Gauging the Digital Yuan's Chances of Replacing the U.S. Dollar

Much has been said about China's efforts to launch a Central Bank Digital Currency (CBDC). The country is currently setting the pace for others, providing more tests and pilot programs as it looks to launch the asset as soon as possible and provide increased insights for the world to see.

Gauging the Digital Yuan's Chances of Replacing the U.S. Dollar

For now, however, the narrative that appears to have endured the most has been about China looking to displace the dollar as the world's reserve currency with its digital yuan.

Escalating the Current Economic War

It is an open secret that China and the United States are in a battle for economic supremacy. The U.S. government amplified this battle over the past four years. The Trump administration imposed several rounds of tariffs on Chinese imports, and the Chinese government retaliated in kind.

The two countries are the two largest economies globally, and there has always been the undertone of a tussle for supremacy.

Many believe that the Chinese government is looking to use its digital yuan to usurp the dollar. Even in the United States, the fears have been rising significantly. Last November, the Washington Examiner reported that John Ratcliffe, the National Intelligence Director, had written a letter to Jay Clayton, the Chairman of the Securities and Exchange Commission (SEC) at the time, over the rising issue of the digital yuan.

Per the report, Ratcliffe offered to send some of his staff to Clayton and brief him on security issues that China's digital yuan could pose. The National Intelligence Director explained that the digital yuan is a prominent concern, and the U.S. government will need to be proactive in policing the asset. He also counseled that crypto firms in the United States prop up their activities to remain competitive.

So, how does the digital yuan pose a threat?

Upending Bretton Woods

Well, the beginning of the 20th century brought a significant change to the global economic structure. Following the Great Depression, global economies understood that coming together would be the only way to ensure collective survival. This objective was what led to the Bretton Woods Conference in 2944.

Since Bretton Woods, the United States dollar essentially became the global reserve currency. Essentially, this meant that almost every form of international trade is being settled in the greenback. Some countries - like China and Russia - have not been under this rule, however, since they are under economic sanctions from the U.S.

Thanks to this special status that the dollar holds, the United States Federal Reserve can enjoy greater flexibility with money printing. The Fed essentially knows that demand for the dollar extends beyond the country's borders. So, it can print even more and pump more cash into circulation - especially in times of crisis.

The dollar's status also means that the United States’ sanctions will be more effective tools of economic and international influence. The White House can choose to restrict countries from making transactions in the dollar, essentially destabilizing their economies and forcing many people to scramble for an alternative.

Now, the digital yuan threatens that. With success, the asset will provide greater transaction efficiency and be more useful than the dollar in settling trade. Soon enough, more countries will demand the digital yuan. Since the asset's value will be directly pegged to the fiat yuan, it goes without saying that demand for the latter will grow as well. Soon enough, the dollar will indeed lose its position.

Another problem comes in the line case of surveillance. The Chinese government is known to focus more on surveillance and tracking, especially for its citizens. When the digital yuan gains enough traction, the Chinese government could have more people's financial information and monitor their transactions even more.

China Denies Any Designs on Power

While some Western authorities are more concerned about the digital yuan, Chinese officials aren't overly concerned.

Last month, Zhou Xiaochuan, the former Governor of the Peoples' Bank of China (PBoC), claimed that the government isn't looking to replace the dollar in any form.

Zhou now works as the President of the Chinese Finance Association. As the South China Morning Post reported, he explained that the government is essentially looking to chart the course of global, cross-border trade. He added that the digital asset will essentially be a tool for investment and trade, and that they don't have any designs on power.

Zhou added that the Chinese government had learned a lesson from the regulatory pushback against Libra, the proposed stablecoin from Facebook. He explained that regulators fear the asset's possible implications on financial systems. Of course, the blowback against Libra has been pretty extensive. With that, Zhou claimed that the Chinese government would be looking to take a more cautious approach:

"Some countries are worried about the internationalization of yuan… We can't push them on sensitive issues, and we can't impose our will. We must avoid the perception of great-power chauvinism," Zhou said.

For now, the digital yuan is already nearing a rollout. The Chinese government is running several tests, and a state-owned bank has even launched ATMs that will allow citizens to convert cash and savings to the asset. When it does launch, we will see how things go.

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