As the COVID-19 crisis continues to roil the world economy, China is pressing forward with its ambitious plans for a national digital currency. Building on its well-publicized blockchain-based infrastructure ambitions, China is piloting their so-called DC/EP (for “Digital Currency/Electronic Payments) system in several cities, with its implementation spread across different types of commerce, from transportation to food to retail. China’s program represents the most advanced effort to develop a sovereign digital currency and is a clear warning to other developed economies, including the United States, that the future of digital commerce is a battle worth waging. And it is not just China; according to one count, more than 80% of the world’s central banks are exploring their own versions of digital currencies. The central question for the United States: do we risk our position as the hegemon of the global financial system if we don’t push forward with similar plans? And if we did, can private sector-driven efforts prove to be superior to proposed international counterparts, particularly China’s DC/EP?
Several factors support the development of digital currencies. The coronavirus crisis has accelerated calls for a cashless society. Consumers in China are already well ahead of their American counterparts in adopting contactless payment systems. According to management consultants Bain, more than 80% of Chinese consumers have used mobile or contactless payment systems in the past year, while less than 10% of Americans have done the same. It’s clear that Chinese consumer society is better-placed to adopt digital forms of currencies than its American counterpart, but that does not explain the entire story of China’s shift towards these systems. WeChat Pay and Alipay are already deeply entrenched in Chinese economic life (it is reported that more than 90% of people living in China’s largest cities use one of these two apps for most of their transactions). So why develop a national version of these systems?
One reason may be balance. While it’s been widely reported that China has taken a keen interest in cryptocurrencies, national blockchain systems, and other forms of digital ledgers over the past several years, a precipitating moment for DC/EP may have been the initial, more ambitious plans for Facebook’s Libra project. Another important factor is the pervasive, ongoing global competition in many arenas between the US and China.
As Mu Changchun, deputy director of the People’s Bank of China’s payments department, said last year in response to a question about why exactly China is developing their own digital currency: “It is to protect our monetary sovereignty and legal currency status. We need to plan ahead for a rainy day.” Other Chinese officials have stated the need to combat illegal activity, including human trafficking and money laundering, as reasons to develop a national digital currency, but balancing the power of the US-led financial system and borderless projects like Libra are also clearly front of mind.
And while China’s central government has its own concerns, so do other observers who question the DC/EP’s impact on privacy. As Mu also noted, the goal of the currency would be to provide “controllable anonymity,” a chillingly Orweillian phrase that has not quieted those concerns. He continued, speaking of the goals of DC/EP to “give those people who demand it anonymity in their transactions,” yet “keep the balance” between privacy and tracking and stopping illicit transactions. These contradictions are worrisome to privacy advocates, to say the least.
In the view of Mu and others within the Chinese government, the benefits of this project are clear. The DC/EP would provide a so-called “God’s eye view” of the entire Chinese economy, tracking purchases and gleaning intimate personal details of its users. It also provides a bulwark against a global financial system that China sometimes sees as balanced against it. And lastly, it counterweights the influence of US-based tech firms in their search for their own global dominance.
In contrast, America’s digital dollar stablecoins do not infringe on privacy and control of consumer behavior as Beijing’s proposed digital currency would. Self-custody and peer-to-peer systems inherent to digital dollar stablecoins protect users’ funds and privacy. This currency would not provide a “God’s eye view.” And given the dollar’s global status as the premier reserve currency, digital programmability features give it a serious headstart on any potential rivals.
The US dollar remains a force in international finance. As of Q4 2019, central banks hold more than $6.745 trillion in dollar reserves. This represents 60.9% of the world’s allocated reserves by currency. In 2019, almost half of the $1.6 trillion dollars in circulation were held abroad and just under half of foreign exchange markets’ daily settlements were done in dollars. Moreover, according to the Federal Reserve Bank of New York, US dollars comprise 62% of international debt securities issuance, 49% of all debt securities issuance, and 48% of all cross-border bank claims. These figures reaffirm the importance of the dollar as the global reserve currency and its prolific use in domestic and international markets.
The expansive use of the dollar has provided the US many benefits. First, it is cheaper for the US to borrow money when the dollar is strong. The strength of the dollar helps the US when the country runs a budget deficit as the US needs to pay less interest while repaying its debt if the value of the dollar remains higher than the currency it owes. Second, the US often uses dollars for debt and interest payments, and this leads many countries to lend to the US at cheaper interest rates because they want to gain US dollars. Finally, the US accrues a diplomatic advantage with the dollar acting as the prominent global reserve currency because it can pressure other countries by imposing economic sanctions.
However, there are emerging dangers to the dollar’s preeminent status. As the US dollar-share of official global reserves has gradually declined, falling from as high as 70% in 1999 to its current level of 60%. The Chinese renminbi’s use as a global reserve currency has grown from $90.28 billion to $211.9 billion between 2016 and 2019. The RMB might not seem to be a threat, given its relatively small current market share of global reserve currency, but it recently became the second most used currency in trade finance and the fifth most popular world payments currency.
For the US to secure its international monetary stature for the long term we must encourage our innovators to modernize how we transact in our currency. As Senator Tom Cotton recently noted at a Senate Banking Committee hearing on the subject, the dollar must not languish in its digital capability; rather, he worries “the dollar will become like the very best flip phone in 2006.”
Several US lawmakers, pressed by the severity of the COVID-19 crisis, have proposed different versions of such a digital currency in recent weeks, including Senator Sherrod Brown and Representative Rashida Tlaib. Others have focused on specific states and cities, such as the “public Venmo” proposal in New York. These proposals have helped spur debate on modernizing the dollar, but digital dollar stablecoins that are already here are growing their market share and solve many of the issues that policymakers want to address. The key to maintaining the position of the United States and the U.S. dollar in the global financial system is to embrace cutting edge monetary technology. Digital dollar stablecoins carry all of the political advantages of a paper dollar, and offer consumers all of the benefits we’ve come to expect from other online-first services. To ensure the power of the dollar, we must support our innovators as they work to modernize how we use our money.