrated in China.” He added: “Is the U.S. really willing to allow China to win this new technological and economic Cold War and, with it, allow China to dictate important parts of a new global payment system?”
General Secretary of the Chinese Communist Party Xi Jinping has repeatedly shown interest in making the CCP the global leader, referring to blockchain as the “new industrial revolution” in 2018. He said in 2019 that “greater effort should be made … to help China gain an edge in the theoretical, innovative, and industrial aspects of this emerging field.” China Finance magazine, operated by the People’s Bank of China, said in September that the power over digital currency would soon be a “new battlefield” and that China should “seize the first track.”
“Competing with China is a serious enough challenge without U.S. regulators getting in the way,” the senior intelligence official told the Washington Examiner, adding, so “our regulatory regime must support American innovation, otherwise American companies are going to be put at such a profound competitive disadvantage that we could permanently lose this race.”
Global financial institutions have begun publicly acknowledging that China is leading in much of the digital currency arena.
Deutsche Bank released a report that same month, warning that “issuing one of the first” central bank digital currencies, or CBDCs, “would also be a step towards China’s target of becoming a world leader in science and innovation by 2050 and provide a reserve currency.” The Federal Reserve and a group of national banks collaborated on a report on possible “core features of a CBDC” in October, but China has already begun making moves toward implementing its central bank-backed “digital yuan.”
Chinese companies such as Alibaba and Baidu have used U.S. markets to raise tens of billions of dollars. The Chinese government shields the firms from U.S. inspections of its financial audits, but the U.S. has begun taking steps to limit Beijing's opaque influence.
In May, the Federal Retirement Thrift Investment Board reversed its decision to invest billions of dollars from retirement funds for federal government employees in market indexes, which included Chinese military-linked firms. In July, Treasury Secretary Steve Mnuchin said the President’s Working Group “unanimously recommends that the Securities and Exchange Commission take steps to enhance the listing standards on U.S. exchanges for access to audit work papers” from Chinese companies. And this month, Sen. Marco Rubio said the SEC “should make unfettered Public Company Accounting Oversight Board access to the audits of firms listed on U.S. securities exchanges a condition for both initial and continued listing.”
The Washington Examiner has learned the U.S. is considering further sanctions against Chinese government leaders committing alleged abuses against the Uighurs and those involved with what the U.S., the United Kingdom, Australia, Canada, and New Zealand consider to be an illegal power grab by China in Hong Kong. The Washington Examiner has also learned that Ratcliffe will soon speak about what the intelligence says about the China threat.
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