Ben Hickey illustration  of a digital dollar on a white square of a checkered black & white background and three yens on black squares
© Ben Hickey

The writer is senior fellow at the Institute on Race, Power and Political Economy at The New School

Few things frighten US policymakers as much as losing to China in the race for global economic supremacy. Now this battle is being fought in the arena of currency: last year, the Chinese government launched a central bank digital currency, giving consumers the power to hold digital yuan backed directly by the People’s Bank of China.

On cue, American political leaders are wondering if the US should launch its own CBDC. President Joe Biden issued an executive order in March requiring federal agencies to study the idea, and the Federal Reserve issued its preliminary report on the feasibility of the concept in January.

But a CBDC that brings only upside with no costs is a pure fantasy. As documented in a report released this week by the Roosevelt Institute, there are better ways to counter the rising global financial power of China than to pursue a Fed-backed digital currency. In other words, if American policymakers want to limit Chinese financial might, issuing a US CBDC is not the way to do it.

There are many reasons for China to issue a CBDC, not least that the PBoC would be able to track every transaction users make, enhancing surveillance capabilities. Perhaps just as importantly, if the Chinese CBDC were adopted across the world it could chip away at the dollar’s global supremacy. A widely used CBDC would enable China and its allies to avoid western sanctions and have a greater say over international financial markets, which are currently dominated by American banks.

The Chinese are investing in this international future. They have created a new exchange in cross-border CBDC in consultation with the Bank for International Settlements, the United Arab Emirates, and Thailand. These efforts are in their infancy, but even if this initiative doesn’t take root, the underlying idea could be replicated with other international partners.

American CBDC advocates interested in geopolitical and financial power want the Fed to issue its own CBDC. They tout domestic advantages as well — for instance, the ability for individuals and corporations to conduct real-time, feeless transactions with a currency fully backed by the US Fed. The idea is that such a CBDC would be attractive to international investors and would help to ensure the dollar remains the world’s global reserve currency.

To launch a US CBDC that would facilitate global trade in a similar way to the Chinese one might, Congress and the Fed would need to design a Fed-backed digital dollar that could be used easily across borders. This is easier said than done. Financial institutions and companies engaging in international trade would need to be able to hold very large quantities of the CBDC, but uncapped holdings of a central bank digital currency present major domestic financial challenges. With no limit on how much CBDC an individual or company might hold, depositors would likely shift many of their commercial bank deposits to CBDC accounts, particularly in moments of financial anxiety. Commercial banks could find themselves in a position where they have to significantly contract their own loan portfolios or raise additional debt or equity financing. This would cause significant disintermediation of the commercial banking sector in the US.

If Congress were to direct the Fed to issue a CBDC, it would have to choose: either one designed to compete with China in international capital markets or one which causes minimum disruption to domestic banking arrangements. It cannot have both.

A good start to taking on Chinese financial power would be to improve the dollar-denominated international payments infrastructure. Given the fierce competition, the US should endeavour to make the international payment system faster without meaningfully sacrificing security goals. One route might be the internationalisation of the Fed’s new real-time payments network, FedNow, which currently only supports domestic transfers. The Fed could convene an international payments task force, similar to the domestic one it convened in 2015, to make a recommendation for how to move forward.

If the Fed develops neither a CBDC nor a real-time payments alternative, it would cede the field to foreign interests and make it more likely that foreign government CBDCs and stablecoins would surge in interest internationally. The Fed doesn’t have to create a CBDC to remain competitive geopolitically, but it does need to quickly invest significantly more resources into offering competitive payments systems globally if it wants to preserve as much of its sphere of influence as possible.

Letters in response to this article:

An intermediated form of CBDC makes sense / From Anthony Elson, Chevy Chase, MD, US

China’s progress is not only reason to develop a CBDCFrom Josh Lipsky, Director, GeoEconomics Center, Atlantic Council, Washington, DC, US

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