China’s central bank digital currency (CBDC) does not have the capacity to displace the United States dollar as the reserve currency.
The Independent Strategy president and global strategist David Roche stated that China’s digital yuan had “a long way” to travel before reaching a point where it can fiercely challenge the USD dominance.
Hypothetically, China’s CBDC (digital yuan) could outwit the U.S. dollar (USD) as the world’s reserve currency, but after a ‘very, very long time.’ According to the strategist, before a currency achieves reserve status, a couple of ‘almost abstract’ conditions should be met, including having a system that is not so much leveraged. The Chinese yuan takes far less international trade settlements portion — that is only 2% compared to the euro, which occupies nearly 18%–20% of all the trade.
Roche reportedly stated the following:
“Dethroning the dollar — which the euro tried to do, and settled at a miserable 18–20% of all the international things that go on — is very, very difficult. […] There is a certain amount of illusion at the moment that the yuan — which accounts for 2% of international trade settlements and even less if you come to financial investment flows — that this can take over.”
He doesn’t believe yet that the People’s Bank of China‘s digital currency has the ‘magic potion’ that is able to topple the greenback off its world’s reserve currency position. The digital yuan, the country’s central bank controlled currency, is China’s effort in the quest to become a cashless society.
U.S. Government Not Worried but Wants to ‘Get It Right’
Over the past two decades, the U.S. economy has been progressively shrinking. However, the dollar is increasingly taking an even bigger proportion of financial reserves and the international trade settlements, as per Roche.
Before Roche’s remarks, the chairman of U.S. Federal Reserve Jerome Powell stated that the U.S. doesn’t have to be first with CBDC rather, it is focused on ‘getting it right.’ So in his words, the U.S. government doesn’t have to be concerned that China is gaining a first-mover advantage in CBDCs issuance.
On the other hand, some industry experts are concerned that if the U.S. dollar doesn’t launch its digital version soon, it would risk losing its status. At the end of last month, Major fintech firm Morgan Creek Digital co-founder Anthony Pompliano argued that the U.S. delay of its digital dollar initiative would make the country fall ‘really far behind China.’ Commodity Futures Trading Commission former chair Christopher Giancarlo also earlier shared the same sentiments in October 2019, when he argued that increased active CBDCs experimenting in other countries would make the dollar to lose its status in the future.
Washington Risks Losing Its Unique Power
The U.S. and by large Western capitalism would suffer multiple negative effects if China becomes victorious in this digital currency race. Washington will no longer be able to have the unique power of imposing sanctions on other countries if foreign businesses manage to bypass the U.S.’s gatekeeping banks.
In that case, foreign central banks would no longer need dollar reserves to maintain their currencies. U.S. government bonds demand would drop, resulting in higher interest rates for the federal government, business loans, credit cards, mortgages, and other credit facilities. Therefore, America has the chance to use its soft-power appeal for civil liberty values to bolster the development of digital currencies, thereby maintaining its foreign trade status.