Pressure ratchet: Edward Fishman’s “Chokepoints”
When a company or a government has leverage over you, they'll use it.
AWS went down on October 20, just as I was trying to resolve an issue with its parent company, Amazon, regarding my new book, ARABIAN CRYPTO. Charles d’Haussy and I were supposed to publish the print version, but Amazon’s publishing platform, Kindle, had some software glitches that were preventing us from going ahead. Just as I thought I was resolving these annoyances, Amazon’s corner of the internet went dark.
Fortunately, the AWS outage was brief. AWS said things were back to normal after a few hours. This was not true of Kindle, which remained inoperable for another day and a half, but presumably AWS made sure its more important clients, such as Coinbase, were not kept waiting.
The incident was largely forgotten. Worse outages have struck, such as last year’s Cloudstrike errors. Viruses and cyberattacks are now routine hazards: Cloudflare (not to be confused with Cloudstrike) caused another outage on November 18. We seem to be suffering these errors regularly now.
Should we be impressed and amazed by the fact that three cloud providers (including Google Cloud and Microsoft Azure) keep the infrastructure running 24/7? Yes, there have been outages. Hundreds of flights canceled. Hospital systems paralyzed. Financial transactions halted. ARABIAN CRYPTO delayed. But nobody died.
(Err, I think.)
And here we are, business as usual. Given the utter prevalence of these cloud providers throughout the world, touching nearly all aspects of society, that’s a pretty impressive feat.
Or should incidents like the AWS blackout scare the willies out of us?
It’s certainly a reminder of why banks and other enterprises still keep parts of their digital activities in on-prem, proprietary servers. Even so, I wanted to get some large banks to speak with me about how they mitigate such risks. Multi-cloud and hybrid models and so forth.
No dice. No one wanted to get near this topic. “Too sensitive” said one bank PR person; “giving it a wide berth” another told me.
This is disappointing, because there’s more to keeping the lights on at a bank or an exchange than just an on/off switch. But I understand the reticence: financial institutions are totally dependent on the same handful of cloud vendors, as are we all. Few people like to talk about being powerless.
This trio of companies exploit a chokepoint in computing hardware (in the West; the Chinese have their own version of this). The Big Three aren’t the only players in this world: data-center builders, private-cloud vendors, platform-as-a-service providers, and second-tier cloud companies like Oracle exist. But ultimately everything – everything – runs back through the silicon of three or four purveyors of servers, storage, and networking on demand.
Monopoly is the holy grail of Silicon Valley economics. “Competition is for losers!” declared Peter Thiel. This is good for shareholders, but bad for everyone else. Given US politicians and courts continue to shy from trust-busting, we’re left to hope that new technologies will disrupt these oligarchs. That these same companies are also dominating AI is not a hopeful sign.
Chokepoints aren’t just the purview of Big Tech. It has become a critical part of geopolitics. The US has weaponized the dollar and its technological strengths; China has weaponized rare earths. Nor is this new: OPEC countries weaponized the supply of oil back in the 1970s.
But America’s leveraging financial and digital infrastructure has directly impacted financial services, from traditional banking to capital markets to fintech and crypto. Indeed, it is a major spur behind today’s craze for stablecoins.
Fears of dollar debasement fueled bitcoin and many memecoins. But the real action involves two things. First is the attempt by countries and their leading companies to use blockchain rails to work around US sanctions and export bans. The second, contradictory trend is the Trump administration’s embrace of crypto and stablecoins as a means of preserving the primacy of the dollar.
These may be countervailing trends but both point to geopolitics and the establishment of chokepoints in finance and technology as an important driver of innovation in money and payments.
Which led me to read Chokepoints: American Power in the Age of Economic Warfare, by Edward Fishman, a former US diplomat as well as a senior official at Treasury and the Depart of Defense. If geopolitics is a major force behind the scenes for fintech developments, it’s helpful to understand why, and what may come next.
In the wake of the 2008 financial crisis, American economic influence was written off by policymakers and analysts. The crisis convinced Chinese leadership that the US was no longer a useful mentor. Throw in the mounting losses of American wars in Iraq and Afghanistan, and American credibility was crumbling.
How strange, then, for this backdrop to reestablish American primacy, but quietly, subtly, almost invisibly.
From the end of the Cold War until the global financial crisis, the US enjoyed a ‘unipolar moment’, and it found the selective use of force to be rewarding, from Iraq (the first Gulf war) to Serbia to the Taiwan Straits. The bankruptcy of Lehman Brothers coincided with a shift in the world towards a revived, revanchist Russia, an Iran on the cusp of obtaining a nuclear bomb, and a China that, under Xi Jinping, would shed Deng’s strategy of biding one’s time in favor of seizing superpower status and economic self-sufficiency.
The short, the world has turned much more dangerous for the US and for democratic powers. These are not adversaries one wants to confront militarily. Besides, the ‘war on terror’ had left Americans weary of adventures, and anyway, the state appeared to have withered in an era of globablization and triumphant multinational corporations.
To grapple with its challenges, the US state had to reestablish its power, but it did so through bureaucratic jiu-jitsu. What this meant and how it happened is the story Fishman relates.
Essentially the US has been fighting economic warfare since the final years of the George W. Bush administration. It has won some battles, flubbed others. Strategically the outcomes are mixed, but overall Fishman rates these efforts as necessary. He was part of the teams at Treasury and State that defined this new way of war, so his account is unapologetically in favor of these methods, and their changing goal, from one of trying to change the adversary’s behavior, to one shading towards total economic war, designed to inflict maximum damage.
Before the GFC, though, American officials had grown skeptical of economics as a means of statecraft. The main tool was sanctions, a blunt instrument that required cooperation from the rest of the world, including UN mandates; even so, they tended to hurt the civilian population but not the regime. Tough global sanctions were placed on Saddam Hussein’s Iraq for years following the first Gulf war (in 1991), but everyone got tired of it. European energy companies chafed to do business with Iraq, etc.
So when Iran was caught cheating on its commitment not to produce nuclear weapons, the Bush administration saw no point to economic measures. Iran was already sanctioned. There was no global appetite to stop importing Iranian oil.
A small team of Treasury and State officials realized, however, that the dollar’s preeminence meant the US didn’t have to get other governments onside. The greenback is involved in 90 percent of forex trades because the rest of the world finds it necessary and convenient to use it as their de facto non-domestic currency, for borrowing, for investing, and for payments. If the US blocked a bank or company from accessing dollar transactions, then that entity is crippled.
Thus with a few obscure bureaucratic decisions in the bowels of a Washington office building, US government officials could turn foreign banks into front-line troops: get foreign banks to stop doing business with sanctioned entities, such as Iranian energy companies. Nobody had to stop importing Iranian oil, but their own banks wouldn’t touch the business. So business would halt.
This required a discrete but comprehensive diplomatic effort. It would only take one bank, somewhere, anywhere, to enable Iran to get paid for its oil. Treasury officials visited as many banks as they could, to explain their reasoning, share evidence of Iran’s use of the global financial system to ignore sanctions and finance its nuclear program – and to lay out the consequences for a foreign bank that was found to be aiding that effort. At no point did these Treasury officials deal with foreign governments; they weren’t seeking a change in policy, but to use global finance’s invisible networks of power to move new levers.
The US succeeded in cutting Iran off from banking, but it couldn’t prevent Iran from exporting oil. But the US found ways to coerce global banks to not pay Tehran its oil-derived revenues: the money was placed in escrow accounts, still belonging to Iran but frozen. This pressure ultimately worked: Iran agreed to new constraints on its nuclear ambitions in return for sanctions relief.
Iran was a pariah, but Russia was a different story. Its 2014 invasion of Crimea required a response. On the surface, the US appeared feeble and complacent, but in fact, the Treasury weaponized its capital markets, by banning Russian entities from raising equity or debt. Although Russia remained a massive energy exporter, it also had extensive foreign debts, which it could no longer roll over. The US also saw that Russian oil majors depended on Western technology and parts, and it blocked Russian firms from accessing these.
These moves didn’t stop Putin. There was no way to change global appetite for Russian energy. Economic warfare led to negative consequences for the US, with Russia turning to China to sell energy and set up central-bank swap lines, build a domestic payments network, and seek substitutes to SWIFT, the messaging utility for global correspondent banking.
But capital markets proved to be a powerful chokepoint. The US wreaked havoc on the Russian economy without having to interfere with other countries’ desire to buy Russian oil and gas. Fishman believes these efforts could have been more effective if they had been applied relentless up front, rather than incrementally, tit for tat – which gave Putin plenty of time to respond, and convinced him the West was weak. Fishman argues that economic warfare requires huge decapitation strikes, not border skirmishes.
That lesson was taken to heart by the Biden administration when Russia invaded Ukraine again in 2022. This time the US pushed for the ultimate weapon: freezing the assets of the Russian central bank. This had long been considered a taboo. Indeed, it has set off a furious effort around the world to come up with the means to evade US financial power, such as BRICS countries trying to come up with their own payment systems. The US didn’t stop the war in Ukraine but the move to seize Russian reserves took Putin by surprise and has pushed Russia into dire poverty. US Treasury officials also worked out a clever plan to use other chokepoints, such as British marine insurance, to cap the price on Russian oil exports to countries like India and China.
The greatest target of US economic warfare is China. Fishman lays out the standard US grievances about Chinese state mercantilism, dumping, and IP theft, which took unfair advantage of an open trading system. The Chinese have their own narrative about this conflict. What matters is what tools the US used to wage its economic war.
China was too big to take head-on. But the US learned to use export controls that targeted key companies it regarded as a threat, such as telecom companies ZTE and Huawei. America’s tactics expanded from payments and capital markets to banning companies from selling products to targeted buyers, lest they fall afoul of US sanctions. This move also made the US Department of Commerce an actor in this game, alongside Treasury, Justice and State.
According to Fishman, the US was on the cusp of killing these companies, but Trump’s erratic nature gave them a reprieve. This was partly due to Trump halting sanctions as a personal favor to Xi Jinping, in the hope of sealing a broad trade agreement. More broadly, export controls do rely on allied countries to participate: Japan, Korea, Taiwan, the Netherlands, and others control critical parts of the tech ecosystem. Whereas Obama officials assiduously courted foreign banks to go after Iran, Trump delighted in lambasting US allies. This created more frictions in enforcing export controls. Finally, Trump prefers the cudgel of tariffs to low-visibility, subtle, patient measures.
The US did enjoy some successes against China. The threat of tech export bans is real. In some areas, China has been able to innovate enough to sidestep these barriers. In other areas, such as semiconductors, China is likely to remain behind. Huawei still flourishes as a mobile phone producer, but it has seen its telco ambitions thwarted in many parts of the world, notably the UK.
Most importantly, the US and China are both actively decoupling, to the extent possible. The logic of economic warfare leads inexorably to greater separation. It also is spurring efforts by many other countries to evade American chokepoints, lest one day they too become a target.
This has put the dollar in play, with crypto and stablecoins now at the forefront of efforts to either shore up the dollar’s primacy, or evade it entirely.
Fishman notes efforts by, say, BRICS countries to consider other currency arrangements, but is skeptical they will amount to much. The GFC may have been a disaster made on Wall Street, but it was the Federal Reserve’s backstop that brought the crisis to a fast resolution; ditto for its role in preventing the Covid pandemic from spiraling into an economic disaster.
The stablecoin mania began after Fishman published Chokepoints, but it’s worth noting that nearly all of these tokens are pegged to the US dollar. Their issuers are busy buying US Treasuries and T-bills to back their reserves. The dollar it seems is more prominent than ever.
China’s e-yuan, of course, could change the game. As a claim on the People’s Bank of China in digital form, it can readily transact in renminbi with foreign counterparts without touching US financial infrastructure. The PBoC is setting the standards for central-bank digital currencies, not the Fed. But capital controls, market interventions, its state-surveillance culture, and wolf-warrior diplomacy are preventing the internationalization of the renminbi. China’s best chance is further US missteps: degrading the rule of law, undermining Fed independence, self-harming tariffs, and unleashing trade wars against its allies: Trump is doing a lot of the heavy lifting for the renminbi!
The roots of American financial power go back to the creation of Eurodollars in London in the 1960s, as a response to American regulation on bank capital. Eurodollars (dollars created and traded overseas) let companies and banks evade capital controls that were a major part of the Bretton Woods system. Washington grudgingly accepted the existence of Eurodollars once it realized it could expand US dollar holdings overseas, which meant foreigners would finance US deficits.
Even so, US spending (Lyndon Johnson’s war on poverty and war in Vietnam) was leading to inflation because of the dollar’s peg to gold, and the willingness of European allies to cash in their dollar holdings for said gold. Nixon ended this in 1971 by leaving the gold standard.
Today we are at the beginning of a new regime for the dollar, one in which many countries are desperate to reduce their dependence, and yet one in which their companies, banks, and citizens are increasingly turning to dollar-denominated stablecoins for payments and other uses. Neither the Fed nor the Treasury can do much about these, however: who’s got sway over Tether? This feels less like a chokepoint and more like a loss of control. (I wish I could say the same about Amazon…)
US financial and technological might will endure – but America’s ability to rely on economic means to fight its enemies may not. Many of the tools used by the US over the past twenty years feel like tactics with diminishing returns, and many relied on an international world system that Trump has undermined. Many readers of The JDB Report will say, good! We don’t like this economic war! Before you cheer, though, consider the alternative.