Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

Does a Digital Dollar Move The Geoeconomic Needle with China?

| Mar. 08, 2021

As Chinese financial officials continue to express skeptical views and worry about the “side effects” of aggressive economic stimulus policies in the United States, the question of potential shifts in global economic primacy progresses. For the past few decades China has made substantial economic strides, seeing tremendous growth year over year, and throwing into question the traditionally Western-centric model of international financial processes. Growing more aggressive in their adversarial role to the United States, they have attempted to highlight the instability of the traditional model time and again, noting the unequal financial power of the US in shaping global markets. The stimulus response to the Coronavirus pandemic and resulting economic downturns have added another opportunity for China to progress their narrative of an unstable, US-led financial order. As they have denounced the world’s dependence on US markets and use of the dollar in foreign reserves, they have simultaneously pressed forward with their own initiatives to increase the influence of the renminbi. One of these initiatives has been the development of a Central Bank Digital Currency (CBDC), that will challenge the traditional role of the dollar in catalyzing cross border exchanges. US Secretary of State Tony Blinken in a recent national security strategy speech said “(China is) the only country with the economic, diplomatic, military and technological power to seriously challenge the stable and open international system.”

The thought is that if China can convince current trade partners and emerging market economies to utilize their digital Yuan, they can reduce the number of transactions that occur in dollars. Through their “Digital Currency/Electronic Payment” (DCEP) System, China can “…harness the market share and technological innovation of private financial firms…gain(ing) better access to information about the financial activities of…consumers.” Over time, this technology may facilitate the escalation of China in the global financial regime. If other countries sign on to China’s first mover innovation, we will also see the “CCP exercise greater control over private transactions, as well as wield punitive power over Chinese citizens in tandem with the social credit system.” Though it will not be the sole factor in determining the future of a US-led global economy, it highlights China’s anticipatory focus on the future and the actions already being taken to dismantle the current system. 

This type of long-term thinking has proved beneficial for the rising global power in the past, requiring substantial creativity and adaptability from the policymaking perspective of the United States Treasury. At the heart of this geoeconomic battle between the U.S. and China is whether the creation of a digital dollar will move the needle in competition with China or if it will simply put the U.S. at the dawn of a new race in digital currency wars. In the current environment, it seems that the U.S. is not going to gain any ground by sitting back and observing China’s progress toward a viable CBDC. Instead, it is critical that policymakers begin taking significant steps to develop a digital dollar that will allow it to compete in future digital currency arenas.  

“China will take notice when the US starts actually deploying a digital dollar – and asking other countries to accept payments that way. Until then China knows they have a major head start” said Josh Lipsky, the director of the Atlantic Council Geoeconomics Center. 

Does it matter who arrives first?

The modern economic structure will require a reliable form of digital transactions, evolving from the current use of credit cards and online payments, to completely digital financial systems, no longer requiring paper money. Though this seems revolutionary, to a certain extent, many of the world’s transactions already occur without a paper intermediary. Year over year in countries around the world, cash transactions have decreased substantially, most notably in the economic powers of China and the United States. As emerging markets are added to the mix, given the opportunity to utilize already existing technological infrastructures for their own financial systems, and enlarge their body of banked citizens, it is likely that global cash transactions will decrease further. Thus, it seems the movement to digital currencies as a primary form of value is already in motion.

 Whenever a critical inflection point like this presents itself to the powers of the world, timing becomes vital. Though it is absolutely necessary to ensure a financial technology is designed correctly to avoid potential vulnerabilities for hackers to exploit and to ensure reliability in its use, first movers in the technology field have proven the importance of speed in releasing new products. In the particular case of CBDCs, a “blue-water” innovation that was untapped until the beginning of 2020, there exists a tremendous opportunity for countries to exert influence on ethics, values, and standards of operation for the new method of digital banking/transactions. As noted in my previous piece, China has already made substantial strides to get their DCEP pilot program out the door, while the United States has been relatively slow to make a similar commitment. This first mover practice allows China to test out different methods of implementation and design that will support their pursuit of global superpower goals – one of these being financial and economic primacy.

The United States has begun its own process to develop a digital currency, with Jerome Powell, the Federal Reserve (FED) president, treating the digital dollar as a “high priority project,” though it has not yet been implemented at any scale. When it comes to domestic issues, the Coronavirus pandemic has highlighted the need for a digital currency. To this point, Janet Yellen, Secretary of the Treasury, has said that “It makes sense for central banks to look at it [CBDC]. We have a financial inclusion problem…I think it could lead to faster, safer, and cheaper payments.” It is a critical first step that the financial policymakers of the United States have acknowledged the need for a CBDC, but that realization is not enough. This geoeconomic race for large scale implementation is yet another battleground on which the United States and China are competing for international influence. China has named blockchain and fintech as “key technologies” in the recently released draft of their latest 5-Year Plan. These mentions highlight the likelihood that these technologies are likely to remain at the forefront of China’s national strategy for global dominance in years to come. 

Impacts 

While a CBDC on its own will not displace the United States in the near term, its unilateral development by China will create enormous possibilities for extending influence abroad. If we were to look at the rise of Africa over the next 30 years, we would see a tremendous increase in working age people that will inevitably be enveloped in the global economic community, leading naturally to an increase in the need for banking and stable financial institutions. While it is possible that Africa will build their own infrastructure, the offer of a “baked-in” solution that has already been vetted will be very attractive to a rapidly developing civilization.

“For a mix of reasons – some related to China, some related to trans-Atlantic ties, and some related to BigTech – American allies are eager to see what technical features and privacy configurations the United States will develop for its own version of a digital currency. The bottom line is are we willing to lead and have a public dialogue around privacy and security?” said JP Schnapper-Casteras, a senior fellow with the Atlantic Council’s GeoEconomics Center.

The central principle of the “blue-water” discussion in terms of CBDCs is the potential of China to extend their values, ethics, authoritarian doctrines, and way of life to current trade partners and emerging markets. As noted by a report from the Center for a New American Security (CNAS), “DCEP will bolster Beijing’s endeavor to leverage artificial intelligence and big data for stronger domestic surveillance.” With each action that China has taken to magnify their global influence, we have not seen revolutionary effects. However, with each “small” step to increase military presence, build economic prowess, and play a central role in international decision-making bodies, we see a significant cumulative effect. While it does not signal the abrupt end of US global primacy if China is able to successfully implement a CBDC domestically and abroad, their continued leadership on a diverse set of international issues certainly builds their momentum for such an eventual shift. The U.S. needs to immediately develop a digital dollar over the next 12-18 months just to have the opportunity to enter the new geoeconomic race in digital currency wars. 

Statements and views expressed in this commentary are solely those of the author and do not imply endorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Science and International Affairs.

Michael B. Greenwald is Director at Tiedemann Advisors. He is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs and a Senior Fellow at the Atlantic Council Geoeconomics Center. From 2015-2017, Greenwald served as the first US Treasury attaché to Qatar and Kuwait.  

This article is supported by research advisor Logan Weber. Weber is a graduate of Harvard University and graduate student at Texas A&M University studying International Affairs.

For more information on this publication: Belfer Communications Office
For Academic Citation: Greenwald, Michael.“Does a Digital Dollar Move The Geoeconomic Needle with China?.” Belfer Center for Science and International Affairs, Harvard Kennedy School, March 8, 2021.

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