In this episode with Yaya Fanusie, we discuss China’s big blockchain ambitions, digital payments for Big Macs, why the nation with the best data is going to win – and whether this technology is closer to the Bee Gees or Fiona Apple.
Yaya Fanusie is an adjunct senior fellow who studies the national security implications of cryptocurrencies at the Center for a New American Security and a former counterterrorism analyst at the CIA. Today he is Chief Strategist for Cryptocurrency AML Strategies.
Josh Burek: This is Immutable, from Harvard Kennedy School’s Belfer Center for Science and International Affairs. I’m Josh Burek. In today’s episode, we hear from Yaya Fanusie. He’s an adjunct senior fellow who studies the national security implications of cryptocurrencies at the Center for a New American Security and a former US counterterrorism analyst at the CIA. Today he is Chief Strategist for Cryptocurrency AML Strategies. Yaya is excited about blockchain technologies, but he sees many stakeholders moving too quickly without a sober assessment of risks, including the potential for authoritarian control over our digital wallets. We discuss China’s big blockchain ambitions, digital payments for Big Macs, why the nation with the best data is going to win – and whether this technology is closer to the Bee Gees or Fiona Apple.
Josh Burek: Welcome to Immutable. Very excited to have you here.
Yaya Fanusie: Thank you, Josh, for inviting me. Happy to be here.
Josh Burek: A core feature of blockchain is its high integrity ledger. To use the Vegas line, what’s transacted there, stays there. This podcast has begun exploring some of the positive business innovations and social impacts this can foster. At the same time, we can’t ignore the fact that blockchain is making it easier for criminal networks to collect, hide, and cash out ransomware payments. Talk to us for a bit about this dark side. How is it being used for harmful ends and what can be done to fight back?
Yaya Fanusie: The adoption of any new digital money format or new money format, is going to mirror the adoption and the experimentation in illicit world. What we’ve seen is that some of the earlier adopters, because of either convenience, because of the intrinsic value, if I could say of Internet money, that it’s easily transmittable over the Internet. There are actors where that is a huge benefit. If you are a cyber hacker, if you’re operating totally on the Internet or in the dark net, the dark web, it actually just makes sense to dabble in cryptocurrencies. To use crypto as a method of payment to store value, to move value, and to launder.
It’s really just the practical side of this new digital money format. In terms of how do we stop it or what is the issue, I like to liken this as the first bucket of risk, because whenever I talk about crypto and blockchain to the folks that are thinking about national security risk, I always say that there are three buckets. There’s this short-term bucket of risk which is probably what most people talk about: ransomware, the potential for terrorist actors to use it, to raise funds. That’s the short-term risk. And even though that’s probably where there’s the most illicit activity, because it’s already available, that’s actually the area which is the most manageable, believe it or not.
Why? Because the movement of crypto has to eventually usually go through on and off ramps. People typically want to pay for things in fiat. So as long as we live in a world where the ransomware attacker at the end of the day wants to move from Bitcoin or Monero, eventually into fiat currency, then really we simply have the regulatory framework that’s worked for all types of money, including digital money before Bitcoin or non-decentralized money. That’s sort of a long-winded way to say, “Yeah, there’s a lot of illicit activity that happens a lot, maybe in absolute terms – proportionally, you could say that it’s small compared to the entire crypto space – but it’s not a new problem per se. These are the same issues and risks that we have in the broader money service business and money transmission arena outside of crypto.”
Josh Burek: You mentioned national security. So of course I have to ask you about China. The United States does not have a national blockchain strategy, but China does. As part of a broader push to digitize its economy and cultivate data as critical national infrastructure, the Chinese communist party has launched a blockchain based service network and is rolling out its own central bank digital currency. Beyond making money smarter, what’s Beijing’s agenda here? How do these efforts position China for global financial influence?
Yaya Fanusie: The Chinese communist party, the CCP, has this vision of a digital economy of the future where all commercial and governmental apparatuses are driven by data. A couple of years ago, China actually created a three-year financial development plan that spells out that intention.
The expectation is that the global economy is going to get more digital. We can see this because we’re all living a more digital life. We’re living through our devices. We’re living through mobile, through the internet. And it’s becoming more a part of her life.
The blockchain effort in China is actually just a small slice of this overall fintech and data strategy. For a bigger context, understand the Chinese government is actually doing more around data. There’s been a huge crackdown on the private tech space, the mobile payments space, the tech sector within China. For what about a decade, the Chinese private sector was open to do a lot of innovation and it innovated with data.
But in the past year, the government has come down and basically said, “If you have data, if you derive data through your applications and your interaction with consumers, the government must have easy access to that data.” So now there are steps to create government subsidiaries and government-holding companies over these previously private tech firms.
So all of that really relates to this objective of data that the government is able to acquire, analyze, put big data analysis on to derive artificial intelligence – to feed AI. Those are the things which are going to feed the global digital economy of the future. At least that’s the CCP’s view and all of these other efforts, whether in blockchain and digital currency, support that.
Josh Burek: From the Western perspective, you have figures like the Winklevoss twins who say blockchain is bigger than the printing press. It represents the decentralization of everything. And from the Chinese lens, they think of that as the possibility of the centralization of everything.
So a fascinating paradigm clash ahead. And I just want to ask you on that front, this tech rivalry around blockchain is part of a bigger battle for tech supremacy across a range of domains, such as 5G, machine learning, green energy (where by the way, we’re getting crushed). Is this mainly for bragging rights, or are the stakes significant in your view?
Yaya Fanusie: It’s more than bragging rights. And sometimes I like to use the language that China uses. Because blockchain is the term that we all know, but underneath the hood of that, a lot of the folks in China that are working on blockchain things, have used the term broadcast transmission in contrast to linear transmission. So let me break down what I’ve observed at least how they’ve explained it. Even though we are used to the internet spreading information – and it can seem to be instantaneous – the plumbing, the architecture is still linear in the sense of data goes from point A to point B, it can go to many different points, but it’s data going in a linear transmission. Whereas blockchain offers simultaneous; the broadcast of data to be acquired, acted upon by several different independent nodes. So instead of transmitting in a linear fashion, blockchain allows you to do a broadcast transmission.
That’s one way of looking at it. The reason why this is important is because China really has two different strategies for its R&D in technology. There are those areas that you’ve mentioned, like 5G, there’s also robotics, semiconductor chips.
Those are areas that of course are priority areas for advancement, but those are areas where the benefit is easily understood. And of course the United States is putting money in putting R&D in those areas. But China actually has another strategy, which is to gain prominence and gain a foothold in some technologies that are very nascent.
And this is where blockchain comes in. China is in this technology because it sees it as an almost generational technology, just like the Internet was, right. The Internet was, you know, almost 20 years in the making, right, even to get to one protocol that everyone agreed upon – OK, this is the Internet. This is what we’re going to build on. So it’s more than bragging rights.
It’s this nascent data transmission area, where there is a lot of activity, but I think we can all admit there has not been the killer app outside of speculation and maybe store of value, but there are all these applications and possibilities for commercial and even governmental use that haven’t been developed yet.
And now China is trying to gain a foothold. So actually I would say the stakes are very high.
Josh Burek: I want to move from killer apps to Big Macs. This is not a podcast about China, but a news report just a few days ago said that China is pressuring U.S. companies like McDonald’s to expand its digital RMB payment systems. You wrote on LinkedIn that that would be a Big Mac-stake.
Yaya Fanusie: Oh, I heard the groans…
Josh Burek: Lettuce cease with the burger puns; listeners want meaty answers. So what’s going on here?
Yaya Fanusie: What’s going on here is the winter Olympics this coming next year will be in Beijing and China has been working on its digital, currency, the digital RMB, or e-CNY for well over a year in terms of piloting it. And the question is how does this relate to foreign companies, to U.S. companies?
Are they going to be taking the e-CNY? And this report says that’s the aim. The Chinese government wants a company like McDonald’s during the Olympics to start offering and accepting this new digital currency. The question is here, what are the risks now?
Maybe it makes sense, right? If you’re in China and this is the fiat digital currency, it makes sense that you would take it. But here are some things that I foresee as being issues. And why it’s a mistake. Number one, I noticed something earlier this year when a European clothing company, H&M – many people may know of it, that has branches in China – basically got de-platformed or lost its digital footprint. Because members of the CCP took offense with an H&M a statement about possible forced labor and human rights violations in the Xianjing region, the Uighur region. So what happened? Pretty soon, you could no longer search for H&M in China on the geolocation maps, or you couldn’t use the Chinese Uber to go to an H&M store.
The store was still there, but on the app, it would say, invalid destination; does not exist. So that was the sign of the government taking, because of its political feathers being ruffled, basically doing what it could to send a message to that company. OK. That has nothing to do with the digital currency because the digital currency has not been fully launched, but if you follow the logic, what you could see is that a digital currency where the central bank of China actually has control over the wallets because they’re digitally connected, from user to the central bank, you enter into a payment system where the government could probably have an easier time blocking payments and even throttling your wallet. So once a U.S. company gets into that, then it has to concede that I am now going out of the regular payment system that I know, where it’s the rules are largely U.S.-led in terms of the banking order, and the way sanctions work and way transactions can be blocked.
We’re used to that. You’re entering a system where, no, you may really be more vulnerable to the whims of the Chinese government, as it relates to your payments. So that’s a big mistake.
Josh Burek: The Belfer Center studies the nexus of science technology and international affairs, so it’s natural for me to ask: How might the rise of crypto and blockchain based services affect the balance of power among nations? And to use one example from another domain, we’ve seen how cyber capabilities have given an impoverished country like North Korea outsized leverage.
Yaya Fanusie: What all of this is doing is it’s reducing the cost for certain types of operations, certain types of cyber actions. North Korea has had a long history of sanctions, evasion schemes involving the shipping industry involving, arrangements with certain Chinese companies and even banks to the tune of hundreds of millions and billions of dollars over the years.
Now you have a relatively low-cost way to try to recoup the same amount of money through hacking exchanges. The fact that now crypto is a thing. The fact that there are countless exchanges holding crypto with their private keys, being held on servers is just a honeypot for actors like North Korea and other illicit actors.
But I would actually say that’s the sort of almost a marginal area. Illicit actors and state actors could benefit. I don’t think that’s the groundbreaking one. What I would point to is the fact that much of the industry is at an experimental stage, even though we’re talking about billion-dollar companies and trillions of dollars in the crypto ecosystem. It’s still experimental in my mind, whether we’re talking about NFTs, right? Yeah. Lots of money is going into NFTs. And even stablecoins, even DeFi. I still would say that these are still basically proof of concepts. The only concept that has been proven is store value and speculation.
But the idea that we’re going to use an NFT for art or for other ownership, or that stablecoins are going to be the way that the world transfers value for cross border transactions, we’re still proof of concept. So everything is really so early.
All of this experimentation probably going to be systemically important when a nation figures out bow to take it from proof of concept to being something that that nation, and then the rest of the world actually is going to rely upon.
That’s what we don’t have. And the irony here is that the blockchain space, which was born out of this idea of being decentralized and outside of government, I look at it a little bit differently. I think that the reason why it hasn’t proliferated in the way that all the technologists and enthusiasts spotted would is actually because it’s still in the proof of concept stage and has not really overlapped with the way governments are operating. So the moral of the story here is that the nation that figures out how to tap into these experiments and make them systemically important, and to deal with data in this sort of broad transmission way, to that nation, perhaps, go the spoils.
It almost seems as if the nation with the best data is going to win.
Josh Burek: Another reason why this technology hasn’t mainstreamed further is interoperability. That’s a mouthful, but for those of us north of 40, it reminds us of the old VHS vs. Betamax VCR wars in the 1980s. And so I want to ask you. Are we headed to a standards war like that, or potentially something worse? Or do you have a sense that this experimental stage, as you put it, could result in a set of services that work harmoniously in a common ecosystem?
Yaya Fanusie: They could, but the challenge is how do you do that? I really appreciate the reference: those of us in the generation X posse understand this very well. The good thing is that all this innovation that we’re seeing in the blockchain space has been driven by mostly private ventures – each one trying to build the one blockchain to rule them all, or the one decentralized environment to rule them all. But the thing is: that’s also, that has been the bad thing. It’s not so much VHS and Beta because if you think…we’re so early. Consider if IBM had tried to build the Internet by itself, right, before the R&D of the Internet had coalesced into a single protocol until TCP/IP. What would it have been like if IBM and apple in the late 70s, were trying to build the internet?
Josh Burek: We’d have walled gardens.
Yaya Fanusie: Lots of walled gardens. Exactly. And I know everyone is saying that they’re building beyond the walled gardens, or they’re trying to build interoperability, but I think there’s just a natural tension here where it’s going to be difficult for a private venture to build the environment that everyone wants to connect to. I have some ideas about how we solve, but I think the way we’re doing it, it’s not really aligned with what we did with the Internet.
Josh Burek: You’re a former intelligence analyst. So you’ve been trained to tune into signals and tune out noise. You’re seeing some truly impressive ventures being formed. You’re also seeing a lot of garbage. What are some ways that the rest of us can be savvy and discerning, as we evaluate this field…maybe some of us are putting some money into this field. What are some questions we should be asking ourselves before we take those steps?
Yaya Fanusie: Even before you ask your questions, you have to I think set proper expectations. And this field has had so much glossy pitch decks and press statements that take the place of news that you have to pull that back.
I’m not going to say that there’s so much garbage. I don’t want to demean a lot of the great projects and attempts, even if they fail, I don’t want to put them down. The framing should be that the barrier to entry is lower with blockchain projects in the sense that startups inherently are risky and ideas are a dime a dozen.
And in the crypto space, because of the decentralized nature of the technology in there, it’s relatively easy to create something and have an idea and to start to gather attention towards it. It really just means that now you’ve got a lot of startups.
And again, most of these startups will probably fail or they’ll have to pivot. So that should be the first thing. So once you hear a good idea and it has blockchain behind it, you just add it to all of the other good ideas with blockchain and just understand doing a startup is tough.
Not confusing the entrepreneurial pitch with the practical reality, but here are some questions that you could ask because this is what I do, especially when I hear even people that I respect, great entrepreneurs in this space when I hear them, give their pitch for why they feel they’re solving a big problem and why they are building the next stage of the Internet.
I often ask things like. What could go wrong? And how has that been mitigated? Now I ask this question a lot because I deal with anti-money laundering issues. I’m looking at the financial crime risks. And I do consulting in this area, right? So if a company comes and says, Hey, we’re going to build this X new product and it’s going to be open. And it’s going to be basically money without borders, et cetera, et cetera. People who don’t follow the anti-money laundering side, probably dismiss the regulatory aspects. You have to really ask, OK, how is this going to be exploited?
Not because you don’t think it’s a good idea, but because obviously, if this thing scales, like you want it to, it’s going to bring illicit actors to it. So that’s one of the ways that I do it. The Internet of money is, it sounds very good, right?
Many of us are attracted to that idea, but keep in mind, as you think about these projects, that the ease of information that we got from the Internet is different than the ease of value when it comes to national security implications and crime implications. Here’s one example.
People will say, hey, publishing used to be highly regulated before we had websites before the Internet, and now we’ve got the Internet and we just had to make everything almost open. The regulators adjusted, which might be true, but just think about this.
What’s the difference between if I offer you a million dollar – not you, because you know, we wouldn’t do this in real life – but if someone were to do murder for hire…
Josh Burek: You’ve got my attention now.
Yaya Fanusie: A million dollars, yeah. But I’m saying for bad purposes. So for murder for hire.
Josh Burek: That’s a different podcast.
Yaya Fanusie: Yeah. I hope I’m not a guest on that one. What does the ease of transferring a billion dollars bring versus the ease of transferring the library of Congress’ contents or the content of certain libraries, right?
These are both groundbreaking things, but they have different implications. So for people who talk about the Internet of value and that transferring a billion dollars or a hundred billion dollars should be as easy as sending an email, you really have to think about the downside and the risks. So that kind of thing could maybe provide a little bit of sobriety to some of the talk we have that comes from these pitches.
Josh Burek: It’s become a cliche in Silicon Valley that nearly every startup slide deck has the words AI or machine learning, even if what’s really going on is quite a bit simpler. And there’s a lesson here for the blockchain world. You’ve told a story about a time when you made the mistake of putting the technology cart in front of the horse.
And I feel like I’ve heard similar pushback from venture capitalists who might look at a business proposition and say, I don’t get it. Can’t this basic problem be solved with the traditional database? Like, why are we talking about blockchain? Is that a common case where you’re seeing solutions in search of problems.
Yaya Fanusie: Some of it is somewhat natural because the blockchain’s phase has had such an allure because of the uniqueness of it and the concepts, right, are really intellectually compelling and interesting. But I go back to the startup world. Ideas are a dime a dozen. And I taught a class, a couple of years back at Morgan State University in Baltimore. t was an Intro to Blockchain course.
The students had to come up with decentralized app ideas. So they weren’t going to build them because we didn’t have that amount of time in the class, but they had to come up with an idea and they had to figure out a problem in the school that they could solve. And part of what we evaluated the students on when they came up with these ideas was we then would ask the question that you said, which is OK, but why do you need a blockchain for that? Of course it was a blockchain course. So the students, it was almost like a trick project.
Josh Burek: To get an A.
Yaya Fanusie: That was the real answer, but I had to actually make them check themselves and say, OK, yeah, but is it worth it to do this with a blockchain? But you have to go through that process because I think when you do that, you could come to, well, where is blockchain really needed? We have to go beyond pitches and ideas and really break down these ideas to their basic part.
Josh Burek: We’re trying to age this field and the question is, are we in our infancy? Are we in the awkward adolescent stage? Are we the midlife crisis? And I guess to give us some specific years and common reference points: If we were to analogize to the rise of the Internet, you and I were part of a conversation a few months ago, and I think I’d asked you, are we at the 1994 stage with crypto? And you said not quite, maybe closer to Bee Gees album in the 70s. Can you say a little bit more about that? And has your thinking changed?
Yaya Fanusie: Yeah, definitely more Stayin’ Alive than, not Nirvana....
Josh Burek: Fiona Apple.
Yaya Fanusie: Yeah, this is a common refrain. And you could try to argue with it, but I have a counter argument. My numbers may be wrong, but I think 1994 AOL had 1 million paid subscribers. It means that you had an Internet where you had an application that was being used by a million folks in the United States that were paying every month for the service. I don’t think you have that. Cause that to me is not analogous to how many people own Bitcoin. Of course, many more people own Bitcoin, but that’s not the same as the application. So in terms of blockchain itself, I don’t think we’re there. I think we are more like in the 70s.
And in the 70s you had researchers actually experimenting, iterating. But here’s the thing: I talked to a former DARPA guy recently. And he told me that the thing about the early development of the Internet was that, people talk about how it was a government-led thing.
DOD was funding all these researchers who were doing all of this, but he said, you know what? It wasn’t like it was a DOD-led and micromanaged thing. If it was, if the government was like day to day managing the development of Internet research, we never would gotten anywhere. It was almost an offhanded, it was funding, it was directed, but you had this place where these researchers were doing and you didn’t have the commercial, expectations at all. So the challenge with comparing what’s happening with blockchain to what happened with the Internet is that there may be a false comparison because blockchain innovation is happening with so many commercial expectations built into it. I think we might have to do some restrategizing; I’m all about the free market and private sector innovation, but as I look at what happened with the Internet, I’m not sure that we’re following the same model. And I think we may be stunted if we don’t look at this.
Josh Burek: I asked our first guest, Dante, about something immutable about him. One of the presumptions of the show is that good is immutable. Mentorship is immutable. So tell me about a time someone went out of their way to help you. And what kind of impact did that have on your life?
Yaya Fanusie: I’ve been following the blockchain stuff really just as a think tank researcher for at least since 2016 and doing it all in the think tank space. And at one point in 2019, I got a call in from a major company, and the company basically was into something really big in the blockchain space. And they called me in because they just wanted my advice. And they said that they had just heard from someone who I didn’t even know very well, who I had talked to and dealt with. And that person just mentioned my name and had said, oh, you should talk to Yaya. And they called me in, I talked to them, et cetera. That ended up being one of my first consulting clients, and it actually led the way for me to start consulting more and to where, most of my time I do consulting, AML consulting, for firms in the crypto space.
That was huge. And it’s funny, like that was two years ago. And so I recently got in touch with the guy again – like I said, we weren’t very close. And we got together and I said, hey, remember this? And he said, he didn’t even remember. I said, hey, I gotta take you out to lunch.
So the fact that people remember your expertise or that whatever that you’re doing, even if you may be doing something it’s not for profit, the fact that someone just remembered something that I’m passionate about, love to research, love to deal with, and that he shared that, that’s something that to me, I’m indebted to him for that.
Josh Burek: Thank you for sharing that. It’s a great reminder about the strength of weak ties and also the fact that our reputations really do proceed us. Yaya Fanusie, an absolute privilege, and honor to have you on.
Yaya Fanusie: Thank you, Josh. Have a great day.
Julie Balise: Immutable is a production of the Belfer Center for Science and International Affairs at Harvard Kennedy School. Our program is produced and edited by Josh Burek, Director of Global Communications and Strategy. The Associate Producer and Technical Director is Benn Craig. Digital Communications by me, Julie Balise. Thanks to Deb Henderson for our podcast artwork. Upcoming episodes and additional information can be found at belfercenter.org/immutable.