Can Digital Yuan Challenge US Dollar's Dominance in International Finance?

[Riaz Haq]

China's central bank is testing its digital currency in several major Chinese cities. The chairman of US Federal Reserve has recently confirmed that the US Central Bank is working on digital dollar. The State Bank of Pakistan announced in 2019 that it was developing a digital currency. It seems that the popularity of Bitcoin has triggered serious worries of loss of control of the official financial systems among the central bankers around the world. China's substantial lead in digital currency could put it far ahead of the US in the future of global payments and financial settlement. It could eventually displace the US dollar and provide China with the immense global financial power that the US currently enjoys. 

Digital Yuan

Central Bank Digital Currency (CBDC):

What Is a Central Bank Digital Currency (CBDC)?  Investopedia defines it as a digital currency that "uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation (or region)". A CBDC is centralized; it is issued and regulated by the  country's Central Bank. Unlike decentralized cryptocurrencies like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.  

Motivations for such currencies are many, but the key one is to maintain control of the national and global finance. Another worry is that the use of unregulated digital currencies like Bitcoin could enable serious domestic and international crimes. It could also make tax evasion easier and hurt governments' ability to support public expenditure on education, healthcare, physical infrastructure, public safety, national defense and other priorities. 

 

Digital Yuan:

 

The People’s Bank of China, the Chinese Central Bank, is testing its e-yuan digital currency in Shanghai, Chengdu and other major cities. It has filed more than 100 patent applications for its digital currency. Reports indicate that the experiments are going smoothly, and soon people will have the option of downloading a government-issued digital wallet. Unlike commercial payment processors such as WeChat Pay and Alipay, the official Chinese version will be equivalent to an account at the central bank with the same guarantee as hard cash, according to The Economist magazine.  China is far ahead of of the rest of the world, including the United States in the development of a central bank-backed digital currency (CBDC). This could put it far ahead in the future of global payments and financial settlement. It could eventually displace the dollar and provide China with the immense global financial power that the US currently enjoys. 

China has set up a partnership with SWIFT, the Society for Worldwide Interbank Financial Telecommunications, that manages the global system for cross-border payments, through its digital currency research institute and clearing center.  SWIFT is a major vehicle for the United States to enforce its unilateral sanctions on countries like Iran, North Korea and Venezuela. China offers CIPS, cross-border interbank payment system, as an alternative to SWIFT. CIPS has only about 80 member banks worldwide compared to over 11,000 banks using SWIFT. 

Digital Dollar: 

US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have confirmed last week that they are working on digital dollar as a high-priority project. 

US Treasury Secretary Janel Yellen has been quoted by the media as saying: “I gather that people at the Federal Reserve Bank of Boston are working with researchers at MIT to study the properties of it. We do have a problem with financial inclusion. Too many Americans really don’t have access to easy payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help with. I think it could result in faster, safer and cheaper payments.”  

Digital Rupee: 

A top official of the State Bank of Pakistan, the nation's central bank, announced in April 2019 that the institution aims to issue a digital currency (Central Bank Digital Currency or CBDC) by 2025, according to media reports.   Speaking at the launch of regulations of Electronic Money Institutions (EMIs), central bank officials said that EMIs will be non-bank entities to be licensed by the central bank to issue e-money for the purpose of digital payments. Pakistan's finance minister Asad Umar and the central bankers said they are targeting Pakistan's economy to go fully digital by 2030.

More recently, the State Bank of Pakistan launched Raast, a digital payment system.  It is essentially a pipe that is intended to connect government and financial institutions with consumers and merchants with each other to process payments instantly at very low cost. Raast will be boosted by Pakistan government's decision to use it to pay salaries, pensions and pay welfare recipients under Benazir Income Support and Ehsaas Emergency Cash programs. 

Raast digital payment infrastructure represents a great leap forward for the use of financial technology (FinTech) and financial inclusion in the  country.  It will also promote e-commerce in Pakistan. Undocumented economy poses a serious threat to the country because it creates opportunities for criminal activities and tax evasion.  Raast is part of the government's effort to modernize payment systems and document the nation's cash-based informal economy. 

America's Global Financial Power: 

There's a common perception that the United State is abusing its extraordinary financial power to arbitrarily punish countries through its unilateral financial sanctions. This power stems mainly from the fact that the US dollar is the main international reserve and trade currency. It allows US to control multi-lateral financial institutions like SWIFT, World Bank, IMF and FATF. Many countries, including major US allies in Europe, are now looking to find alternatives to SWIFT. This has been specially true since former US President Donald Trump existed the JCPOA (Joint Comprehensive Plan of Action) agreed among the 5 permanent members of the UN Security Council (P5) plus Germany. Here's an excerpt of a recent New York op ed by Peter Beinart: 

"By deluding themselves about the extent of America’s might, they are depleting it. A key source of America’s power is the dollar, which serves as the reserve currency for much of the globe. It’s because so many foreign banks and businesses conduct their international transactions in dollars that America’s secondary sanctions scare them so much. But the more Washington wields the dollar to bully non-Americans into participating in our sieges, the greater their incentive to find an alternative to the dollar. The search for a substitute is already accelerating. And the fewer dollars non-Americans want, the harder Americans will find it to keep living beyond their means."

 

Summary:

Central Bank Digital Currencies (CDBDs) are gaining momentum with the talk of digital yuan and digital dollar. Motivations for such currencies are many, but the key one is to maintain control of the national and global trade and financial systems. If successful, these new currencies and associated payment systems could challenge the global financial power of the United States and fundamentally transform banking as we know it. 

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[Riaz Haq]

The era of US dollar dominance is 'finished,' says Wall Street veteran who just retired after 54 years

https://markets.businessinsider.com/news/currencies/dick-bove-banks...

"The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times. Bove, 83, predicted that China's economy would surpass America's in size.

The dollar's reign as the world's reserve currency is nearly over, Dick Bove says.

The newly retired bank analyst blamed corporate offshoring and flagged the threat posed by China.

Bove highlighted the de-dollarization trend and said other analysts are too bought in to admit it.

The US dollar has been the lifeblood of global finance and trade since World War II — but one Wall Street veteran thinks the end of that era is nigh.

"The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times.

Bove, 83, predicted that China's economy would surpass America's in size. He blamed the outsourcing of US manufacturing to other countries, arguing that trend has given other countries more control of international production, the global economy, and worldwide money flows.

He also suggested that cryptocurrencies such as bitcoin could help fill the void left by the dollar's shrinking influence.

Dollar-denominated assets make up nearly 60% of international reserves, per the International Monetary Fund. However, several countries are embracing "de-dollarization" — working to erode dollar dominance — especially after the US took advantage of Russia's reliance on the greenback to levy sanctions against it following its invasion of Ukraine in 2022.

Nations ranging from Brazil and Argentina to India and Bangladesh are exploring the use of backup currencies and assets, such as the Chinese yuan and bitcoin, for trade and payments.

Several governments have blasted the excessive influence of US monetary policy on other economies and currencies, the dollar's strength for pricing out poor countries from imports, and the diminishing need for a petrodollar now the US has achieved energy independence through domestic shale oil and green energy production.

Bove, who worked at 17 brokerages during his career, told the Times that analysts who aren't forecasting dollar doom are simply "monks praying to money" who are unwilling to bite the hand that feeds them: the traditional financial system.

[Riaz Haq]

Saudi Arabia privately hinted earlier this year it might sell some European debt holdings if the Group of Seven decided to seize almost $300 billion of Russia's frozen assets, people familiar with the matter said, according to Bloomberg.

https://www.middleeasteye.net/news/saudi-arabia-threatened-sell-eur...

Like other Gulf states, Saudi Arabia’s currency is pegged to the dollar and it sells its oil in greenbacks, boosting the dollar’s position as the world’s reserve currency.

In January 2023, Saudi Arabia said it was considering trading in currencies other than the US dollar after reports that it was in discussions with China about selling some crude in yuan.

It’s not clear how much European debt Saudi Arabia holds, but its central bank’s net foreign currency reserves stand at $445bn. Saudi Arabia holds $135.9bn in US treasuries, placing it 17th among investors in the US bonds.

US President Joe Biden’s pledge to make Saudi Arabia “a pariah” over the murder of Middle East Eye and Washington Post columnist Jamal Khashoggi crystallised fears that Washington could one day turn on its decades-old ally.

Biden has since pivoted and is leaning on Saudi Arabia to seal a normalisation deal with Israel and play a role in post-war governance of the Gaza Strip.

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Like other Gulf states, Saudi Arabia’s currency is pegged to the dollar and it sells its oil in greenbacks, boosting the dollar’s position as the world’s reserve currency.

In January 2023, Saudi Arabia said it was considering trading in currencies other than the US dollar after reports that it was in discussions with China about selling some crude in yuan.

It’s not clear how much European debt Saudi Arabia holds, but its central bank’s net foreign currency reserves stand at $445bn. Saudi Arabia holds $135.9bn in US treasuries, placing it 17th among investors in the US bonds.

US President Joe Biden’s pledge to make Saudi Arabia “a pariah” over the murder of Middle East Eye and Washington Post columnist Jamal Khashoggi crystallised fears that Washington could one day turn on its decades-old ally.

Biden has since pivoted and is leaning on Saudi Arabia to seal a normalisation deal with Israel and play a role in post-war governance of the Gaza Strip.

Saudi Arabia’s threat underscores concerns in wealthy Gulf states that the West could one day apply similar economic levers it is pulling against Russia to Gulf powers' overseas assets, if criticism of human rights issues in the Gulf or their foreign policy decisions resurfaces.

Russian President Vladimir Putin has courted Saudi Arabia, as he relies on the oil-rich kingdom to counter Moscow’s isolation on the world stage and shore up energy markets.

Putin made a rare visit to Saudi Arabia and the UAE in December.