China has just launched its Digital Currency Electronic Payment System, called variously the electronic yuan or electronic renminbi (abbreviated e-CNY or e-RMB). It will likely thwart Alipay and WeChat Pay’s dominance in China’s financial tech market and allow the government to track almost all financial transactions in real time. There are, of course, international implications to China being the first country to roll out a digital currency backed by the central bank.
Can the Digital Yuan Compete with the Dollar for Global Dominance?
Some analysts now see China’s move to a digital currency based on blockchain technology as intended to displace the dollar. Right now, eighty-eight percent of global trade interactions are in U.S. dollars, followed by the euro, and the Japanese yen. (Other top currencies are the British pound sterling, the Canadian dollar, the Australian dollar, and the Swiss franc.) Only about 4% of global trade currently uses Chinese currency as a medium of exchange. Thus, analysts argue, the e-CNY can’t compete with the dollar because the world lacks confidence in the yuan. But China’s forging ahead in this direction does have implications for the U.S.’s ability to hold businesses accountable:
In 1944 the U.S. dollar was set as the reserve currency for global trade. It has maintained its dominance because it is relatively stable and easily transferable. One outcome was that the United States could both monitor financial transactions and penalize entities that violated global democratic norms.
The U.S. monitors these transactions through the Society for Worldwide Interbank Financial Telecommunications (SWIFT) in Belgium, a messaging system that monitors electronic payments between international banks. So, for example, after the September 11, 2001, attacks, the U.S. has used sanctions to restrict individuals, companies, or countries for funding terrorists as well as violating human rights norms.
A digital currency would allow direct transfer between global banks that could theoretically bypass the SWIFT monitoring system but still have the backing of a central bank (as opposed to cryptocurrencies like Bitcoin that are unregulated). An alternative government-backed currency that is directly transferable would allow countries
that are sanctioned by the U.S. to buy and sell with China. Even now, Huawei sells Hewlett-Packard equipment to Iran:
The digital yuan could give those the U.S. seeks to penalize a way to exchange money without U.S. knowledge. Exchanges wouldn’t need to use SWIFT, the messaging network that is used in money transfers between commercial banks and that can be monitored by the U.S. government.James T. Areddy, “China Creates Its Own Digital Currency, a First for Major Economy” at Wall Street Journal (April 5, 2021)
The Chinese government is particularly interested in bypassing SWIFT because the list of Chinese politicians, individuals, and companies on the U.S. sanctions list continues to increase. China, likewise, has sanctioned several U.S. politicians but because the U.S. dollar is the currency for global trade, U.S. sanctions are far more consequential than China’s sanctions.
Beijing is especially discomfited by a fast-expanding part of the sanctions register: more than 250 Chinese names, including politicians the U.S. accuses of atrocities against ethnic minorities or of curtailing freedoms in Hong Kong…The chance to weaken the power of American sanctions is central to Beijing’s marketing of the digital yuan and to its efforts to internationalize the yuan more generally.James T. Areddy, “China Creates Its Own Digital Currency, a First for Major Economy” at Wall Street Journal (April 5, 2021)
By way of example: Hong Kong’s leader, Carrie Lam, said she cannot open a bank account in a global financial center after the U.S. placed sanctions on her in response to the national security law passed last year because banks in Hong Kong are afraid of violating sanctions.
Exporting Authoritarian “Controllable Anonymity”
While the U.S., Japan, and several other countries are also working on digital currencies, China is likely seeking the advantages that come with global currency dominance. The Diplomat interviewed author and research assistant Emily Jin, about the ramifications of China being the first country to launch a digital currency backed by its central bank. According to Jin,
This could potentially mean an authoritarian model of privacy and governance being exported abroad to other countries developing their own [Central Bank Digital Currencies]. This could mean other countries would take after the “controllable anonymity” model the [People’s Bank of China] is currently employing for its digital RMB, where the central authority has access to one’s transaction information, while counterparties can retain their anonymity with one another.”Mercy A. Kuo, “China’s Digital Currency: Implications for the U.S.” at The Diplomat
In a translated speech given on Hong Kong’s Blockchain Society’s page, China’s president Xi Jinping said that China needs to accelerate the development of blockchain technology and actively promote its social-economic integration:
It is necessary to strengthen basic research, enhance the original innovation ability, and strive to let China take the leading position in the emerging field of blockchain, occupy the commanding heights of innovation, and gain new industrial advantages… It is necessary to lead the standard setting and right to speak in the world.“Hong Kong Blockchain Society”
U.S. Securities and Exchange Commissioner Hester Pierce maintains that such stablecoins (privately issued digital currency backed by the U.S. dollar) are an answer to China’s e-CNY. U.S. Federal Reserve Chair Jerome Powell cautioned that the important thing is not to be the first to launch a Central Bank Digital Currency but to do it right.
“Doing it right” prompts the question, does China intend to do the same things as the U.S. has historically done or does it aim at different goals?
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