Biden’s team observes the potential threat of China’s digital Yuan plans

Photographer: Yan Cong / Bloomberg

The Biden administration is stepping up its review of China’s plans for a digital yuan, with some officials worried that the decision could launch a long-term bid to top the dollar as the world’s dominant reserve currency, according to people who knows the subject.

Now that China’s digital currency efforts are gaining momentum, Treasury, State Department, Pentagon and National Security Council officials are stepping up their efforts to understand the possible implications, according to people.

U.S. officials are less concerned about an immediate challenge to the current structure of the global financial system, but are eager to understand how the digital yuan will be distributed and whether it could also be used to address U.S. sanctions. condition of anonymity.

A Treasury spokeswoman declined to comment. A National Security Council spokeswoman did not respond to any requests for comment.

The People’s Bank of China has launched the trial issuance of a digital yuan in cities across the country, setting it on track to become the first major central bank to issue a virtual currency. A wider deployment is expected for the Beijing Winter Olympics next February, which will unveil the international effort.

Many key details of the digital yuan are still in flux, including details on how it would be distributed. The recent establishment of China in the joint venture with SWIFT, the messaging nexus through which most cross-border settlements pass, suggests that it is possible for a digital yuan to work within the current financial architecture and not outside it.

U.S. officials are reassured that China’s intentions are not to use the digital yuan to evade U.S. sanctions, according to people familiar with the matter. The current dominance of the dollar in cross-border transactions gives the U.S. Treasury the power to cut much of a business or even a country’s access to the global financial system.

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

The following explains how a central bank digital currency could work: graph

“To provide a backup or redundancy of the retail payment system, the central bank needs to be strengthened” and provide digital currency services, said Mu Changchun, director of the PBOC’s digital currency research institute, at an event last month.

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

Currently, the Biden administration has no plans to take any action to counter the long-term threats to China’s digital currency, according to people familiar with the discussions. However, China’s plans have given renewed impetus to efforts to consider creating a digital dollar, they said.

Members of Congress have also been 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 issue in hearings. earlier this year.

Powell said in February that the Fed was looking “very carefully” at the digital dollar. “We do not need to be the first. We have to get it right. ”

Yellen has shown interest in researching the viability of a digital dollar, a change due to the lack of enthusiasm of his predecessor, Steven Mnuchin.