What’s at the center of the U.S.-China power struggle? Crypto

Chinese spy balloons in America and naval provocations in the Taiwan Strait create exciting and dramatic headlines, but just last year Chinese President Xi Jinping himself argued that “technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce.”

Whether U.S. policymakers like it or not, cryptocurrency and blockchain technology are a primary battleground in America’s contest with China—and the U.S. is dramatically falling behind.

Forefront in China

Chinese-affiliated cryptocurrency exchanges account for the vast majority of global trading. The Chinese Communist Party has already established bilateral agreements and deployed its central bank digital currency, the e-Yuan, beyond its own borders in places such as in Ecuador, Peru, and other major port locations across South America. And, last year, the Digital Currency Research Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates joined the Multiple CBDC, or m-CBDC, Bridge, a project to build a system for real-time cross-border forex payments.

In parallel, criminal networks operating out of China and its neighbors have stolen and laundered billions of dollars in digital assets globally—including in the U.S. Chinese intermediaries, for example, that helped North Korean hackers launder hundreds of millions in stolen crypto. And it’s an unknown Chinese transnational criminal network behind the multibillion-dollar crypto scam called “Pig Butchering” that’s plagued everyday Americans looking to enter crypto markets for nearly a decade. “Pig Butchering” victims typically are new to crypto and unknowingly send their savings to these scammers. More robust markets in the U.S., with safe investment options from both crypto-native firms and traditional financial institutions, would reduce the scale and effectiveness of these operations.

Retreat in the U.S.

Of the top 15 cryptocurrency exchanges by volume, only three are American companies. While China banned cryptocurrency exchange operations in 2017 and transactions in 2021, the other 12 top exchanges by volume all have affiliations with China or Hong Kong, which China has used as an avenue for access to global markets broadly in the past and reportedly now as a testing ground for crypto markets. That amounts to over $10 billion in daily trading volume that’s outside U.S. jurisdiction. 

At the same time, and particularly of late with the current regulatory landscape, some of the largest American market makers and exchanges are moving offshore. Jane Street and Jump Crypto, for example, have both scaled back operations in the U.S., and many others are searching for new headquarters in Dubai, Singapore, Hong Kong, and other jurisdictions that have established clear regulatory frameworks. Coinbase, the U.S.-based publicly traded exchange that was recently sued by the SEC, is considering setting up an international hub in the United Arab Emirates, and Galaxy Digital, a crypto investment company, is moving more of its operations offshore. Coinbase and Gemini, another U.S.-based exchange, also both recently launched derivatives platforms for non-U.S. users. 

This industry is not going away—just shifting offshore—and America is losing what little influence it has over its trajectory.

What’s next?

A future where China owns the crypto forefront means less financial freedom for those who adopt its system, less creative influence, more opportunity for hidden financial crimes, a limited ability in the U.S. to impose sanctions and other financial penalties globally, and a diminished reliance on U.S. financial firms and the U.S. dollar.

America needs something more thoughtful and strategic than simply cracking down on exchanges. Despite the recent challenges cryptocurrency markets have faced—frauds, scams, hacks, and a bear market—decentralized finance has proven its value proposition and will rebound to continue to play a growing role in our global markets.

When China announced that a digital Yuan would be piloted in May of 2020, Mu Changchun, the head of the Digital Currency Research Institute of the PBoC, told a forum in Hong Kong about the nation’s “horse race approach” to cryptocurrency, and that “the front-runner will take the whole market—who is more efficient, who can provide a better service to the public—they can survive in the future.”

America must respond. The way the U.S. can win is the way it always has, with what’s fundamental to America: an open society with bold thinkers and entrepreneurs pushing the limits of the system with responsible technological innovation. We must foster innovation in decentralized finance because it’s the only way U.S. interests can win this “horse race.” Our national security depends on it.

Adam Zarazinski is the founder of the digital asset data analytics company Inca Digital and a major in the Air Force Reserve JAG Corps. The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.