The Dilemma of China’s Digital Currency

A digital currency is an electronic form of money. Prominent examples include cryptocurrencies such as Bitcoin and central bank digital currencies—often shortened to CBDCs— which are electronic versions of a nation’s official currency and can substitute for physical cash. 

Many countries around the world are exploring the adoption of CBDCs, but China is the first major country to deploy one widely within its borders, which it calls the e-CNY.

The e-CNY is part of a broader push by Beijing to establish global leadership in new technologies, assert independence from United States power, and intensify control over Chinese society and the financial sector.

It will provide China’s central bank with a direct window into corporate and personal financial transactions. To the extent that the e-CNY becomes heavily used, the central bank will be able to directly trace money flows via bank accounts, ID cards, domestic phone numbers, and potentially even foreign phone numbers. This raises serious concerns about privacy and state surveillance.

The e-CNY could also be linked to other programs, such as the social credit system, which aim to reward and punish Chinese citizens.

Given China’s heft in global trade and investment, the e-CNY may become a currency of choice for transactions between a significant number of foreign governments and businesses and their Chinese counterparts. This could weaken the U.S.-led financial sanctions regime.

How has the U.S. government responded? So far, the U.S. administration and the Federal Reserve System have yet to put forward their own visions for the integration of digital currencies into the US domestic and global payments systems, and have not yet set norms governing the use of public and private digital currencies, domestically or internationally.

We believe the United States should embrace the opportunity to shape the future digital economy. 

First, the United States should move quickly to determine the appropriate nature and role of digital currencies within our economy. 

Second, the United States should attempt to prevent the e-CNY from undermining U.S. geo-economic and strategic influence, which stems in large part from the dominance of the U.S. dollar in the global economy.

And third, the United States should take adequate steps to prevent the global spread of payment arrangements based in Chinese currency, including the e-CNY, from threatening individual freedoms and human rights.

More broadly, the United States needs to figure out how payments systems should work within the digital economy. We need to determine standards that still allow CBDCs, fast payment systems, and private payment methods like the use of stablecoins to safely facilitate various forms of economic transactions.

The United States should also position itself as a global leader in the digital currency space. That means creating and promoting a global framework of regulatory principles that is consistent with U.S. expectations concerning consumer protection, privacy, financial anti-crime compliance, financial stability, and the protection of monetary sovereignty.

While it is crucial that the United States develop its own CBDC technology, this does not imply that the United States should necessarily deploy its own Central Bank Digital Currency. 

Digital currency designs that maintain the privacy of Americans, while at the same time defeating illegal payments and providing for a competitive, inclusive, and innovative payments landscape, could come from the public or the private sector. Either way, the Federal Reserve, the Congress, and the Executive must act soon.