With help from Derek Robertson

Who gets to run the future?

The answer isn’t always clear in the moment. Forty years ago, Digital Equipment Corporation was a dominant tech giant thanks to its mini-computers, which were more compact than standard mainframes. Then even smaller, cheaper personal computers came along, and well, Digital Equipment Corporation faded away.

Its fate is one of many similar cases detailed in “The Innovator’s Dilemma,” the 1997 business strategy classic written by late Harvard Business School professor Clayton Christensen.

The dilemma is that established businesses face incentives that force them to focus on incrementally improving their already successful products. That leaves them vulnerable to upstarts that can focus on developing radically new technologies that might seem risky, or immature, but ultimately take over the market.

What if a version of that strategic dilemma applies to countries, too?

This is one big question raised, most recently, by the argument about whether the United States’ ongoing crypto crackdown is driving the industry to more hospitable foreign shores, and whether that matters. One problem is the United States has been criticized for regulating the industry while at the same time failing to issue clear guidance on what those regulations are.

The U.S. dominates the global financial system, and U.S.-headquartered tech giants dominate the internet.

If a new kind of technology comes along that one, is premised on shaking up these systems that your country dominates, and two, is associated with a lot of problems like hacking, sanctions evasion, and financial meltdowns, then you’re more likely to crack down on the firms using the technology than you are to encourage their growth.

We’re seeing a version of this right now with crypto as U.S. regulators ramp up enforcement in the wake of the FTX collapse.

This approach may well make sense for American consumers. And it definitely makes sense for the established financial industry. But how will it affect national competitiveness in the longer term? The problem is that there are lots of other countries that don’t have the same interest in protecting the reigning digital and financial order. And a lot of them are laying out the welcome mats.

As POLITICO reported late last month, the EU’s new legal framework for digital assets, which creates regulatory clarity for the industry, is making it more attractive to some firms, a point that crypto lobbyists in Washington have taken pains to point out.

It’s not just the EU. British Prime Minister Rishi Sunak harbors ambitions of using digital assets to restore London’s primacy as a financial hub. Dubai and the United Arab Emirates have both courted the industry. And Japan’s government sees, in the related development of Web3, an opportunity to regain its high-tech edge.

As the headline of one recent op-ed in CoinDesk put it, pointedly, “I’m American, but My Crypto Startup Won’t Be.”

So… is it true the U.S. might lose primacy in a growing industry? Or is this just a case of regulators finally doing their jobs? In an interview with POLITICO’s Sam Sutton and Declan Harty, published Tuesday, SEC Chair Gary Gensler pushed back on the industry’s offshoring argument.

“We lose more if investors get harmed here,” he said. “It’s a basic bargain in finance: If you want to raise money from the public, disclose certain facts and figures.”

In a vacuum, the dilemma here looks like a simple regulatory race to the bottom. Create an industry-friendly legal environment or all that economic activity will move somewhere else. And in some cases this is fine: There are plenty of risky or dirty industries that Americans don’t mind kissing goodbye.

But the involvement of technology that could potentially disrupt the U.S. position in the financial system and the internet adds a whole other layer of complication: Is the U.S. pushing away the next big thing? Is there even a good way to capitalize on this new thing without messing up the thing it’s already got?

Take the race to develop and deploy central bank digital currencies, which often incorporate the same innovations employed by private and open-source blockchain networks. As with its cautious regulatory stance, the U.S. approach is complicated by the fact that it already has a good thing going.

BCG’s global CBDC tracker gives a sense of the state of play internationally. Much of Europe and Asia have moved to proof of concept or pilot stage, while the U.S. remains in the research phase (The Atlantic Council’s tracker, with its own methodology, paints roughly the same picture).

Notably, China’s surveillance-heavy digital yuan has already been used for billions of dollars worth of transactions as the country seeks to make its currency a larger part of global trade.

Last week, the U.S. inched closer to a digital dollar when the Treasury Department announced a new interagency working group to explore its possible creation. But the response from a number of constituencies, from the banking industry, to Federal Reserve governors, to corners of the Biden administration, to Republicans on the Hill has ranged from lukewarm to outright hostile. A lot of people have a lot to lose, which makes it hard to remake the system from the inside.

Executives at incumbent businesses might feel their hands are tied by economic incentives, but that’s nothing compared to the political straitjacket waiting for anyone who wants to remake the dollar from the inside.

It turns out that when your currency underpins the global financial order, it’s hard to “move fast and break things.”

Of course, to the biggest crypto believers, CBDCs just look like the mini-computers of money: a halfway upgrade that will soon be forgotten when the real revolution takes off.

Last year’s CHIPS and Science Act was pitched in large part as a tool with which to remain competitive with China. But what if America needs to go even further to keep up?

That’s what Dan Wang, a Shanghai-based tech analyst, argues in a lengthy essay published recently in Foreign Affairs. In short, Wang argues that the “chips” are the science, and that America must “treat manufacturing as an integral part of technological advancement, not a mere sideshow to the more thrilling acts of invention and R & D.”

“Beijing’s manufacturing-driven approach has become critical to its ability to challenge the West in advanced technology,” Wang writes. “...The country’s most significant technological achievement over the past two decades has been its development of a vast and highly experienced skilled workforce, which can be adapted as needed for the most tech-intensive industries.”

Wang compares and contrasts the U.S. and China’s solar power efforts over the past decade as a case in point, demonstrating how China’s solar industry has thrived as a result of such integration where America’s has flagged. — Derek Robertson

All of a sudden, there is a lot going on in Washington with regard to AI.

In this morning’s Morning Tech newsletter for Pro subscribers, POLITICO’s Mallory Culhane and the rest of the tech policy team recapped yesterday’s hearings on AI from the Senate Committee on Homeland Security and Government Affairs and the House Oversight Subcommittee. Some notable takeaways:

• AI for now seems like a bipartisan issue… mostly. Senate Republicans declined to attend the Homeland Security meeting when its chair, Sen. Gary Peters (D-Mich.), declined to include remote testimony from Jordan Peterson.
• Sen. Richard Blumenthal (D-Conn.) used the hearing as a chance to tout his Kids Online Safety Act, which would update federal child safety guidelines for new technologies.

House members, maybe unsurprisingly, drilled former Google CEO and all-around AI and tech guru Eric Schmidt in particular with questions. — Derek Robertson

• The chatbots’ output aside, computer code itself has its own linguistic quirks.
• The rise of generative AI has already caused massive disruptions in the tech industry.
• Baidu employees are working around the clock on China’s ChatGPT competitor.
• Hey, remember John McAfee’s “presidential run”?
• Headline of the day: “Today’s startups should terrify you”.

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Mohar Chatterjee ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). Follow us @DigitalFuture on Twitter.

Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.

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