When China began rolling out tests of its new digital yuan, many observers feared that the central bank-issued digital currency posed a threat to the U.S. dollar’s role as the world’s reserve currency and preferred medium of exchange. But the real threat may be to America’s private sector.
That’s according to Yaya Fanusie, a former CIA analyst and fellow at the Center for American Security, who spoke Wednesday at a virtual event staged by the Atlantic Council, exploring the economic and geopolitical implications of the digital yuan.
He pointed to a recent crackdown by Chinese authorities on Sweden-based Hennes & Mauritz
after the world’s second-largest fashion chain said last year that it would no longer source cotton from China’s Xinjiang region in response to human-rights abuses there.
“They’ve gotten rid of H&M, so that users in China could not find or access their clothing,” he said. “If foreign companies have to take the digital yuan, it also means they are in a situation where the Chinese government has influence over those transactions.”
Fanusie also pointed to another Swedish company, Ericsson
which became the target of Chinese authorities after the Swedish government said it would bar the use of China-based Huawei’s equipment in its buildout of a 5G telecommunications network, citing national security concerns. In response, China has threatened to block Ericsson from participating in the buildout of its 5G network. “The Chinese government is looking for ways to retaliate against foreign companies,” he said.
China’s digital yuan does not make use of the blockchain technology that undergirds private digital money like bitcoin
but Fanusie said that the Chinese government is simultaneously experimenting with similar distributed computing technology called the Blockchain-Based Service Network. The network provides developers with a low-cost infrastructure upon which they can build new applications that China hopes will be the source of innovations that drive the global economy in the coming decades.
“What it means practically is that they are trying to develop infrastructure for new types of financial activity,” Fanusie said. “China is not trying to outcompete with the dollar” but set the stage for future innovation that will make China the center of the global economy, much in the same way that the development of the internet has done for the U.S. over the past generation.
Julia Friedlander, a former Treasury Department official who worked on blocking terrorist financing and other financial crimes, also noted during the event that it’s a misconception that the digital yuan could be an effective means for America’s enemies to evade international sanctions.
“If the Chinese state is attempting to conceal transactions, a central-bank digital currency is not the best way to do it,” she said, noting that the transport of physical cash across porous borders still remains the best way to transfer money without alerting relevant authorities. Even private digital currencies are more convenient that a central-bank digital currency for money laundering, because currencies like bitcoin can be transferred without ever touching entities that want to remain in the good graces of the U.S. government.
A third panelist at the discussion, Mark Sobel of the Official Monetary and Financial Institutions Forum, argued that U.S. policymakers should not take the digital yuan as a threat, because the U.S. dollar’s role in the global economy was decided by the marketplace and is a testament to America’s open financial system, large and dynamic economy, and independent central bank and judicial system that vigorously protects individual property rights.
On the other hand, “China’s financial system is very weak,” Sobel said. “The yuan is not fully convertible and contract enforcement there can be arbitrary.” China could advance policies like ending controls that prevent the free ebb and flow of capital in and out of the country, but the Chinese Communist Party’s primary focus of maintaining strict control of the economy prevents that from happening, he added.
Sobel said he wasn’t “sure we need a digital dollar” and that the Federal Reserve should concentrate its efforts on improving the speed and reliability of America’s existing payments system. Fanusie and Friedlander, meanwhile, argued that security and not speed should not be the primary concern as the Fed contemplates issuing its own digital currency, in light of the recent ransomware attacks on critical U.S. infrastructure, such as oil pipelines.
“This is why the U.S. shouldn’t be first to the party with digital currency,” Fanusie said. “Cybersecurity needs to be the first issue to be addressed before moving forward, and that’s a huge asterisk.”