The adoption of digital currencies by central banks (CBDCs) could undermine the leading position of the US dollar in the global financ...
The adoption of digital currencies by central banks (CBDCs) could undermine the leading position of the US dollar in the global financial system, JPMorgan analysts say . Experts note that if the United States does not pay attention to the new technology, the country risks losing its dominant position in the global financial system. Dozens of countries are exploring the possibility of launching CBDC, but China has gone farthest - testing the digital yuan has already been launched in the country. What are its chances to take the place of the dollar as a reserve currency, we understand the material.
Global digital currency will replace the dollar as a reserve currency
JPMorgan analysts believe that CBDCs are dangerous primarily for the US dollar.
"There are tremendous benefits to the issuance of a global reserve currency and a medium of exchange for international trade in goods, raw materials and services ... There is no country that could lose more from the destructive potential of digital currency than the United States," the report said. cited by Bloomberg .
JPMorgan experts believe that the dollar is unlikely to lose its leadership role in the near future. It will continue to be necessary for companies and banks to reduce the risk of depreciation of the national currency in international transactions. But CBDCs threaten the “most fragile” aspects of currency dominance: cross-border transfers, as well as SWIFT's interbank information transfer and payment system.
The widespread use of the dollar gives the US authorities a means of influencing unwanted “partners” and enemies. Most international payments go through SWIFT, a significant portion of which is sent through American correspondent banks. Sharing information with these agencies allows the US authorities to identify illegal activities (money laundering and terrorist financing) and impose sanctions against unwanted entrepreneurs or regimes. For example, in 2018, the suspension of the access of Iranian banks to the system was initiated .
If countries find a way to bypass the SWIFT system, the role of the dollar in the global system will diminish. CBDC can do just fine with this, because intermediary banks will no longer be needed. CBDCs can be used in cross-border payments entirely without the involvement of the US financial system. In this case, the United States could lose one of its most powerful tools of geopolitical influence.
Therefore, according to JPMorgan experts, the United States must invest time and money in creating a digital dollar to protect its role in the global economy.
“Offering a cross-border payment solution built on the digital dollar would be…. a very modest investment to protect one of the key means of ensuring power in the global economy. For high-income countries and the United States in particular, digital currency is an exercise in geopolitical risk management, ”summarize the authors of the report.
China is already testing digital yuan
The People's Bank of China (PBOC) is well ahead of other central banks in developing digital currency. Back in 2014, he began work on the digital yuan, or China's national digital currency (DCEP). To create it, the country's authorities were first prompted by the desire to find another way to move away from the dollar, and later - by the growing competition of fiat funds with cryptocurrencies and the global stablecoin project Libra from Facebook.
At the end of April this year, it became known that the currency had released its mobile application and that several companies in four Chinese cities are already testing it, as well as two dozen companies in the Xiong'an Special Economic Region. The new testing phase is expected to be launched during the Beijing 2022 Winter Olympics. At the same time, blockchain is included in the national technology development strategy, but the Chinese regulator is cautious about risks, fearing possible negative consequences from the launch of DCEP. Therefore, the authorities are in no hurry to fully launch the project. On May 26, the head of the NBK Yi Gang said that the digital yuan does not have a clear launch schedule, moreover, it may not be launched.
The digital yuan is primarily a political project in China. Since the end of the 2000s, the country has pursued a policy of “internationalizing” the Chinese currency by political means, for example:
- Dim Sum bonds are debt securities issued outside of China, but denominated in yuan, not local currency.
- The One Belt - One Road project is a proposal for the combined projects of the Silk Road Economic Belt and the 21st Century Maritime Silk Road.
- As well as the creation of the Asian Infrastructure Investment Bank (AIIB) - a competitor to the IMF and the World Bank.
In 2015, the IMF recognized the yuan as a reserve currency along with the dollar, euro, pound and yen. But it was a political, not an economic victory - the world recognized China's role in the global economy, but in practice the yuan takes little place in it. Until now, the Chinese currency is mostly only used in a few Asian countries and in some transactions, such as the purchase of crude oil from Iran, as US sanctions prevent Iran from accepting payments in dollars.
Most likely, the Chinese authorities hope for the international use of the digital yuan. Mu Changchun , Deputy Governor of the Central Bank of China , spoke last September that DCEP is viewed as a way to "protect the country's monetary sovereignty" . For China itself, the digital currency could help increase the share of settlements in yuan in foreign trade, and for third countries it could become a tool to bypass the American financial system. If China's Belt and Road infrastructure project succeeds, DCEP could be used in trade in more than 60 countries. This will not dethrone the dollar, but create an alternative to its dominance.
It is not yet clear in what form the digital yuan will exist. Most likely, this will be a centralized model in which the central bank will be able to control the money supply and track all transactions. But testing with retail buyers and companies suggests that China may outsource at least some of DCEP's functions to private companies. This would allow the digital currency to move slightly away from the image of the country's totalitarian power. Foreign users would most likely be able to trust Alibaba or WeChat more than Beijing. This option seems unlikely, but China already has a one-country-two system in place for Hong Kong. Therefore, the digital yuan may also be more "Western" than its fiat counterpart.
USA doesn't need digital dollar yet
While China is testing the digital yuan, the US is only discussing the possibility of a digital dollar, but apparently does not plan to release one anytime soon.
Back in February, US Treasury Secretary Steven Mnuchin said that the country's authorities are not yet going to issue digital currency, although they do not exclude such a possibility in the future. At the same time, Fed Chairman Jerome Powell said that the department is studying the possibility of launching its own CBDC, but considers it “open a question ". Earlier in September 2019, Powell also noted that there is simply no need for US digital currency - users have so many payment options. At the same time, CBDC has too big risks outweighing all its possible benefits. Powell did not say this, but the main problem with the launch of the digital dollar is that it directly threatens the Fed itself, which with the help of the money supply controls inflation and stimulates the economy.
However, the position of the FRS does not mean that the digital dollar will not exist - life dictates its own rules. So, with direct payments to American households during the COVID-19 pandemic, it turned out that 8 million of them (which is more than a third of the total) do not have a bank account to which money could be transferred. Because of this, they receive funds with outdated paper checks, but this process can drag on until the end of the summer. This is where CBDC would come in handy.
Moreover, in the spring, there were two initiatives in Congress that involve the use of digital currencies for direct payments: the provision for the creation of digital wallets by Chairman of the House Financial Services Committee, Maxine Waters, and Senator Sherrod Brown 's Banking for All Bill , which provides for the creation of a free digital dollar wallet "FedAccount".
And in January this year, the Digital Dollar Foundation and Accenture teamed up to launch the Digital Dollar, an initiative “to support research and public discourse on the potential benefits of the digital dollar.” At one time, a digital currency research institute was established in China, and now the country is testing DCEP. Digital Dollar is a clear analogue of the Chinese organization. Hopefully the results will be similar too.
Does the digital yuan have a chance to take the dollar's place?
So far, the digital yuan lives only as a test project. It doesn't have to actually launch - the Chinese government often changes its approach to blockchain. But even if it becomes a reality, despite all its advantages, the yuan simply does not have the potential to seriously claim the place of the dollar. Even digitally, it will remain the Chinese currency - with all the pros and cons.
The value of the yuan is exaggerated. The turnover of this currency in international trade is only 4.3% , including transfers between China and Hong Kong. At the same time, 88% of all international transactions were carried out in US dollars in 2019. At the same time, last year 61% of all foreign exchange reserves of the world were stored in the US currency, and only 1.96% in yuan. It is unlikely that the digital yuan would be able to grab a significant market share, even taking into account all its advantages.
The yuan is not a freely convertible currency, its exchange rate is significantly limited by government intervention. The authorities are not too interested in changing the situation - the growth in demand for foreign currency would greatly hurt local exporters. Hence the modest interest of traders and investors in the currency. As long as the Chinese authorities manipulate and undervalue the exchange rate, the yuan will not be able to claim the role of a global reserve currency.
We often hear that China is ahead of the rest in the fintech sector, and this is what could jeopardize the global status of the dollar. The proliferation of non-cash and contactless payments in the country is truly amazing. But it is due to the fact that China had almost no traditional Western banking infrastructure - the population en masse switched to WeChat payments, bypassing credit cards. But paying with smartphones is just a form. In the US, people don't really pay in large quantities with their phones, but that doesn't give the Chinese financial system any advantage.
Former US Treasury Secretary and CEO of Goldman Sachs Hank Paulson wrote an article for Foreign Affairs in which he argued that the launch of the digital yuan would not help it become a global reserve currency that could compete with the US dollar. The main reason is that the digital yuan will still be the Chinese yuan. A digital currency's outlook for reserve status depends on the same set of factors that apply to the issuer of that currency.
Paulson notes that "the privilege granted to the US dollar as the world's reserve currency was hardly predetermined, " but was due to historical contingencies; geopolitical conditions after the Second World War; a vibrant economy based on sound macroeconomic and financial policies; transparent, open political system. For the yuan to oust the dollar from the top spot, it must become another currency. To do this, China “ must make more progress in its transition to a market economy, improve corporate governance and develop efficient, well-regulated financial markets that deserve the respect of international investors so that Beijing can remove capital controls and transform the yuan into a market-driven currency.Paulson concludes.
Finally
While China's digital currency may not threaten the dollar's primacy, it promotes the international recognition of the yuan. There are many Chinese companies operating in the developing countries of Africa and Latin America. The digital yuan is likely to be a popular currency there.
When it comes to the dominance of the dollar, the main risk comes not from China, but from the United States itself, Paulson noted in his article. The dollar's status reflects the reliability and strength of the American political and economic system. To maintain the dollar's position, it must remain stable and set an example to the rest of the world. The dollar's status will now be tested by Washington's ability to weather the shocks from COVID-19 - it will need to cope with inflation, unemployment and deficits.
