The Geopolitics of Digital Currency

Introduction

The U.S. Federal Reserve, Treasury Department, and Congress have begun considering the viability of a Central Bank Digital Currency (CBDC), a legal tender national digital currency for consumer use. They are understandably focused on domestic policy issues such as potential impact on U.S. financial stability or expanding public access to financial services. The national security implications of CBDCs are not yet central considerations for U.S. policymakers, but they should be.

Digitized currency is data. Digital currency will move across international borders, potentially revealing information harmful to individual, corporate, or national interests. The United States could play a critical role in fostering open and collaborative technologies that protect this data -- upholding privacy and security standards while maintaining lawful auditability in a fully digital economic world. But the United States lags other nations in its consideration of a CBDC.

China has been working toward a CBDC for almost a decade.1 It will be first among the world’s major economies to widely deploy a retail CBDC. Accordingly, China is well positioned to shape the global standards and processes governing this financial transformation. The results could transcend data privacy and security.

New global payment exchanges could undermine components of the international financial system that enhance U.S. financial power and help sustain norms of international behavior. Vulnerable components include the SWIFT2 messaging service, which facilitates the movement of money across international borders and, among other things, is fundamental to the U.S. financial sanctions regime. American leadership will be required to adapt international financial systems to CBDC technologies without compromising U.S. interests.

These considerations should inform and accelerate U.S. consideration of a CBDC and prompt greater American engagement in developing global standards and cross-border payments processes.