By Marisa Herman ( 

Originally Published Friday, 09 Apr 2021 7:36 AM

China experts predict the digital currency could debut worldwide as early as next year — just in time for the Winter Olympics, which is set to be held in Beijing. In an effort to get the new currency up and running, however, Chinese banks have already begun providing people in several cities with digital money, also known as CBDC, DCEP, or eCNY, to make payments using pilot programs. 

Some analysts believe China’s ultimate plan aims for more than just a domestic project to slowly switch from coins and bills to a technologically savvy way of paying for goods. They warn China is teeing up the yuan — which is also known in English as the renminbi — to eventually challenge the U.S. dollar, which 

has reigned as king of the global financial system since World War II. But others contend the yuan, even in a digitized form, poses no risk to the dollar, which accounts for about 90% of global transactions. 

"The fact that a superpower is already testing a digital currency should carry with it a host of concerns for American interests," said Richard Gardner, CEO of financial technology (or "fintech") firm Modulus. "Logistically and politically, [the digital yuan] is a far greater risk to the long-term viability of the U.S. dollar as the primary mechanism for global trade than anything else at this point, though, even the digital yuan still has miles to go." 

Gardner added that if he were sitting on the House Permanent Select Committee on Intelligence, the digital yuan would "absolutely" be on his radar. 

Tom Toomey, who served as testing manager for the Republican National Committee during the Trump 2020 campaign and worked as a revenue operations manager for an emerging artificial intelligence company, said he is concerned that China is focused on becoming the world’s top currency, which "diminishes the U.S. on so many levels." 

"If our money isn’t every country’s reserve, the U.S. is not as powerful," Toomey said. "That’s the real big worry." 

China expert and author Gordon Chang, however, said China’s digitized currency doesn’t worry him one bit — as long as it remains non-convertible for capital accounts, transactions made between companies in China, and other nations across the world. Currently, China’s renminbi is not convertible despite numerous pledges from the government to change that. 

"It’s subject to such restrictions, it’s not going to pose a threat to the dollar," Chang said of the digital yuan. "This is just China’s renminbi in digital form." 

If the Chinese agree to make the digital currency "attractive" by allowing it to be convertible, however, Chang said it would "trigger the biggest flow of money in China’s history." 

Tim Heath, a senior international defense researcher at the RAND Corporation, agrees it is unlikely that the renminbi will replace the dollar as the top currency choice in the world economy. 

"China’s economy is strong, but the U.S. economy is widely regarded by the world as the strongest," he said. Heath also notes that China’s unwillingness to make its currency convertible ultimately proves the government "doesn’t want to pay the cost of having a world currency."

Still, he warns China’s advancements with the digital dollar, coupled with its cutting-edge digital payment systems, could play into the overarching tech war being fought between the U.S and China. 

"It’s very possible that if the U.S. doesn’t develop its own competitive system for digital payment and transactions that the Chinese will gain a larger market share," Heath said. "There is a tech competition here with a geopolitical aspect, as well." 

Threat or not, the perception that China could be ahead of the U.S. in an emerging field might prove to be enough to pressure the Federal Reserve to act. 

"This is a Sputnik moment for digital currencies," said Peter Earle, an economist with the American Institute for Economic Research, referencing the U.S.-Soviet space race and the tiny USSR satellite that kicked it off. "This is going to bring policymakers and people who follow developments in geopolitical issues to say: ‘It’s time to step up the game and make this happen.’" 

Rolling out a digital currency 

Developing a digital currency isn’t a new concept. 

During the past several years, all types of cryptocurrencies, such as Bitcoin, have been introduced, and the global popularity of digital currency has surged. But, unlike Bitcoin, which is a decentralized form of currency not tied to a bank, China’s digital yuan will be legal tender backed by the People’s Bank of China. 

About 80% of the world’s central banks are working on launching their own digital currency and 10% of those banks have already developed pilot projects to that end, according to a 2020 survey published by the Bank for International Settlements. 

"We have known that the Chinese digital yuan has been coming for years," Bitcoin Foundation chairman Brock Pierce said. "This has not been a secret." 

And though China has been hogging the spotlight, the U.S. is creeping into the digital currency arena — albeit at a much slower pace. 

Stanley Chao, author of "Selling to China" and managing director for All In Consulting, which assists western companies in China, said the U.S. is likely 3-5 years behind China in digital currency. 

He predicts the digital yuan will be "widely introduced" ahead of the Beijing Olympics, especially in rural parts of China where many people lack bank accounts. 

While China prepares to make a splash with the whole world watching, U.S. officials are just beginning to recognize the seriousness of the subject and do something about it. 

Fed Chair Jerome Powell recently said the Fed would "move with great care and transparency" before rolling out a digital dollar, while Treasury Secretary Janet Yellen said during a February virtual conference hosted by The New York Times that central banks should explore creating and issuing digital currencies.

At the conference, Yellen said a digital dollar overseen by the Federal Reserve, could result in "faster, safer, and cheaper payments," according to the Times. She also posed a series of questions designed to stimulate thought about what a digital dollar might look like and how it might work. 

She concluded: "it’s worth looking at." 

But despite the sluggish response from U.S. officials, Pierce said China’s progress has placed "tremendous pressure on the U.S." 

"It pains me to say it, but we are far behind [China]," he said. 

Pierce contends, however, that it’s more important for the U.S. to get a digital dollar done "right" rather than quickly. 

"It’s something we have to do to stay competitive, but it’s really important we get this right," he said. 

Experts are almost unanimous that the rumors of China’s digital yuan unveiling during the Beijing Olympics appear to be accurate. 

"Part of the attempt to disseminate the digital yuan might be done through combinations of spending or consumer interactions around the Olympics," Earle said. 

Toomey "could definitely see the Olympics being a target" for the debut of the digital yuan, especially due to the sheer number of people — watching worldwide and attending in-person — the event will draw. If Olympic attendees were allotted digital yuan to pay for items, for instance, Toomey says the Chinese government could collect massive amounts of valuable data. 

Privacy issues 

In contrast to the nearly anonymous transactions Bitcoin permits users to make because it isn’t supported by a government or central bank, the Chinese government will be able to oversee every transaction a person — or country — makes on its ledger with the People’s Bank of China-backed digital yuan. 

Mu Changchun, the director of the People’s Bank of China’s Digital Currency Research Institute, recently said creating a fully anonymous digital currency isn’t "feasible." And, while surveillance of citizens is routine in China, privacy concerns are something the U.S. would have to seriously consider when deciding whether to roll out any form of digital currency. 

Experts say one of the main reasons China wants to issue a digital currency is so the government can monitor transactions. 

Doug Schwenk, chairman of Digital Asset Research, which provides crypto pricing and market data to institutional investors, said digital currencies provide "far more detailed transaction information than traditional currencies." 

"China may be able to collect detailed information on consumer and institutional behavior outside of China, should the digital yuan become more widely used," Schwenk said. "All of which can be used to their advantage in global competition and statecraft."

One of the more interesting features of the digital yuan is its ability to be programmed: Chinese banks can set expiration dates on digital dollars, which could induce spending at certain times. 

While it would mostly impact domestic spending in China, the programmable funds ultimately give the Chinese government total control over how — and when — people spend their money. Earle said the digital currency could be "purposely engineered to disincentive people to save money," giving China a monetary policy that other countries don’t have. 

Experts agree, however, an invasion of privacy will likely dissuade other countries from using the Chinese digital currency. 

"A lot of countries will be hesitant to buy into a Chinese government-controlled currency," Heath said. "People who are suspicious and distrustful of the Chinese government will have reasons to resist the appeal of using it." 

National security concerns 

Among its positive attributes, China’s digital yuan has the potential to completely overhaul the arduous process of making an international transaction. It promises to be a more mobile, frictionless currency, which could entice countries to make the switch from the current global bank-based system. 

Currently, global transactions go through the Belgium-based Society for Worldwide Interbank Financial Telecommunication — or SWIFT — system, which is a global network that processes payments between different countries. 

But Pierce said the system hasn’t kept up with the digital world we live in. He said many people are tired of banks, which have limited hours, are closed on weekends, and can take several days to settle transactions, which has enhanced the appeal of digital and cryptocurrencies. 

But the convenience of bypassing SWIFT comes with a host of potential problems for U.S. national security. 

Evading SWIFT through a China-backed parallel global banking system could render U.S. sanctions imposed on rogue nations totally meaningless. In one nightmare scenario, North Korea could buy missiles with digital yuan. In another, China could pay Iran for oil in large sums of digital yuan. 

"Countries under U.S. sanctions like Russia, North Korea, Syria, Iran, and Iraq could now easily trade using the digital yuan and the U.S. would have no way of knowing," Chao said. 

He believes that thwarting SWIFT and reducing the U.S.’ ability to "police the world" is one of the motivating reasons behind China’s creation of the digital yuan. 

"[China] doesn’t want to be controlled by the U.S., nor does it want to be under the watchful eye of the U.S. under the SWIFT system," Chao said. 

Earle notes that the looming threat of China diminishing SWIFT could prompt the U.S. to push to improve the system. He said that, for a system named SWIFT, it’s "notoriously slow," and people in the banking world have been complaining and calling for a change or overhaul for years.

China’s digital yuan could also find fertile ground in developing countries where governments struggle to keep up with new fintech and have weaker financial systems. Chao said China can woo these countries to trade with them using the digital yuan, which is easy, quick, and mobile and avoids involving a third party. 

"The Chinese could influence countries to use China's fintech to introduce digital currencies," he said. 

China already boasts one of the most advanced digital payment systems with WeChat Pay and AliPay, and adding a digital currency could be another weapon in the country’s diverse arsenal that leadership has firmly trained on global domination. 

There is some time, however, and financial analysts generally believe China isn’t quite ready to compete with the U.S. dollar — but China is definitely gaining ground. 

"The Fed in the U.S. and other western central banks are working on digital currencies, but have a good deal of ground to make up and constituencies that will provide friction," Schwenk said. "The Chinese government can mandate use of a new currency, while payments providers in the U.S. will find a U.S. digital dollar competitive and lobby against it." 

Still, Chang isn’t convinced that the international community will be willing to accept a currency totally controlled by Beijing anytime soon. In addition to making the digital yuan easy to use in global transactions, he said China would have to "convince the world" it would manage the currency in a way that would be beneficial to the international community — and not just Beijing. 

"The Chinese people may not have a choice," Chang said. "But people in the rest of the world do."

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