Chinese officials have made no secret that their highly accelerated efforts to introduce and distribute the digital yuan are an opening move in their long-term strategy to undermine the dollar’s global supremacy and expand its influence.
Despite this, major US financial officials have rolled their eyes at any suggestion that deeper dangers lurk for the dollar, and therefore also for US national security, in the global race for digital currency. Even with China moving forward and bitcoin’s value reaching $ 1 trillion, the Federal Reserve was in no hurry to be a competitor.
So far.
This week marked a public turning point for the most important US government officials involved in international finance – Treasury Secretary Janet Yellen and Federal Reserve President Jerome Powell. Josh Lipsky, director of the Atlantic Council GeoEconomic Center, tweeted that marked “the firing of a starting weapon”.
At a New York Times event on Monday with Secretary Yellen, CNBC’s Andrew Ross Sorkin led to his strongest endorsement of a digital dollar, or Central Bank Digital Currency, or CBDC. Although Sorkin drew Yellen’s attention to an Atlantic Council survey with Harvard’s Belfer Center, showing that 70 countries now have digital currency projects, Yellen’s focus was on the domestic good that a digital dollar could do to Americans.
“I think it makes sense that central banks are looking at this,” said Yellen, in a historical snippet on snapchat.
“I realized that the people at the Federal Reserve Bank in Boston are working with MIT researchers to study his properties. We have a financial inclusion problem. Many Americans don’t really have access to easy payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help. I think it can result in faster, safer and cheaper payments. “
In a testimony in Congress a day later, Fed Powell president also innovated, calling the digital dollar “a high priority project for us”. He added: “We are committed to solving technology problems and consulting the public widely and in a very transparent manner with all interested constituents if we should do this.”
However, while the Fed consults, China executes.
Neither Yellen nor Powell mentioned China’s growing leadership in the development of the digital currency, but that was the context. His call for action coincides with China’s announcement earlier this month of a significant partnership with the international payment system SWIFT, removing all doubts that Beijing intends to internationalize the digital yuan.
At the same time, China concluded a free trade agreement, or FTA, with Mauritius, the first with an African state, in an agreement that aims to create a digital financial testing ground. “As China develops its digital currency plans, it may be that Mauritius will lead the way in 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 mechanism in the territory of Mauritius”.
All of this happens when Beijing authorities take advantage of the Chinese New Year celebrations on February 12 to deploy three large-scale pilot projects to distribute about $ 1.5 million digital yuan in about “red packages” of about $ 30 each. So this week, China expanded its digital currency testing program to the city of Chengdu, the capital of Sichuan province and the country’s fifth most populous city, where it is distributing about $ 6 million in digital yuan.
A red bundle of digital Chinese currency is seen on a mobile phone in an arranged photograph as the city of Chengdu begins distributing 200,000 40 million yuan E-CNY “red bundles” on February 24, 2021 in Yichang, province from Hubei in China.
VCG | Visual China Group | Getty Images
China’s ambition appears to be to lay the groundwork now for the digital yuan launch party in late 2022 at the XXIV Winter Olympics in Beijing. The speculation is that Chinese organizers may require all participants and athletes to download an app that would ensure that all their payments on hotel games, tickets, food, souvenirs and more are made in their new digital currency. Even if there is no physical boycott of the Chinese Olympic Games, watch out for digital boycotts from the US and other teams.
It is difficult not to compare China’s current leadership in the development of digital currency, ignored by American authorities until now, with its initial global leadership in the development of the 5G, or fifth generation, cellular broadband technology standard. Until the Trump administration responded on the side of Western manufacturers, no one could compete with Chinese 5G suppliers and equipment manufacturers globally, the most dominant of which being Huawei.
The consistent prioritization of China’s technological advance underscores its recognition that, in history, the country that achieved the technological level of its time was also, for the most part, the dominant international actor.
If the United States loses the high position of financial technological innovation, combined with the weakening of the global dominance of the dollar, the benefits for Beijing will be considerable.
China’s different approach to privacy offers a competitive advantage. The need for the United States and Europe to address privacy concerns will complicate the development of CBDC. On the other hand, Beijing sees the digital yuan as a way to further strengthen its already formidable state of surveillance, while also improving its ability to combat money laundering, corruption and terrorist financing.
In a recently released article published by CNAS, authors Yaya J. Fanusie and Emily Jin capture how deeply China understands the geopolitical importance of its digital currency project. They report how Yao Qian, the former head of the People’s Bank of China Digital Currency Research, compared the progress of digital currency in his country with China’s earlier advances in robotics, big data and artificial intelligence.
Speaking before a United Nations information technology conference, “Yao postulated the digital currency as part of the ‘Next War'”, write the authors, referring to an article with that title in the Economist that discussed the central role of technology in the US-China competition.
The Fed is concerned about being too hasty in introducing the digital dollar, given what is at stake as the world’s reserve currency. The greatest geopolitical danger, however, is how quickly it is lagging behind.
The US can still win this contest if it not only quickly develops a digital dollar, but collaborates in creating a digital euro, digital pound and digital yen. The total firepower of these coins would close the innovation gap quickly. 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 president and CEO of the Atlantic Council, one of the most influential think tanks in the United States on global issues. He has worked for The Wall Street Journal for more than 25 years as a foreign correspondent, assistant administrative editor and as the oldest editor of the European edition of the newspaper. His latest book – “Berlin 1961: Kennedy, Khrushchev and the most dangerous place on Earth” – was a New York Times bestseller and was published in more than a dozen languages. Follow him on Twitter @FredKempe and sign up for Inflection Points here, his look every Saturday on the main news and trends from last week.
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