Does the United States Need a Digital Dollar to Counter the Chinese Threat?
Some lawmakers from Congress’ point of view China’s new digital currency as a growing threat to the dollar, and they urge the Federal Reserve to embark on a digital dollar.
A bipartisan bill introduced in the House in late May, dubbed the 21st Century Dollar Act, aims to make the dollar the “world’s main reserve currency”. This would require the Treasury to report within six months on efforts to develop a digital dollar.
The measure also targets China’s global monetary aspirations. The bill requires the Treasury to assess the risks to the United States posed by the new Chinese digital renminbi, launched last year as part of a nationwide pilot program ahead of a wider deployment planned for the Olympic Games. Beijing winter in 2022.
“China is playing a long game in moving the dollar and our capital market system with a global economy of which China is the center,” said representative French Hill (R., Ark.), Co-sponsor of the project. law, in an interview with Barron. The digital renminbi, he adds, “helps make the Chinese currency more acceptable for commercial purposes, for sovereign and consumer payments.”
Hill, who co-sponsored the bill last week with Rep. Jim Himes (D., Connecticut), argues that the digital renminbi could also be used to repay China’s vast loans to countries in Asia, d ‘Africa and other regions, potentially shifting the dollar. And he says China is developing telecommunications equipment and payment technologies, including peer-to-peer mobile apps, aimed at expanding the country’s geopolitical and economic influence.
“The evolution of payment technologies in China challenges the dollar-based monetary system in place since World War II,” Hill said. “The Treasury and the Fed must have a strategy and key policies to maintain the supremacy of the dollar.”
The Chinese digital renminbi is far from challenging the dollar in global trade. Along with other hard currencies like the yen, euro, and pound sterling, the dollar dominates global trade and foreign currency reserves held by banks and consumers.
The renminbi, also known as the yuan, accounts for 2.4% of global payments, compared to 38% for the dollar, according to the Society for Worldwide Interbank Financial Telecommunications. Still, the yuan has climbed the charts, now ranking fifth for global transactions, down from 35th in October 2010, according to Bloomberg.
China has said it is not developing a digital currency to challenge the dollar.
“For the internationalization of the renminbi, we have said several times that it is a natural process and that our goal is not to replace [the] US dollar or any other international currency, ”said Li Bo, deputy governor of the People’s Bank of China, in April, according to CNBC. “I think our goal is to allow the market to choose and facilitate international trade and investment.”
China is now distributing 40 million digital renminbi ($ 6.3 million) in a lottery to Beijing citizens, following similar airdrops to mobile wallets in other cities last year, according to the media.
Nonetheless, China is planning a wider rollout of the digital renminbi ahead of the 2022 Winter Olympics. And many other countries are developing digital coins backed by their central bank reserves. The European Central Bank, Bank of England,
Bank of Japan,
and others study all central bank digital currencies known as CBDCs.
A digital dollar would not replace cash, checks or other standard monetary instruments. And it probably wouldn’t be a cryptocurrency like Bitcoin, running on a blockchain network and requiring ‘proof of work’ to verify every transaction. It could operate on a decentralized financial network and travel seamlessly through global banking systems. Consumers could access it through mobile apps, reducing transaction costs and speeding up settlements compared to payments in traditional currency formats.
Democrats in Congress urged the United States to develop a digital dollar, in part to encourage financial inclusion among “unbanked” people who do not have bank accounts and pay high fees for cashing checks and other financial services. A digital dollar could also be used for international remittances which now incur high transaction fees.
The growth of “stablecoins” puts pressure on the Fed and other central banks to develop digital rivals. Stablecoins are pegged at a 1: 1 ratio to a currency like the dollar, and they are increasingly used for private and commercial payments. Tech companies, banks, and the like are all developing stablecoins.
The largest stablecoin backed by large corporations is Diem (formerly known as Libra), which is developed by a consortium including
(ticker: FB) and
(UBER). The group said in May that it planned to launch a Diem pilot for a U.S. dollar coin, pending regulatory approvals.
“We need a digital dollar to participate in this blockchain commerce movement in the years to come,” says Hill, referring to the challenge posed by Diem and others.
Information on the US government’s plans is expected to arrive soon. The Federal Reserve Bank of Boston is expected to release the findings of a technical study on a digital dollar, in conjunction with the Massachusetts Institute of Technology, later this summer or early fall.
The 21st Century Dollar Act may still have to go through a House committee before it reaches the floor for a vote. Hill would not commit to a timeline, saying, “I hope we can mark this, move it to the House, and find support in the Senate.”
Write to Daren Fonda at [email protected]