Digital yuan is really about geopolitical dominance, the first move in what will surely be a high-stakes, cut-throat competition with the West
This month, U.S. lawmakers warned their athletes attending the 2022 Beijing Winter Olympics: do not use China’s new digital currency, or risk being “tracked and traced.”
That elicited a response from an aggressive Chinese spokesman, Zhao Lijian — a flack who so egregiously violates his industry’s rule of not becoming the story that the New York Times Magazine once spent 9,000 words profiling him. U.S. lawmakers should “stop making troubles” and “figure out what a digital currency really is,” Zhao said.
That little dustup is amusing, for there is truth to both sides. Yes, China’s central bank digital currency should be cause for concern for the United States. And yes, those U.S. lawmakers should also learn more about the issue.
Maybe China will track a week or two of spending for a couple hundred athletes — who cares? That situation would, of course, be bad. But focusing on it misses the bigger picture: the digital yuan is really about geopolitical dominance, the first move in what will surely be a high-stakes, cut-throat competition between the powers.
To unpack that, we have to talk about the current state of the world, the so-called liberal international order and Western hegemony. It is upheld increasingly not just by the mailed fist of military might but also the gilded glove of the greenback.
The U.S. dollar is the most transacted currency in international trade. That grants the American government immense power, for controlling a currency also means controlling the heavy infrastructure used to move it.
The United States is often the prime mover in economic sanctions. Aiming to restrict international trade for targeted countries, such actions have become more prevalent in recent years. And the result can be harsh and debilitating, given the increasing interdependence and interconnectedness of the world. Russia, for example, a frequent target of U.S. sanctions, has an economy smaller than Canada’s.
That power of the United States is often unseen but never unwielded, unfelt nor unimportant — “dollar weaponization,” as it is called, sometimes disparagingly. Money that circumvents the traditional financial system cuts at the heart of all that.
A cryptocurrency essentially turns money into code. Its back-end infrastructure, much lighter, is not the sort that can be easily controlled. When sending, say, one bitcoin, the process is like simply handing it over, like passing cash. That is disruptive, to say the least.
China’s hostility toward cryptocurrency is well-known. Some may call that short-sighted, but it is not for no reason. A cryptocurrency’s aversion to being controlled can be both a feature and a bug, and its price is often volatile. China’s digital yuan, on the other hand, which is inspired but not based on blockchain, grants the ease of movement of a cryptocurrency without the perceived uncertainties. It is no surprise that China, the United States’ main rival on nearly every front, is the first major economy to launch a central bank digital currency.
China’s digital yuan is, of course, still in its testing phase. Actual cryptocurrencies also need to be considered. Many of Latin America’s ailing economies, for example, have embraced bitcoin. In a field a little more than 10 years old, anything can happen. It is certainly not this day that the digital yuan will become the global reserve currency — nor perhaps any other day. The U.S. dollar still accounts for 88 per cent of international trade.
The digital yuan, however, does not require wide use to be a threat. The vast majority of international transactions are not exactly the sort that defy sanctions. Whether to dampen the impact of sanctions or expand China’s influence, all it takes is a small international uptake of the digital yuan, among certain states.
China, let’s not forget, is already using its paper yuan to project power and suck countries deeper into its orbit. Particularly in some parts of Africa and the Middle East, places the West neglects, China has been not just buying goodwill but also accused of inducing dependency. Those efforts would be much easier with the digital yuan.