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Op-ed: A digital greenback would assist the US and its allies hold China in test

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Chinese officials have made no secret of the fact that their accelerated efforts to introduce and spread the digital yuan are a first step in their long-term strategy to undermine and expand the dollar’s global supremacy.

Nevertheless, leading US finance officials rolled their eyes at every hint that the global race for digital currencies lurked deeper dangers for the dollar and thus also for the national security of the US. Even as China marched forward and Bitcoin’s value hit $ 1 trillion, the Federal Reserve was in no hurry to be a candidate.

Until now.

This week marked a public turning point for top US government officials involved in international finance – Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell. Josh Lipsky, director of the Atlantic Council’s GeoEconomic Center, tweeted that this was “firing a starting weapon.”

At a New York Times event Monday with Secretary Yellen, CNBC’s Andrew Ross Sorkin called for their most comprehensive approval to date of a digital dollar, central bank digital currency, or CBDC. Although Sorkin drew Yellen’s attention to a poll by the Atlantic Council at the Belfer Center at Harvard that found 70 countries now have digital currency projects, Yellen instead focused on the domestic good a digital dollar could bring to Americans.

“I think it makes sense for the central banks to look at this,” Yellen said in a historical clip from Snapchat.

“I found that staff from the Federal Reserve Bank of Boston are working with researchers from MIT to study its characteristics. We have a problem with financial inclusion. Too many Americans really don’t have access to simple payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help with. I think this could lead to faster, safer and cheaper payments. “

A day later, Fed Chairman Powell testified in Congress and also broke new ground. He described the digital dollar as “a high priority project for us”. He added: “We are determined to solve the technology problems and to advise the public very comprehensively and very transparently with all interested constituencies on whether we should do this.”

But while the Fed is in consultation, China will be executed.

Neither Yellen nor Powell mentioned China’s growing lead in developing digital currencies, but that was the context. Their call to action coincides with China’s announcement of a significant partnership with the SWIFT cross-border payments system earlier this month, removing any doubts that Beijing intends to internationalize the digital yuan.

At the same time, China has signed a free trade agreement (FTA) with Mauritius, the first free trade agreement with an African state, with which a digital financial audit facility is to be created. “While China continues to develop its plans for digital currencies, it is ultimately Mauritius that leads Africa in this area,” write experts Lauren Johnston and Marc Lanteigne for the World Economic Forum. The free trade agreement agrees to “promote the development of a renminbi clearing and settlement facility in Mauritius”.

All of this is because Beijing authorities used the February 12th Chinese New Year celebrations to launch three large pilot projects to distribute digital yuan worth approximately $ 1.5 million in “red packages” each perform about $ 30. Then, this week, China expanded its digital currency handout testing program to include Chengdu City, capital of Sichuan Province and the fifth largest city in the country, where it is distributing approximately $ 6 million worth of digital yuan.

A red package in digital Chinese currency can be seen on an arranged photo on a mobile phone as Chengdu City begins handing out 200,000 red E-CNY packages valued at 40 million yuan on February 24, 2021 in Yichang, Hubei Province .

VCG | Visual China Group | Getty Images

China’s goal appears to be to lay the foundation for the digital yuan coming-out party at the XXIV Winter Olympics in Beijing in late 2022. It is speculated that Chinese organizers might require all contestants and athletes to download an app that will ensure that all payments at the Games for hotels, tickets, food, souvenirs and more are made in the new digital currency. Even if you don’t see a physical boycott of the Olympics in China, watch out for digital boycotts from the US and other teams.

It’s hard not to compare China’s current lead in developing digital currencies, so far shaken off by American officials, with its early global lead in developing the 5G or fifth generation broadband cellular standard. Until the Trump administration reacted alongside Western manufacturers, no one could compete with Chinese 5G providers and device manufacturers worldwide, including Huawei.

China’s consistent prioritization of technological progress underscores its realization that in history the country that reached the technological peak in its era was mostly also the dominant international actor.

If the US loses the importance of financial technology innovation, combined with a weakening of the global dominance of the dollar, the benefits for Beijing would be considerable.

China’s different approaches to privacy give it a competitive advantage. The need for the US and Europe to address privacy concerns will complicate CBDC development. Conversely, Beijing sees the digital yuan as a way to further strengthen its already formidable surveillance state while improving its ability to fight money laundering, corruption and terrorist financing.

In a recent article published by CNAS, authors Yaya J. Fanusie and Emily Jin capture how deeply China understands the geopolitical significance of their project for digital currencies. They tell how Yao Qian, former head of digital currency research at People’s Bank of China, compared the advancement of his country’s digital currency with previous Chinese advances in robotics, big data, and artificial intelligence.

Speaking at a United Nations conference on information technology, Yao said, “Yao set up the digital currency as part of the” next war, “” referring to an article in that title in The Economist that highlighted the central role of technology in competition between the US and the US China was discussed.

The Fed fears that it will prematurely introduce a digital dollar in view of its use as the world’s reserve currency. The bigger geopolitical threat, however, is how quickly it is falling behind.

The US can still win this competition if they not only develop a digital dollar quickly, but work together to create a digital euro, a digital pound, and a digital yen. The total firepower of these currencies would quickly fill the innovation gap. It would also demonstrate the value of working with allies, a core part of Biden’s foreign policy.

Frederick Kempe is a best-selling author, award-winning journalist, and President and CEO of the Atlantic Council, one of America’s most influential think tanks on global affairs. He worked for the Wall Street Journal for more than 25 years as foreign correspondent, assistant editor-in-chief and senior editor for the European edition of the newspaper. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place in the World” – was a New York Times bestseller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his view every Saturday of the top stories and trends of the past week.

More information from CNBC staff can be found here @ CNBCopinion on twitter.

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Katherine Clark