China is now testing its digital version of the yuan after five years of development.
It will be the first nation in the world to begin a digital currency rollout, but certainly won’t be the last. According to the Federal Reserve, central bank digital currencies are already on their way, including the possibility of some form of a digital dollar.
Bitcoin, you may recall, was the original digital currency, leveraging the highly innovative distributed ledger technology known as blockchain. Not only has Bitcoin’s more than a decade of existence and growing use around the world demonstrated the power of digital currency, but Bitcoin has continued to enjoy dominant, first-mover advantage in the cryptocurrency space.
As of yet, however, no nation has issued a digital currency. But China will likely be the first to do so. If the test run is successful, China’s “digital yuan” may well replace the paper one sooner than later.
It may even challenge Bitcoin.
There may be, of course, some adjustment period in the transition to digital currency from paper, but for the Chinese, that actually may not be such a radical change. Large numbers of Chinese citizens already pay for many transactions with smartphones linked to their bank accounts. In 2018 alone, China had more than $37 trillion in mobile transactions, or about 16 percent of transactions.
For this reason, the transition to a digital yuan would probably be relatively smooth. The exception would be those who rely on cash transactions in order to avoid detection from China’s vast surveillance state. The digital transition likely will be a very unwelcome change.
China’s First-Mover Advantage
But more importantly, the digital yuan is likely to set the pace for other nations and organizations. In fact, China’s transition to digital currency could well give it some first-mover advantages, such as enabling it to challenge U.S. global leadership in a variety of critical areas.
Such a shift could even trigger a major shift in the global balance of power.
The most obvious area of leverage for China would be the global financial system. As the world’s second-largest economy, as Forbes noted recently, “If companies doing business in China are forced to adopt a digital yuan, it will certainly erode the dollar’s primacy in the global financial market.”
Such an occurrence would also threaten the dollar’s position as the world’s reserve currency.
Over the past 70 years, the dollar-based system has given the U.S. dollar tremendous advantages and American foreign policy unrivaled power and influence over other nations. About 80 percent of all transactions on the global market use dollars in one way or another. That fact alone has made dollars a necessity for international commerce.
The oil–dollar nexus, is another example. For the past 45 years, oil has almost always been priced in dollars. This requirement has helped sustain global demand for the dollar over all other currencies and has enabled the U.S. government to run enormous deficits while selling its Treasury bonds to creditor nations around the world. The digital yuan would likely help end the petrodollar.
But the implications go much further than trade and finance.
Undercutting US Foreign Policy
The dollar-based financial system also gives the United States tremendous power to persuade, reward, and punish countries around the world. Russia, Iran, and North Korea, for example, are all currently under U.S. sanctions. Consequently, they have very limited access to the global financial system and is at least a partial reason they are all under economic duress.
A digital yuan would be able to bypass the dollar-based financial system altogether and perhaps greatly diminish the global demand for dollars. It could give China and its trading partners such as Russia, Iran, North Korea, and other anti-U.S. regimes a way to avoid U.S. economic sanctions and currency restrictions to a much greater extent.
A digital currency would enable China to sell more arms, more sophisticated technology, and other embargoed items on the world market and to nations adversarial to U.S. interests.
But it’s not just rogue states that could benefit from the emergence of the digital yuan.
Shifting Financial Gravity to Beijing
Given China’s preeminent trading status with the European Union, its digital yuan backed by economic might—and, as some speculate, gold—may well help shift the global center of financial power to China from the United States. Whether intended or not, the digital yuan may quickly challenge the dollar as the world’s preferred currency.
The result of such a shift could be very destabilizing very quickly. If the dollar is suddenly out of favor with major trading nations of the world, the United States would no longer be able to afford to finance its hegemonic role in the world.
What’s more, if the United States is no longer able to minimize threats with financial levers, then it must do so by other means. Arise in the frequency and intensity of cyberattacks, for example, could be one outcome. That alone could lead to significant escalation and disruptions in cyber systems related to trade, defense, and other critical systems.
Targeting US Hegemony
As a result, naval embargoes or perhaps other physical or military responses to threats against U.S. interests may be necessary. When the current order and all that supports is removed or greatly weakened, as is happening in the wake of the CCP virus pandemic and expansionist Chinese foreign policy, global instability and overt competition over resources, markets, and territory would seem to be a direct or indirect consequence.
China’s move to a digital currency is by no means the cause of the rising tensions between Beijing and Washington. The Chinese regime’s longstanding goal has been to dethrone the United States and replace it as the global leader.
The digital yuan is but one more weapon aimed directly at the dollar and American hegemony.
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.