Elephants in the Room
The Greenback Needs a Digital Makeover
To preserve the dollar’s status as the world’s reserve currency, the United States can’t let China get ahead on cryptocurrency.
Last July, U.S. Treasury Secretary Steven Mnuchin took to the podium in the White House briefing room to explain his view on the risks of so-called digital, or “crypto,” currencies. “Cryptocurrencies, such as bitcoin, have been exploited to support billions of dollars of illicit activity,” the secretary said. “Many players have attempted to use cryptocurrencies to fund their malign behavior. This is indeed a national security issue.” Since then, the federal government has failed to adopt any overarching policy toward digital currency, leading to regulatory uncertainty and a stated hostility that is driving innovation away from the United States.
Mnuchin was quite correct: The emerging revolution of digital currency is a national security issue. But the problem is that his approach to digital currency may drive innovation into the hands of the United States’ leading national security competitor: China.
Chinese President Xi Jinping has made digital currency a key innovation goal for his country. For example, in October 2019, three months after Mnuchin’s White House statement, Xi told his Politburo that they “must take blockchain as an important breakthrough for independent innovation … clarify the main directions, increase investment … and accelerate the development of blockchain.”
Almost immediately after this statement, the National People’s Congress dutifully enacted a new cryptocurrency law to establish the framework for a regulatory regime for a Chinese national digital currency. This Chinese digital currency, a so-called “digital yuan,” is now ready for trial, according to the People’s Bank of China.
While Washington focuses on whether to allow digital currency in the U.S. financial system, in other words, China is moving ahead in earnest. The prospect of the Chinese Communist Party (CCP) dominating this emerging financial technology should be alarming.
Since the end of World War II, the United States has enjoyed significant advantages related to the U.S. dollar’s role as the world’s reserve currency. So great are those benefits that a former French president characterized them as an “exorbitant privilege.” For example, when it comes time for Washington to finance its profligate fiscal irresponsibility, it can do so more cheaply because all of the world relies on the dollar. Meanwhile, the U.S. military would likely be the first to suffer from a more austere fiscal balance sheet if the cost of borrowing rose significantly.
Or, consider U.S. economic sanctions. The foundation of U.S. sanctions is the unique status enjoyed by the dollar as a global reserve currency. “Even a company that has basically no trade in the United States, their banks do,” Jarrett Blanc, a senior fellow at the Carnegie Endowment for International Peace, told the Atlantic. “And so they basically can’t be banked if they are trading with a country that has been targeted with these very powerful U.S. sanctions.”
In turn, the U.S. president has options between tolerating illicit behavior—whether a North Korean ballistic missile test or Iranian terrorism—and sending in the military. Indeed, innumerable U.S. policies are served by economic sanctions, from stopping sex trafficking to punishing human rights abuses (for example, those against Uighur Muslims in China).
The frequency with which the targets of U.S. economic sanctions are entities under the control of Beijing may shed some light on why Xi is so interested in finding ways to avoid the dollar. So too does the deeper control it would give him over those in China. As the Wall Street Journal noted in November that “[f]oreign tourists in China looking to buy a bottle of water or a taxi ride with cash or credit card are finding themselves out of luck.” The reliance on digital payments gives the CCP unprecedented insight and control into every transaction in China. Xi’s government is free to weaponize this power to punish its adversaries, whether a Hong Kong activist or a Uighur Muslim.
Already the master of the largest surveillance state in the world, the CCP is exporting its system and tools across its Belt and Road global mercantilist system, from Kazakhstan to Djibouti to Europe itself. With a digital currency, in other words, China may all but eliminate blocks posed by foreign exchange controls while setting up a parallel network that needn’t rely on the dollar.
The dollar’s unique status—the exorbitant privilege—won’t disappear overnight. Beijing has been described as having “infinite patience,” and with the latest moves in cryptocurrency, it is framing an alternative today for exploitation tomorrow. And it is clear that this alternative currency system won’t be designed to promote Western values of privacy and rule of law.
Digital currency innovators don’t have to work in the United States if it continues to reject them; they can and will search for the best place to do business. Increasingly, central banks around the world—whether in China, Russia, Iran, Japan, or the European Union—are looking at digital currency and how they will position themselves for the post-dollar world.
The Trump administration’s National Security Strategy noted that “economic security is national security.” The United States must lead in digital currency: It’s time for the greenback’s digital makeover.