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Digital Dollar Strategy Powerpoint- Krach Touw (Public Version)

Digital Dollar Strategy Powerpoint- Krach Touw (Public Version)

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Digital Dollar Strategy
Rise of China Payment Networks and Digital Currencies. China’s emerging payment networks, together with its new digital currency, pose a greater long-term threat to U.S. national security interests globally than 5G, AI, or semiconductors, combined. If the United States acts now, it can counter China’s expansionary efforts to control emerging market money flows, and ultimately, global monetary flows. Policy and strategy recommendations are provided. In 2020, China also launched the world’s first Central Bank Digital Currency (CBDC) based on the renminbi (a “digital yuan”). China began research on its digital yuan in 2014.9 Although this effort is targeted at the M010 money supply, given its digital nature, it can eventually grow into M111 money supplies. Both Alipay and TenPay will support China’s digital yuan, making the renminbi the primary currency underpinning these Chinese-controlled payment networks.12 A digital yuan by itself would likely be confined to China, but together on growing payment networks outside of China, is a far greater threat to the U.S. dollar as the reserve currency.

U.S. policy and strategy recommendations:
1) Consider placing Tencent (TenPay and WeChat Pay) and Ant Group (Alipay) on the Entities List, requiring a license for any current or future U.S. technologies, particularly before Ant Group’s impending IPO,
2) BlockdownloadsofAlipayandWeChatPayintheUnitedStates(after careful interagency deliberations). The highly personal information that is required to be stored in Alipay and TenPay (WeChat Pay), makes TikTok look like child’s play
3)TheUnitedStatesshouldleadaconsortiumoftechnologypartnerstofasttrack the development of a better, more compelling alternative digital currency and payment network platform for developing economy central banks.

Digital Dollar Strategy
Rise of China Payment Networks and Digital Currencies. China’s emerging payment networks, together with its new digital currency, pose a greater long-term threat to U.S. national security interests globally than 5G, AI, or semiconductors, combined. If the United States acts now, it can counter China’s expansionary efforts to control emerging market money flows, and ultimately, global monetary flows. Policy and strategy recommendations are provided. In 2020, China also launched the world’s first Central Bank Digital Currency (CBDC) based on the renminbi (a “digital yuan”). China began research on its digital yuan in 2014.9 Although this effort is targeted at the M010 money supply, given its digital nature, it can eventually grow into M111 money supplies. Both Alipay and TenPay will support China’s digital yuan, making the renminbi the primary currency underpinning these Chinese-controlled payment networks.12 A digital yuan by itself would likely be confined to China, but together on growing payment networks outside of China, is a far greater threat to the U.S. dollar as the reserve currency.

U.S. policy and strategy recommendations:
1) Consider placing Tencent (TenPay and WeChat Pay) and Ant Group (Alipay) on the Entities List, requiring a license for any current or future U.S. technologies, particularly before Ant Group’s impending IPO,
2) BlockdownloadsofAlipayandWeChatPayintheUnitedStates(after careful interagency deliberations). The highly personal information that is required to be stored in Alipay and TenPay (WeChat Pay), makes TikTok look like child’s play
3)TheUnitedStatesshouldleadaconsortiumoftechnologypartnerstofasttrack the development of a better, more compelling alternative digital currency and payment network platform for developing economy central banks.

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Digital Dollar Strategy Powerpoint- Krach Touw (Public Version)

  1. 1. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 2 SEPTEMBER, 2020 China’s Rising Digital Payment Networks AUTHORS Paul C. M. Touw, Science Fellow, Chief Strategy Officer CONTRIBUTORS AND SUPPORTING AUTHORS Mung Chang, Science and Technology Adviser to the Secretary Edward P. Kinsey, II, Senior Advisor, Chief Financial Strategy Officer James Shinn, Senior Advisor, Economic Growth, Energy and the Environment U.S. Department of State Office of Economic Growth, Energy, and the Environment U/S Keith J. Krach
  2. 2. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 4 U.S. foreign policy tends to react, often after it’s too late. Case in point: 5G.
  3. 3. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 5 China’s emerging payment networks are a greater threat to U.S. national security aboard than 5G, Semiconductors, or AI. If the U.S. acts now, it can counter China’s rising quest to control global payments. BLUF:
  4. 4. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 6 $0b $125b $250b $375b $500b Payment networks are big business U.S. industry revenues Payments U.S. revenues from payment fees 3/4/5G Wireless U.S. cellular wireless revenues Semiconductor U.S. semiconductor sales AI U.S. AI industry revenues (hardware, software and service revenues) $470b $187b $220b $21b Source: McKinsey & Company, 2018, “Global payments 2018: A dynamic industry continues to break new ground,” https://www.mckinsey.com/~/media/McKinsey/ Industries/Financial%20Services/Our%20Insights/ Global%20payments%20Expansive%20growth% 20targeted%20opportunities/Global-payments- map-2018.ashx Source: Statista, 2019 U.S. wireless industry revenues https://www.statista.com/statistics/ 185802/mobile-wirless-service-revenues- in-the-united-states-since-1985/ Source: 2019, Semiconductor Industry Association (SIA) https://www.semiconductors.org/wp- content/uploads/2019/05/2019-SIA- Factbook-FINAL.pdf Source: Market Research PVT, 2019 North America AI Market https://www.maximizemarketresearch.com/ market-report/north-america-artificial- intelligence-ai-market/11329/
  5. 5. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 7 $0T $10T $20T $30T $40T $50T China’s payment networks are crushing it $41.5T $796b $8.8T $6.5T $6.0T Source: 2019 Visa Annual Report Source: 2019 Mastercard Annual Report Source: Digital Transaction, April 2019, https://www.digitaltransactions.net/ amex-card-volume-up-7-and- other-digital-transactions-news- briefs-from-4-18-19/ Source: PayPal 10Q 4Q 2019 Report Source: Caixin, Mar. 22, 2019, China’s Mobile Payments Transaction Volume (TenPay, Alipay, Union Pay) China Mobile Payments (TenPay, AliPay, UnionPay) https://www.caixinglobal.com/2019-03-22/chart-of-the-day-chinas-mobile-payment- transaction-volume-hits-4151-trillion-in-2018-101395789.html The U.S. first-mover is ~50x smaller?
  6. 6. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 8 China “mobilized” payments in under a decade
  7. 7. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 10 Going global Countries that now accept Alipay, TenPay
  8. 8. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 11 U.S.merchants adopt Alipay,TenPay Although adoption is meant to attract Chinese traveler’s spend in the U.S.
  9. 9. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 12 From a cyber-security perspective, Chinese payment networks make TikTok (& 5G) look like child’s play.
  10. 10. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 13 5G Network Although critical data is generally encrypted Hypothetically, personal information can be hacked Moving data over China-controlled 5G networks presents “hypothetical” security risks
  11. 11. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 14 China Payment Network Payment Network Servers Consumers Merchants Highly Personal Information is Required, Stored, and Tracked! • Name • Phone Number • DOB, SSN, DL • Personal addresses • Geo location tracking • Bank account information • Bank credentials, passwords • Credit card numbers • Credit card pin • Credit ratings • Payment history • Travel history • Citizenship • Employer(s) • Social score Moving money over China-controlled payment networks presents “real and imminent” security threats
  12. 12. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 15 Personal cyber-security threat matrix Highly Personal Data Alipay, TenPay TikTok Huawei 5G Personal Data ✓ Required ✓ Optional ✓ Maybe Bank Account Data ✓ Required Bank Account Log-in Credentials ✓ Required Credit Card Information ✓ Required Credit Card Pin ✓ Required DOB, DL, SSN, Citizenship ✓ Required GEO tracking ✓ Yes ✓ Optional ✓ Yes Travel history ✓ Yes ✓ Some Spending history ✓ Yes Employment history ✓ Yes Face-ID access ✓ Yes ✓ Yes ✓ Yes Call logging ✓ Yes ✓ Maybe ✓ Maybe
  13. 13. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 16 Economic control of an economy threat matrix Economic Sanctioning Alipay, TenPay TikTok Huawei 5G Economic brown-outs ✓ Yes Sanction users, or groups of uses, by shutting down ability to pay ✓ Yes Sanction a country by shutting down commerce ✓ Yes Ability to track individual’s movements, spending, travel ✓ Yes ✓ Yes ✓ Yes Espionage of individuals, merchants, and companies ✓ Yes ✓ Maybe Steal money, bank accounts ✓ Yes Flow of money
  14. 14. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 17 Select U.S.actions to counter China 5G,Semiconductors,AI 5G Semiconductors AI Payment Networks • Banned Huawei, ZTE in the United States • Sanctioned Huawei, ZTE • Export controls on semiconductor equipment and technology to Huawei • International effort to block Huawei in foreign countries, Japan, Australia, part of Europe • 1996 Wassenaar Arrangement, excluding China • 2020 Chips Act, $10 Billion, passed by Congress, signed by President • Numerous Export Controls on semiconductor equipment to China • DoD, NSF invest billions in AI • Republicans propose $100 billion Endless Frontier Act, including investments in AI • Democrats propose $350 billion bill to counter China, including investments in AI ? • EO blocking downloads, halted by courts
  15. 15. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 18 In 5G, Semi’s, and AI, western allies are winning
  16. 16. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 19 Western allies are winning in 5G 62% 38% China 5G Equipment Manufacturer Deal Wins Europe 5G Equipment Manufacturer Deal Wins Is China losing in 5G? In 2019/20, Europe beat China by a nearly 2-1 margin in 5G equipment wins. Which Countries have banned Huawei?
  17. 17. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 20 Western allies are winning in semiconductors China is still a net consumer of chips $0B $25B $50B $75B $100B $125B $150B $175B $200B 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Purchases Sales China Purchases vs.Sales of semiconductor chips
  18. 18. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 21 And,western allies are leading in AI Despite some concerns to the contrary CSET further estimates that, “we assess with low to moderate confidence that China’s public investment in AI R&D was on the order of a few billion dollars in 2018. With higher confidence, we assess that China’s government is not investing tens of billions of dollars annually in AI R&D, as some have suggested.” 3% 25% 17% 55% North America Europe Asia Rest of World North America leading in AI investments (Pitchbook, 2019, stateof.ai)
  19. 19. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 22 In mobile payment networks, China is winning—by a large margin, and it’s a bigger potential problem.
  20. 20. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 23 $0T $10T $20T $30T $40T $50T Once again…China dominates digital payments $41.5T $796b $8.8T $6.5T $6.0T Source: 2019 Visa Annual Report Source: 2019 Mastercard Annual Report Source: Digital Transaction, April 2019, https://www.digitaltransactions.net/ amex-card-volume-up-7-and- other-digital-transactions-news- briefs-from-4-18-19/ Source: PayPal 10Q 4Q 2019 Report Source: Caixin, Mar. 22, 2019, China’s Mobile Payments Transaction Volume (TenPay, Alipay, Union Pay) China Mobile Payments (TenPay, AliPay, UnionPay) https://www.caixinglobal.com/2019-03-22/chart-of-the-day-chinas-mobile-payment- transaction-volume-hits-4151-trillion-in-2018-101395789.html
  21. 21. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 24 U.S.regulatory environment crimps Fintech • U.S. money transmitter laws require licenses in 50 separate states • Process can take years and millions to complete • Many Fintech’s require U.S. banking licenses, thus they avoid • Most U.S. new payment networks are “slaved” to banks or credit card networks, muting their benefits • China’s regulatory environment is far less cumbersome • Thus, China’s global rise in Fintech and lower cost structure
  22. 22. 25 Cash Credit Cards (+ Paypal,Venmo, ApplePay,etc.) China Payment Networks Micro- transactions 0-$10 Mid-range transactions $10-$10,000 High-value transactions $10,000+ Ok Must obtain cash from bank,does not work online Bad Insecure to handle larger amounts,does not work online Very Bad Does not work, except for money- laundering purposes Bad Minimum per transaction fees can take 5-16% Ok Fees range from 2.1% to 3.0%,but works online, cards stolen often Very Bad Fees become impractical,most don’t accept Best works across the spectrum — • Lowest fees • Works on/offline • Real-time • More secure • No wallet • No ATM • No credit req’d Bigger,broader payments spectrum Payments Spectrum
  23. 23. 26 Better convenience for consumers
  24. 24. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 27 Cheaper for merchants 0.0% 1.0% 2.0% 3.0% 4.0% $41.5T 2.95% 2.98% 2.98% 3.20% 0.60% China’s payment networks charge substantially lower fees to merchants
  25. 25. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 28 China adoption of advanced payments is near complete
  26. 26. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 29 Credit Card Cash Bank card Check Paypal Apple Pay Venmo Zelle Google Pay Square Facebook Other Snapcash 0% 20% 40% 60% 80% 1% 2% 3% 3% 6% 6% 7% 9% 44% 53% 59% 79% 80% Percentage Adoption 1Source: Bain/Research Now Retail Banking NPS Survey 2018 Traditional Methods Mobile Generally slaved to credit card networks at approx.3% fees! U.S.adoption of advanced payments has been slow1 In part, because U.S. mobile payments do not offer something bigger, better, cheaper
  27. 27. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 30 Like lower corporate taxes, lower payment fees can be a competitive advantage to an economy.
  28. 28. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 32 Credit Card Fees $274 million1 State, FET, Fed Taxes $289 million Share Holders $459 million 1Note that online “card-not-present” fees are higher.Data from Southwest 10K filed 02/08/2011 for period ending Dec 31,2010; credit card fees based on industry averages of 2.21% on passenger ticket revenues. Where do Southwest’s gross profits go? What consumers actually paid After all expenses $1,022 million Case study: Southwest
  29. 29. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 35 Bottom line— China’s rising payment networks pose a threat to U.S. national security interest abroad.
  30. 30. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 36 Targeting BRI regions,62% of world population Alipay, TenPay expanding to Africa, Latin America, and Indo-Pacific Likely regions targeted by Chinese payment networks
  31. 31. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE Max Min 37 Cyber-security threat is real Alipay,TenPay actually collect your most valuable personal information • Potential for espionage… • But, sensitive information is generally encrypted • Overseas operators still control 5G deployments • Name, address, location • Bank accounts + login credentials • Credit cards + pin • KYA data • Employer data • Geo tracking • Citizenship Max Min 5G is a “conduit,” but mobile data can be encrypted
  32. 32. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 39 U.S.might wake-up to a world surrounded by Alipay
  33. 33. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 40 Many U.S.Military and State personnel rely on Alipay or TenPay abroad • China could track military movements,spending,personal data • Or,cut thousands off from an ability to pay in-country if tensions arise
  34. 34. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 41 Alipay,TenPay to support China’s new digital yuan Renminbi could underpin these payment networks The U.S.Dollar is the reserve currency,until it isn’t!
  35. 35. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 42 Giving rise to a very real possibility…
  36. 36. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 43 In time,giving China a new weapon in global payments The ability to coerce people, groups, and countries by controlling payments
  37. 37. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 44 Recommendations to U.S. foreign policy— the best defense is a great offense. If the U.S. acts now, it can counter China’s rising quest to control global payments.
  38. 38. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 45 Consider placing Alipay,TenPay on Entities List
  39. 39. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 46 Consider slowing Chinese Payment Networks with 5G-like campaign to foreign gov’ts abroad
  40. 40. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 47 Thankfully,in 5G,U.S.could push western alternatives Western 5G Alternatives Payment Platform,Digital Currency Alternatives ?
  41. 41. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 48 Foreign central banks have a foremost interest in controlling their own monetary policies, payment networks, and digital currencies. But they lack the technical expertise or solutions to deploy them, or the ability to make them inter-operable abroad. Consider an offensive strategy
  42. 42. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 49 America leads in core technologies required to implement payment networks and digital currencies Cloud Solutions Transaction Processing Solutions Database Solutions Largest Social Network Platforms
  43. 43. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 50 More importantly,America dominates in mobile OS’s 99%of mobile OS market is Apple iOS or Google Android Source: statista, 2020, https://www.statista.com/statistics/266136/global-market-share-held-by-smartphone-operating-systems/
  44. 44. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 51 An open-source CBDC,payment network platform Consortium Team Public-Private Assemble a team of U.S. technology leaders to build an open-source, configurable, digital currency and payment network platform for independent foreign central banks Build, Maintain Once Deploy Everywhere Potential Technology Partners
  45. 45. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 52 Like “Operation Warp Speed” Timeline Over 40 Central Banks are considering Digital Currency policies for their countries Build in parallel a configurable CBDC and open-source payments platform that can accommodate most likely policy scenarios When foreign central banks are ready, they can configure, implement, and go-live
  46. 46. FOR OFFICIAL USE ONLY, PRE-DECISIONAL, DELIBERATIVE 53 Benefits of one system,independently deployed Common POS inter-operability standards— allows mobiles devices to work everywhere (NFC, QR-code standards) The right U.S. technology partners could be highly motivated to participate at no charge. They seek new “use cases” for their end products. International currency clearing mechanisms—allows one digital currency to be converted into another, allowing cross broader payments
  47. 47. 48 For immediate comment, analysis, and further explanations contact: Paul Touw Chief Strategy Officer Senior Advisor to U/S Keith Krach Economic Growth, the Environment, and Energy U.S. Department of State TouwP@state.gov Cell: (202) 664-6421 Keith Krach Under Secretary of State Economic Growth, the Environment, and Energy U.S. Department of State KrachKJ@state.gov Cell: (202) 975-5469 Work: 202-647-7575

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