Chinese officials have made no secret that their massively 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 that, top US financial officials have rolled their eyes at any suggestion that deeper dangers lie in wait for the dollar, and therefore also for US national security. Even as China moves forward and bitcoin’s value reaches a trillion dollars, the Federal Reserve was in no rush to participate.
Up to now.
This week marked a public turning point for the top US government officials involved 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 which marked “the firing of a starting pistol.”
At a New York Times event Monday with Secretary Yellen, CNBC’s Andrew Ross Sorkin sparked its most comprehensive endorsement yet 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, which shows that 70 countries now have digital currency projects, Yellen’s focus was on the national good that a digital dollar could do to Americans. .
“I think it makes sense that central banks are looking at it,” 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 their properties. We have a problem with financial inclusion. Too many Americans don’t really have access to easy payment systems and bank accounts. This is it. something that a digital dollar, a central bank digital currency, could help with. I think it could lead to faster, safer and cheaper payments. “
In testimony before 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 problems and consulting very broadly with the public and very transparently with all interested groups if we should do this.”
Yet while the Fed consults, China executes.
Neither Yellen nor Powell mentioned China’s growing leadership in digital currency development, but that was the context. His call to action coincides with China’s announcement earlier this month of a meaningful partnership with the cross-border payment system SWIFT, removing any doubt that Beijing intends to internationalize the digital yuan.
At the same time, China has concluded a free trade agreement, or FTA, with Mauritius, the first with an African state, in an agreement that is designed to create a digital financial testing ground. “As China develops its digital currency plans, Mauritius may ultimately be the leader 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 clearing and settlement mechanism in renminbi in the territory of Mauritius.”
All of this comes as Beijing authorities took advantage of the Chinese New Year celebrations on February 12 to implement three large-scale pilot projects to distribute roughly $ 1.5 million worth of digital yuan in “red packages” of roughly $ 30 each. . Then this week, China expanded its digital currency handout testing program to the city of Chengdu, the capital of Sichuan province and the fifth most populous city in the country, where it is distributing about $ 6 million in digital yuan.
A red packet of Chinese digital currency is seen on a mobile phone in an arranged photograph as the city of Chengdu begins to distribute 200,000 E-CNY ‘red packets’ worth 40 million yuan on February 24, 2021 in Yichang, province of Hubei of China.
VCG | Visual China Group | fake 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 could require all attendees and athletes to download an app that ensures that all their payments in games for hotels, tickets, food, souvenirs and more are made in their new digital currency. Even if one doesn’t experience a physical boycott of the China Olympics, keep an eye out for digital boycotts by the US and other teams.
It’s hard not to compare China’s current leadership in digital currency development, ignored by US officials until now, with its initial global leadership in developing the 5G, or fifth-generation, broadband cellular technology standard. Until the Trump administration responded alongside Western manufacturers, no one could compete with Chinese 5G providers and equipment manufacturers globally, the most dominant being Huawei.
China’s constant prioritization of technological advancement underscores its recognition that, in history, the country that has taken the highest technological ground in its time has also very often been the dominant international player.
If the United States loses the high ground of financial technological innovation, combined with a weakening of the global dominance of the dollar, the benefits for Beijing would be considerable.
China’s different approach to privacy gives it a competitive advantage. The American and European need to satisfy privacy concerns will complicate the development of CBDC. Rather, Beijing sees the digital yuan as a way to further strengthen its already formidable surveillance status, while also enhancing its ability to combat money laundering, corruption and terrorist financing.
In an article recently published by CNAS, authors Yaya J. Fanusie and Emily Jin capture how deeply China understands the geopolitical importance of its digital currency project. They recounted how Yao Qian, the former head of the People’s Digital Currency Research Bank of China, compared the progress of his country’s digital currency to previous Chinese advances in robotics, big data and artificial intelligence.
Speaking before a United Nations information technology conference, “Yao posited digital currency as part of ‘the next war,'” the authors write, referring to an article of that title in The Economist that discussed the central role of technology in the competition between the United States and China.
The Fed is concerned about being too hasty in introducing a digital dollar, given what is at stake as a global reserve currency. However, the biggest geopolitical danger is how quickly it is lagging behind.
The United States can still win this contest if you not only quickly develop a digital dollar, but help create a digital euro, a digital pound, and a digital yen. The sheer firepower of these coins would quickly close the innovation gap. It would also demonstrate the value of working with allies, a centerpiece of Biden’s foreign policy.
Frederick Kempe is a best-selling author, award-winning journalist, and president and CEO of the Atlantic Council, one of America’s most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, associate editor and as the editor with the longest experience in 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 has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe to Inflection Points here, his look every Saturday at the top stories and trends from the past week.
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