A digital dollar would help the United States and its allies keep China in check

Chinese officials have made no secret that their dramatically accelerated efforts to introduce and distribute the digital yuan are a first step in their long-term strategy to undermine the dollar’s global supremacy and expand their influence.

Despite this, top U.S. financial officials have rolled their eyes at any suggestion that deeper dangers lurk for the dollar, and therefore also for U.S. national security, in the global race for digital currency. Even as China advances and the value of bitcoin reaches $ 1 trillion, the Federal Reserve was in no rush to be a competitor.

Until now.

This week marked a public turning point for top U.S. government officials engaged in international finance – Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell. Josh Lipsky, Director of the Geoeconomic Center of the Atlantic Council, tweeted that he marked “the firing of a starting rifle”.

At a New York Times event on Monday with Secretary Yellen, CNBC’s Andrew Ross Sorkin garnered his fullest endorsement to date of a digital dollar, or central bank digital currency, or CBDC. Although Sorkin drew Yellen’s attention to an Atlantic Council investigation with Harvard’s Belfer Center, showing that 70 countries now have digital currency projects, Yellen is focusing more on the domestic good than a dollar. digital could do for Americans.

“I think it makes sense for central banks to look into the matter,” Yellen said, in a historical snippet on Snapchat.

“My understanding is that the folks at the Federal Reserve Bank of Boston are working with researchers at MIT to study the properties. We have a financial inclusion problem. Too many Americans really don’t have access to payment systems. and easy bank accounts. This is something that a digital dollar, a central bank digital currency, could help. I think it could lead to faster, safer and cheaper payments. “

In testimony to Congress a day later, Fed Chairman Powell also broke new ground, calling the digital dollar “a high priority project for us.” He added: “We are committed to solving technology issues and to consulting the public very widely and in a very transparent manner with all interested parties as to whether we should do this.”

Yet while the Fed is consulting, China is executing.

Neither Yellen nor Powell mentioned China’s growing lead in digital currency development, but that was the background. Their call to action coincides with China’s announcement earlier this month of an important partnership with cross-border payments system SWIFT, dispelling any doubts about Beijing’s intention to internationalize the digital yuan.

At the same time, China has entered into a free trade agreement, or FTA, with Mauritius, the first with an African state, as part of an agreement designed to create a digital financial testing ground. “As China evolves its digital currency plans, it may be Mauritius leading in this area for Africa,” write experts Lauren Johnston and Marc Lanteigne for the World Economic Forum. The FTA agrees to promote “the development of a renminbi clearing and settlement facility in the territory of Mauritius”.

It all comes as authorities in Beijing took advantage of the Chinese New Year celebrations on February 12 to roll out three large-scale pilot projects to distribute digital yuan worth around $ 1.5 million in “red packages.” Worth about $ 30 each. Then this week, China extended its digital currency distribution test program to the city of Chengdu, the capital of Sichuan province and the fifth most populous city in the country, where it distributes some $ 6 million in yuan. digital.

China’s ambition seems to be to lay the groundwork now for the release of the digital yuan at the end of 2022 at the XXIV Olympic Winter Games in Beijing. Speculation is that Chinese organizers could require all participants and athletes to download an app that would ensure all of their gaming payments for hotels, tickets, food, souvenirs and more are made in its new digital currency. While there is no physical boycott of the Chinese Olympics, watch for digital boycotts from the United States and other teams.

It’s hard not to compare China’s current lead in digital currency development, so far ignored by US officials, to its early global lead in developing 5G broadband cellular technology standard. , or fifth generation. Until the Trump administration reacts alongside Western manufacturers, no one could compete with Chinese 5G suppliers and equipment manufacturers around the world, the most dominant of which is Huawei.

China’s constant focus on technological advancements underscores its recognition that historically, the country that took on high-tech in its time has most often been the dominant international player as well.

If the United States lost the high ground of financial technology innovation, combined with a weakening of the dollar’s global dominance, the benefits for Beijing would be substantial.

China’s different approach to privacy gives it a competitive advantage. The need for the United States and Europe to address privacy concerns will complicate the development of CBDCs. Conversely, Beijing sees the digital yuan as a way to further strengthen its already formidable state of surveillance, while improving its ability to fight money laundering, corruption and terrorist financing.

In an article recently published by CNAS, authors Yaya J. Fanusie and Emily Jin illustrate how China understands the geopolitical importance of their digital currency project. They tell how Yao Qian, former head of digital currency research at the People’s Bank of China, compared the progress of his country’s digital currency to China’s previous advances in robotics, big data and intelligence. artificial.

Speaking ahead of a United Nations information technology conference, “Yao posed digital currency as part of ‘the next war’,” the authors write, referring to an article by this title in The Economist which dealt with the central role of technology in US-China competition.

The Fed is concerned about being too hasty in introducing a digital dollar, given the stakes as a global reserve currency. The biggest geopolitical danger, however, is how quickly it is falling behind.

The United States can still win this competition if it not only quickly develops a digital dollar, but collaborates on the creation of a digital euro, digital book and digital yen. The full firepower of these currencies would quickly fill the innovation gap. It would also demonstrate the value of working with allies, a centerpiece of Biden’s foreign policy.

Frederick Kempe is a bestselling author, award-winning journalist and CEO of the Atlantic Council, one of the United States’ most influential think tanks on world affairs. He worked at the Wall Street Journal for over 25 years as an overseas correspondent, deputy editor and senior editor of the newspaper’s European edition. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the World’s Most Dangerous Place” – was a New York Times bestseller and has been published in over a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look every Saturday on top stories and trends from the past week.

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