July 14, 2021

China’s Fintech Strategy: Seeking to Dominate the Next Data Revolution

By Yaya J. Fanusie

Chair Warren, Ranking Member Cassidy, the distinguished members of the subcommittee, and my fellow panelists, it is an honor to participate in today’s hearing. Please allow me to add that although I do consulting with the private sector on financial technology issues, my comments today are my personal opinion and are not on behalf of any clients.

Today, I will explain how the Chinese government’s recent foray into financial technology (fintech), including by investing heavily in blockchain technology and piloting a central bank digital currency, is a long-term strategy to dominate the digital economy of the future. This strategy is a new financial dimension to the great-power competition between China and the United States. But it is about more than money or currency. It is really about data. Specifically, it is about which country will be most successful at leveraging data for technical innovation, to set the standards for new global financial infrastructure, and become the anchor for the information revolution that is on the horizon. The Chinese Communist Party (CCP) intends to upend the United States’ leading economic and geopolitical status by investing in nascent technologies that the United States is not currently prioritizing and building the digital infrastructure that will drive global commerce and shape the evolution of the internet itself. If the United States does not understand China’s fintech strategy and how it fits into seismic technological shifts that are emerging, the United States will not be able to develop an appropriate strategic response and could lose the geopolitical leadership position it has held since the end of World War II. In my testimony, I will explain key elements of China’s fintech strategy, how they fit into a continuum of innovations in the world’s history of data revolutions, and recommend ways that the United States must adapt and position itself to compete with China in the 21st-century economy. But first, I’d like to start with some historical context.

From the late 1960s and into the early 1980s, a revolution in humankind’s transmission of data occurred, slowly. The internet was born. The infrastructure of the internet was constructed over decades. It was a quiet data revolution. It happened largely outside the limelight because building a network for computers to talk to each other across great distances had little practical value for the broader population, most of which had no direct access to computers at the time. So, creating the internet then was not a profit-seeking endeavour at first. Its impetus was military. At the height of the Cold War, the U.S. Department of Defense funded computer science academics and gave them a long innovation leash. However, the DoD funders tethered the research to an ultimate objective: to build computer infrastructure that would support the U.S. military’s information and communication needs around the world. The internet protocol that we all engage in today, known as TCP/IP, emerged in 1983. But it was not until mostly American firms built civilian applications on top of it, such as public websites and private email accounts, that the internet offered mainstream value and revolutionized the world.

No one entity or nation technically owns the underlying infrastructure of the internet. However, it cannot be denied that the United States’ decades-long investment in building it enabled U.S. companies to lead the technological and business growth that arose out of the internet’s information revolution. This position, however, is being challenged, slowly and steadily, by China. The clearest example of China working to upend America’s economic dominance on the internet is its Blockchain-based Service Network (BSN), a state-driven project that has partnered with Chinese private tech firms to build what the Chinese Communist Party believes is the next generation of internet infrastructure. The BSN, like the United States’ endeavor to build the original internet, is a decades-long campaign. The BSN vision is an internet environment where data transmits through distributed broadcasting, in which separate applications and business systems can simultaneously access and operate on agreed-upon, authenticated data. This contrasts with current internet processes, where data is siloed between different systems and moves through the internet in a linear fashion. In theory, this upgraded internet would enable an internet of things where all digital things can communicate and transact with each other, enabling a new era of digital innovation and economic possibilities. But it would be an internet where China owns the underlying infrastructure.

Since blockchain technology emerged with the Bitcoin protocol in 2009, many technologists and entrepreneurs have argued that its distributed architecture model could eliminate long-lasting inefficiencies in data management and dissemination. In theory, this new way of recording and conveying data can revolutionize financial services, supply chain management, media, and government recordkeeping. In practice, these and other industries have yet to be disrupted by the new technology. So blockchain, also known as distributed ledger technology (DLT), today remains an experimental computer science niche with no single private or public sector entity dominating its development. Yet, it is interesting that, instead of dismissing blockchain as over-hyped and underperforming, China is doubling down on it. To understand why, let’s look at China’s overall approach to new technologies and the state of global blockchain development over the past few years.

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  1. Ben Tarnoff, “How the Internet was Invented,” The Guardian, July 15, 2016, https://www.theguardian.com/technology/2016/jul/15/how-the-internet-was-invented-1976-arpa-kahn-cerf.
  2. Defense Advanced Research Projects Agency, ARPANET: Advancing National Security Through Fundamental Research, https://www.darpa.mil/attachments/ARPANET_final.pdf.
  3. Justin Jaffe, “Happy Birthday, Dear Internet,” Wired, December 31, 2002, https://www.wired.com/2002/12/happy-birthday-dear-internet/.
  4. Yifan He, “Consensus 2021: Rebuilding the Internet with Blockchain Broadcasting,” Coindesk, May 6, 2021, https://www.coindesk.com/consensus-2021-rebuilding-internet-blockchain-broadcasting.
  5. Sam Wood, “Technology vs. Trust: Why this Wharton Professor Thinks Blockchain’s Time is Yet to Come,” The Philadelphia Inquirer, March 11, 2019, https://www.inquirer.com/business/weed/blockchain-kevin-werbach-wharton-school-mit-press-20190311.html.
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