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Global Payment Systems and the U.S. Dollar
a Chinese currency-centered alternative to SWIFT. Instead of replicating SWIFT’s function (sending messages to arrange the terms of a payment transfer between and by other organizations), CIPS clears and settles the transfer simultaneously – executing the transaction faster and cheaper. This allows CIPS to work as a clearing and settlement system when integrated with SWIFT. Nearly a thousand institutions in roughly 100 countries have used the system.22 A digital currency could allow the necessary discrete payments steps to be compressed still further. In this sense, international payment processes (to include CIPS) remain ripe for disruption.
SWIFT leadership has acknowledged the need to improve transaction efficiency, data quality, and transparency. Citing Chinese regulatory compliance and customer demand, SWIFT created a joint venture with three Chinese entities including CIPS early in 2021 to provide information system integration, data processing, and technological consulting.23
In parallel with partnering with SWIFT, China is exploring alternatives. The e-CNY can operate directly with any entity that opens an e-CNY account to execute, clear and settle transactions. Tight integration of these processes mean that the e-CNY could help displace SWIFT. In 2021 China also joined what is now called the Multiple CBDC (mCBDC) Bridge Project, previously launched by Hong Kong and Thailand, to explore a multi-currency cross-border payment system for wholesale activity.24 China aims to include other Asian nations in this distributed-ledger technology project.25
Chinese officials appear to recognize other nations’ concerns about a competing e-CNY ecosystem. Zhou Xiaochuan, former head of the PBOC said, “Some countries are worried about the internationalization of yuan. We can’t push them on sensitive issues and we can’t impose our will. We must avoid the perception of great power chauvinism.”26
Regardless of the Chinese government’s intentions, CBDCs may enable the disruption of certain legacy processes undergirding Western financial power. China’s stated national interests and past actions suggest that its position as a CBDC pioneer could allow it to begin gradually reshaping aspects of the international financial system to serve CCP interests.
Conclusion
The United States lags other major economic powers, especially China, on the path to a digital national currency. Federal Reserve Chairman Powell has emphasized the need to be deliberate. “We do think it’s more important to get it right than to be first,” he explained, “and getting it right means that we not only look at the potential benefits of a CBDC, but also the potential risks, and also recognize the important trade-offs that have to be thought through carefully.”27 Yet there are geopolitical risks associated with delay. The United States should prioritize expeditious and collaborative exploration of CBDC designs.
Fortunately, Federal Reserve has been conducting a variety of research on how to implement CBDCs and other payments technologies using both legacy and newer technologies.28 The Boston Federal Reserve Bank has been conducting CBDC research in partnership with the Digital Currency Initiative at MIT. Called Project Hamilton, the effort aims to build a modular and scalable CBDC platform. The researchers are exploring different technical and policy issues to ensure the speed, security, privacy, and resilience of any U.S. CBDC. While ambitious in its goals, it remains modest in scale and resourcing.
The evolving platform could provide a foundation for more open and collaborative international CBDC efforts. The results of Project Hamilton will be released as open-source software that any party can review and modify for its own use. Because other governments can scrutinize, contribute to, and further customize the software, they can assess its integrity and compatibility with their own national policy goals, including privacy protections. Therefore, even if the United States lacks its own CBDC, its research efforts could promote a transparent and democratic CBDC ecosystem.
Some Federal Reserve Governors, Treasury officials, and Members of Congress have offered thoughts about how CBDCs might advance financial inclusion or enable direct payments to citizens. But there is not yet a framework for national decision-making, let alone any consensus about
moving toward a CBDC. Policymakers have yet to engage the full range of stakeholders from commercial banks to privacy advocates. Ultimately, Congress will have to define the goals and policies governing any CBDC, including the respective roles of government and the private sector.
Other countries will not simply wait for the United States to develop an American CBDC before they consider designing their own CBDC. The United States thus may find that both its domestic options and global influence regarding CBDCs will shrink over time. China, with its impending CBDC launch, is well-positioned to lead international efforts to develop standards, pioneer new uses, or develop new payments systems. This could undermine the interests of the United States and its global partners as well as global norms of state behavior.
The United States should closely monitor the technical development and practical implementation of China’s e-CNY to better understand evolving data access and alternative payments systems issues and their potential implications. The U.S. government should engage with academia, the private sector, and global partners and institutions (e.g., the Bank for International Settlements, International Monetary Fund, World Bank) regarding CBDC technical and policy choices. The U.S. should provide additional resources for the Federal Reserve and its partners to expand and accelerate research and experimentation on CBDCs.
U.S. officials should build a coalition of nations to promote the adoption of international standards and payments processes that are open, collaborative, and consistent with democratic interests and values. Finally, U.S. policymakers should factor in the geopolitical stakes as they consider the timeline and domestic issues associated with a potential American CBDC.
References
1 People’s Bank of China. Progress of Research & Development of E-CNY in China. Working Group on E-CNY Research and Development of the People’s Bank of China, July 2021. http://www.pbc.gov.cn/en/3688110/3 688172/4157443/4293696/2021071614584691871.pdf.
2 Society for Worldwide Interbank Financial Telecommunication. 3 Ossinger, Joanna. “Crypto Market Retakes $2 Trillion Market Cap Amid Bitcoin Gains.” Bloomberg.com. Bloomberg, August 15, 2021. https://www.bloomberg.com/news/articles/2021-08-15/crypto-market-retakes-2-trillion-market-cap-amid-bitcoin-gains.
4 Stablecoins are often built upon existing cryptocurrencies like Ethereum, which means the stablecoin in question inherits any destabilizing risks that threaten the economic or technical health of the host platform. The U.S. Treasury has identified several such risks, including risks of fraud, conflict of interest, misleading or misused information, as well as risks of governance, interoperability, and security. “Report on Stablecoins.” Treasury.gov. President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency., November 2021. https://home.treasury. gov/system/files/136/StableCoinReport_Nov1_508.pdf. 5 In theory, a group of nations might use decentralized technologies to collaborate in the governance of a common CBDC like an “e-Euro”, but unlike cryptocurrencies, even if governments outsource the creation of the CBDC software platform to a private entity, they are unlikely to outsource the governance of their operational CBDC.
6 “Atlantic Council Releases New State-of-the-Art Central Bank Digital Currency Tracker.” Economy & Business. Atlantic Council, July 22, 2021. https://www.atlanticcouncil.org/news/press-releases/atlantic-councilreleases-new-state-of-the-art-central-bank-digital-currency-tracker/.
7 Wyss, Jim. “How the Tiny Bahamas Beat Global Giants in the E-Currency Race.” Bloomberg.com. Bloomberg, May 20, 2021. https://www.bloomberg.com/news/articles/2021-05-20/the-bahamas-centralbanker-explains-why-its-sand-dollar-led-the-way.
8 Sorensen, Sune. “China Is Opting out of US-Run Financial System.” CoinDesk Opinion. CoinDesk, April 30, 2021. https://www.coindesk.com/policy/2021/04/30/china-is-opting-out-of-us-run-financial-system/.
9 PBOC. Progress of Research & Development of E-CNY in China.
10 Ibid.
11 Kayrouz, Paul. Central Bank Digital Currencies and the Future of Money. PwC, June 2021. https://www.pwc. com/m1/en/media-centre/2021/documents/central-bank-digital-currencies-and-the-future-of-moneypart1.pdf.
12 Alun John and Samuel Shen, Tom Wilson.” China’s top regulators ban crypto trading and mining, sending bitcoin tumbling.” Reuters, September 24, 2021. https://www.reuters.com/world/china/china-central-bank-vows-crackdown-cryptocurrency-trading-2021-09-24/
13 Coco Feng. “China digital currency: e-CNY wallet lands in app stores ahead of Winter Olympics 2022.” South China Morning Post, January 4, 2022. https://www.scmp.com/tech/policy/article/3162094/chinadigital-currency-e-cny-wallet-lands-app-stores-ahead-winter
14 Reliance on mobile apps may not necessarily equate to reliability and universal accessibility. During recent episodes of heavy flooding in China, individuals who had become accustomed to not carrying cash found themselves unable to pay for much-needed commodities as high waters crashed the cell network and electrical grids for extended periods of time. Areddy, James T. “China Flooding Exposed Risks in Beijing’s Plan to Launch Digital Currency.” The Wall Street Journal. Dow Jones & Company, October 19, 2021. https://www.wsj.com/articles/china-flooding-exposed-risks-in-beijings-plan-to-launch-digital-currency-11634654928.
15 “China Offers Digital Yuan at Olympics to Test Overseas Appeal.” Bloomberg News, January 10, 2022. https://www.bloomberg.com/news/articles/2022-01-10/china-offers-digital-yuan-at-olympics-to-test-overseas-appeal#:~:text=Visitors%20line%20up%20to%20buy,Beijing%2C%20in%20Sept.%20 2021.&text=The%20Bank%20of%20China%20said,crucial%20test%20of%20its%20services.
16 PBOC, Progress of Research & Development of E-CNY in China. 17 Ibid.
18 Wang, Maya. “China’s Techno-Authoritarianism Has Gone Global.” Foreign Affairs, November 9, 2021. https://www.foreignaffairs.com/articles/china/2021-04-08/chinas-techno-authoritarianism-has-gone-global. Diamond, Larry, and Anna Mitchell. “China’s Surveillance State Should Scare Everyone.” The Atlantic. Atlantic Media Company, February 5, 2018. https://www.theatlantic.com/international/ archive/2018/02/china-surveillance/552203/.
19 Chinese law governing the physical Renminbi has no protections for personal information. China’s cybersecurity law theoretically does, but it is unclear how it applies to the e-CNY. Further, digital currency could be classified as critical infrastructure and thereby subject to special regulations enabling greater party control. Wang, Martha. “China’s Digital Currency and What This Could Mean for Foreign Companies and Financial Institutions in China.” Orrick, February 9, 2021. https://www.orrick.com/en/Insights/2021/02/Chinas-Digital-Currency-and-What-This-Could-Mean-For-Foreign-Companies-and-Financial-Institutions.
20 Reuters Staff. “Chinese Banks Urged to Switch Away from Swift as U.S. Sanctions Loom.” Reuters. Thomson Reuters, July 29, 2020. https://www.reuters.com/article/us-china-banks-usa-sanctions/chinese-banksurged-to-switch-away-from-swift-as-u-s-sanctions-loom-idUSKCN24U0SN.
21 Reuters Staff. “China’s Onshore Yuan Clearing and Settlement System CIPS.” FACTBOX. Thomson Reuters, July 30, 2020. https://www.reuters.com/article/china-banks-clearing/factbox-chinas-onshore-yuan-clearing-and-settlement-system-cips-idUSL3N2F115E.
22 Ibid.
23 Reuters Staff. “SWIFT Sets up JV with China’s Central Bank.” Reuters. Thomson Reuters, February 4, 2021. https://www.reuters.com/article/china-swift-pboc/update-1-swift-sets-up-jv-with-chinas-central-bankidUSL1N2KA0MS.
24 Kharpal, Arjun. “China’s PBOC Joins Cross-Border Digital Currency Project with Other Central Banks.” Tech. CNBC, February 24, 2021. https://www.cnbc.com/2021/02/24/chinas-pboc-joins-cross-border-digital-currency-project.html.
25 “III. CBDCs: An Opportunity for the Monetary System.” BIS Annual Economic Report 2021. Bank for International Settlements, 2021. https://www.bis.org/publ/arpdf/ar2021e3.pdf.
26 Ogundare, Ibukun. “Former PBOC Governor Says Digital Yuan Is Not Threat to Fiat Currencies.” Coinspeaker, December 14, 2020. https://www.coinspeaker.com/former-pboc-governor-digital-yuan/. 27 https://www.reuters.com/article/us-usa-fed-powell-digitalcurrency/feds-powell-more-important-for-u-sto-get-digital-currency-right-than-be-first-idUSKBN2741OI 28 https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf
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