The New Era of Digital Asset Foreign Policy

In April 2021, the People’s Bank of China (PBoC) began what they called “technical testing” of their digital yuan for cross border transactions. Though Chinese officials have previously stated that they have no intention of unseating the US dollar or replacing it in its role of preferred global currency, their recent participation in joint ventures with SWIFT and the Multiple Central Bank Digital Currency Bridge would signal otherwise. As 3000 Chinese banks now support ATMs that allow for cash withdrawal of digital yuan, the number of people with access to Digital Currency Electronic Payment (DCEP), or e-CNY, is growing rapidly. As of July, foreign travelers to china will be able to use the digital yuan without a local bank account. According to recent reports “a total of six Chinese cities — Shenzhen, Suzhou, Beijing, Chengdu, Changsha and Shanghai — have conducted 11 rounds of e-CNY giveaway lotteries since October with the amounts totaling more than 250 million in digital yuan, worth about $40 million.” Rapid expansion of the centralized Chinese digital currency is occurring while the Chinese government hammers down on decentralized cryptocurrencies like Bitcoin – but what are the real implications? The digital lines are being drawn among the different brands of digital asset foreign policy, China is leading the way, and vital decisions must be made by each country that speak directly to their values in a quest for modernization. 

Writing the Authoritarian CBDC Playbook

Authoritarian governments around the world tend to follow in the footsteps of China when it comes to dealing with control, power, regulating disruptive technologies, and surveilling citizens. This is especially the case when it comes to dealing with payments systems and emerging digital currencies like Bitcoin, which China has firmly denounced in recent months. As an authoritarian regime that relies on surveillance and control over everything within its borders, China opposes any type of technology that may add opacity to consumer transactions and cash flows. As a result, it has created a highly surveilled pilot system of DCEP/e-CNY that could provide other authoritarian regimes around the world with the necessary tools to monitor their citizens. By launching a program with their own set of standards, they have offered hope for an alternative financial narrative to countries like Russia and Iran who are also seeking ways to break free from the US-centric global financial order. This may be most prominent in the China-Iran 25-year Economic Cooperation Program that was signed in March 2021 which essentially allows both countries to more effectively evade Western sanctions. 

As China builds out the playbook for authoritarian regimes, the ushering in of a new era in digital asset foreign policy begins. This new world is one in which digital lines are drawn between central banks and how countries choose to utilize digital geoeconomic tools. While some will end up choosing China’s harsher brand of surveillance and control, others will seek to leverage these digital tools for the benefit of the consumer, maximizing efficiencies in cross border banking collaboration and increasing account access for the unbanked. 

Who’s Next?

The countries of the world are rapidly choosing teams in an increasingly polarized international community. The captain of the open market free world is the United States, while China supplies the leadership for authoritarian regimes and centralized economies. While the US has long term partners in Europe, there are many nations across the world that are still yet to decide how they are going to develop politically, socially, and technologically. Though China, Russia, and Iran stand in direct opposition to the United States, posing their own options for a global financial system, it is not clear which path some of the less developed countries in South America and Africa will take. As we have explored in previous articles, the “plug and play” model of authoritarian governance, centralized payments systems, and surveillance is being utilized by China in countries around the world. When looking at China’s DCEP, this idea becomes particularly prescient because the implementation of a technological system is relatively easy once it reaches full development. 

In the next few years, it is likely that China could force partner countries involved in their Belt and Road Initiative (BRI) to pay for infrastructure and debt using digital yuan. If this occurs, there will be a wave of CBDC control that will stand in direct opposition to what G7 allies are currently trying to do by rolling out their own digital currencies for speed, efficiency, and privacy. If other countries sign on to a centralized payments system based around the digital yuan and debt agreements are organized in the same fashion, China will be aligning themselves in the most advantageous way for the future.

Light Vs. Dark

The way that centralized, authoritarian governments operate is the antithesis of governments founded on values of democracy and liberalism. This dichotomy of thought has been (and likely will always be) a division between these types of societies. In the past when there was less crowding and more separation between civilizations on our planet, it may have been possible for us to look our own directions and develop according to our societal preferences. However, as we enter the modern age of technology and interconnectedness, we are forced to take note of the decisions of every nation. As China captains one type of governance and hopes to increase their influence abroad, the US faces mounting challenges to keep allies and partners on their side. The way that each country determines which “stablecoins” and “cryptocurrencies” they will support within their borders will say a great deal about their brand of digital asset foreign policy. While some will seek control and surveillance, others will champion privacy, openness, and diversity in the currencies offered.  

When it comes to the evolution of digital currencies, this is especially important since it will affect every single citizen/consumer of the world. The way that we decide to run our payments systems (level of privacy, access, surveillance, etc.) may splinter our world into two separate arrangements of standard operating procedures. At the end of the day, the organization of the global financial system (and who is on each team) will determine which country holds international control and power by the middle of the 21st century.

Statements and views expressed in this commentary are solely those of the authors 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 and Director for Digital Asset Education. He was the first US Treasury attaché to Qatar and Kuwait, acting as the principal liaison to the banking sector in those nations, while serving in two presidential administrations and under three treasury secretaries from 2010-2017. 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.

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.