The Biden administration is stepping up scrutiny of China’s plans for a digital yuan, with some officials fearing the move could spark a long-term attempt to overthrow the dollar as the world’s dominant reserve currency, according to people familiar with the folder.
Now that China’s digital currency efforts are gaining momentum, officials from the Treasury, State Department, Pentagon and National Security Council are stepping up efforts to understand the potential implications, people said. .
US officials are less worried about an immediate challenge to the current structure of the global financial system, but are eager to understand how the digital yuan will be distributed and whether it could also be used to circumvent US sanctions, the people said. on condition of anonymity.
A spokeswoman for the Treasury declined to comment. A spokesperson for the National Security Council did not respond to a request for comment.
The People’s Bank of China has launched the trial issue of a digital yuan in cities across the country, making it the first major central bank to issue a virtual currency. A larger deployment is planned for the Beijing Winter Olympics next February, giving the effort international visibility.
Many key details of the digital yuan are still evolving, including details of how it would be distributed. China’s recent creation of a joint venture with SWIFT, the messaging link through which most cross-border settlements go today, suggests that it is possible that a digital yuan could work in the current financial architecture instead. than outside of it.
U.S. officials are reassured that China’s intentions are not to use the digital yuan to evade U.S. sanctions, according to people familiar with the matter. The dollar’s current dominance in cross-border transactions gives the US Treasury the power to shut off much of a business or even a country’s access to the global financial system.
Chinese officials said the digital yuan’s main intentions are to replace banknotes and coins, reduce the incentive to use cryptocurrencies, and complement the current, privately-dominated electronic payment system – dominated by by Alipay from Ant Group Co. and WeChat Pay from Tencent Holdings Ltd. The PBOC has been working on the digital yuan, also known as e-CNY, for years, having established a specialized research team in 2014.
Here’s how a central bank digital currency might work: chart
“To provide backup or redundancy for the retail payment system, the central bank needs to step up” and provide digital currency services, said Mu Changchun, director of the PBOC’s digital currency research institute, at an event last month. .
The BPC is also examining the potential for using the digital yuan in cross-border payments, launching a project to study the issue with a unit of the Bank for International Settlements as well as the United Arab Emirates, Thailand and the Monetary Authority. from Hong Kong.
The Biden administration currently does not plan to take any action to address long-term threats from China’s digital currency, people familiar with the talks said. However, China’s plans have given new impetus to efforts to consider creating a digital dollar, they said.
Members of Congress have also been increasingly interested in a digital dollar, aware of China’s movements, and have questioned Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen on the issue in more hearings. early this year.
Powell said in February that the Fed was looking “very carefully” at a digital dollar. “We don’t need to be the first. We have to do it right. “
Yellen has expressed interest in researching the viability of a digital dollar, a slide from a lack of enthusiasm under his predecessor, Steven Mnuchin.“It makes sense for central banks to consider” issuing sovereign digital currencies, “she said at a virtual conference in February. Yellen said a digital version of the dollar could help overcome barriers to financial inclusion in the United States among low-income households.
A recent According to a report by the US director of national intelligence, the extent of the threat of any foreign digital currency to the centrality of the dollar in the global financial system “will depend on the regulatory rules established”.
The Chinese currency represents a little more than 2% of the world’s foreign exchange reserves against nearly 60% for the US dollar. Political decisions, rather than technical developments, will also be needed to advance the internationalization of the yuan, as China maintains a strict regime of capital controls.
China’s financial system is too “fragile and weak” to pose a real threat to the dollar’s status as the world’s reserve currency, according to Mark Sobel, US chairman of the Official Forum of Monetary and Financial Institutions.
“At the end of the day, the markets trust the Fed more” than the Chinese central bank, said Sobel, a former senior US Treasury official for international affairs.
– With the help of Lucille Liu and Peter L Martin