Biden team sees potential threat to China’s digital yuan plans

Photographer: Yan Cong / Bloomberg

The Biden government is tightening scrutiny of China’s plans for a digital yuan, with some officials concerned that the move could lead to a long-term bid to topple the dollar as the world’s dominant reserve currency, according to people familiar with the issue .

As China’s digital currency efforts gain momentum, officials from the Treasury, State Department, Pentagon and National Security Council are stepping up their efforts to understand the potential implications, the people said.

US officials are less concerned about an immediate challenge to the current structure of the global financial system, but would like to understand how the digital yuan will be distributed and whether it could also be used to circumvent US sanctions, said the people on the condition of anonymity.

A Treasury Department spokeswoman declined to comment. A National Security Council spokeswoman did not respond to a request for comment.

The People’s Bank of China has rolled out pilot issuance of a digital yuan in cities across the country, putting it on track to be the first major central bank to issue a virtual currency. A wider rollout is expected ahead of the Beijing Winter Olympics in February, bringing the effort to international exposure.

Many important details of the digital yuan are still in motion, including details on how it would be distributed. China’s recent establishment of one joint venture with SWIFT, the messaging nexus most cross-border settlements go through today, suggests that it is possible that a digital yuan could work within the current financial architecture rather than outside it.

US officials are reassured that China’s intentions are not to use the digital yuan to circumvent US sanctions, people familiar with the case said. The current dominance of the dollar in cross-border transactions gives the US Treasury the power to shut down much of a business or even a country’s access to the global financial system.

Chinese officials have said the digital yuan’s main intentions are to replace banknotes and coins, reduce the incentive to use cryptocurrencies, and complement the current private-sector-run electronic payment system – dominated by Ant Group Co.’s Alipay and WeChat Pay from Tencent Holdings Ltd. The PBOC has been working on the digital yuan, also known as the e-CNY, after setting up a specialized research team in 2014.

Here’s how a central bank digital currency could work: chart

“To provide backup or redundancy to the retail payment system, the central bank must go a step further” and provide digital currency services, Mu Changchun, the director of the PBOC Digital Currency Research Institute, said at an event last month. . .

The PBOC is also exploring the potential for using the digital yuan in cross-border payments and launching one project examining the issue with a unit of the Bank for International Settlements, together with the United Arab Emirates, Thailand and the Hong Kong Monetary Authority.

The Biden government does not currently intend to take any action to counter long-term threats from China’s digital currency, the people familiar with the discussions said. However, China’s plans have given new impetus to efforts to consider the creation of a digital dollar, they said.

Congressmen were also increasingly interested in a digital dollar, aware of China’s movements, and asked Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen about the matter during hearings earlier this year.

Powell said in February that the Fed was looking “very carefully” at a digital dollar. ‘We don’t have to be the first. We have to do it right. “

Yellen has expressed an interest in researching the viability of a digital dollar, shifting from a lack of enthusiasm under her predecessor, Steven Mnuchin.