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The Future of Money

The development of new financial technologies and their adoption by nation states and private actors is unleashing transformative effects on the international financial system. Though the dollar remains the dominant international currency today, there is contentious debate over whether it can be, or is in the process of being, replaced.

While another fiat currency replacing the dollar in the short term remains unlikely, the development of digital currencies in the form of central bank digital currencies (CBDCs), de-centralized cryptocurrencies, and private-sector digital currencies all pose threats to the U.S.’s ability to continue capturing gains from current systems, leveraging dollar centrality to enforce sanctions, and otherwise influence international financial transactions over the longer term.

Our 3-part series, The Future of Money, breaks down the technologies and geopolitical forces shaping the global financial landscape and is a critical resource for those looking to better understand and navigate its rapid transformation.

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Future of Money
Part 1

Emerging Challenges to U.S. Dollar Supremacy

Driven by perceived U.S. sanctions overreach, numerous countries now seek to circumvent the dollar-dominated financial system. Emerging technologies are paving the way.

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Future of Money
Part 2

Cryptocurrencies: Vehicles of Financial Change

The widespread adoption of cryptocurrencies could undermine governments' control over monetary policies and disrupt global finance.

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Future of Money
Part 3

Institutional Adoption of Disruptive Financial Technologies

A comprehensive picture of the forces and actors that are critical to understanding and navigating the future financial system.

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CRYPTOCURRENCY DATABASE

A catalogue and country-level breakdown of cryptocurrency regulation across 117 countries.

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Section 1

U.S. Control of the International Financial System and Sanctions Overreach

The dollar has served as the world’s key reserve currency since the post-WWII international monetary order was established at the Bretton Woods Conference in 1944. The Bretton Woods system of fixed-but-adjustable exchange rates has since collapsed, but the central importance of the U.S. dollar in the international monetary system has endured. The widespread use of dollars as the predominant currency in international trade and payments grants the U.S. extensive control over the international exchange of goods and services and makes its ability to enforce sanctions particularly effective. Today, the U.S. is the only country that can effectively lock other countries out of the global financial system—something that is a source of resentment among other economic powers. Since most foreign exchange transactions (88 percent) are conducted in dollars, and these international transactions are transferred through the U.S. banking system, the U.S. has the power to cut off access to the dollarized economy. The U.S. uses this economic power as leverage in geopolitical negotiations and to levy economic sanctions against countries. For example, the U.S. has used its influence to exert pressure on the Belgium-based Society for Worldwide Interbank Financial Telecommunications (SWIFT) system, which is responsible for sending interbank messages containing the secure payment and transfer information necessary to settle international transactions. During negotiations over Iran’s nuclear program in 2018, the U.S. unilaterally pressured SWIFT into denying Iranian banks access to its messaging system, thus crippling Iran’s ability to conduct international trade. In 2017, the U.S. threatened to cut off China’s access to the dollar system entirely if it did not uphold sanctions against North Korea. These actions, among others, are now inspiring challenges to the current system from China, Russia, the EU, and other countries seeking to circumvent U.S. control.

Section 1
Key Takeaways

  1. The Current Situation

    Since the end of WWII, the U.S. dollar has served as the world’s reserve currency, granting the U.S. widespread influence in the international monetary system and unique economic and geopolitical advantages. Among these are the ability to run large trade deficits, borrow substantial sums at relatively low rates, maintain stable currency demand, and control global dollar-denominated financial flows.

  2. Points of Contention

    The ability to control dollar flows and influence the SWIFT system allows the U.S. to enforce a wide-reaching global sanctions regime and exercise financial leverage in international negotiations. Under the Trump administration, the U.S. aggressively expanded sanctions on countries such as China, Russia, and Iran, increasing their incentives to develop vehicles for circumventing the current U.S.-dominated system.

  3. What’s at Stake?

    U.S. influence over the international financial system has wide-ranging impacts, including playing a central role in the U.S.’s containment capabilities of China and Russia, its ability to curb nuclear programs in Iran and North Korea, and its broader global influence. Since the 1990s, sanctions have served as an increasingly critical tool for U.S. international relations. Undermining the U.S.’s ability to enforce sanctions through the current financial system would significantly shift global power dynamics, particularly among great powers.

How U.S. Influence Permeates the Global Financial System

The dollar’s status as the world’s reserve currency grants the U.S. an “exorbitant privilege”—the U.S. can purchase commodities without foreign exchange risk, borrow cheaply in its own currency, and impose economic sanctions. The dollar’s centrality in the international financial system gives the U.S. a unique ability to use the international financial system as a geopolitical tool. There are several key chokepoints the U.S. authorities target to facilitate (or interdict) the flow of dollars through the global economy and allow the U.S. to exercise its leverage over global trade, invoicing, and foreign exchange. Over 80 percent of global trade involves U.S. dollars, and transactions denominated in U.S. dollars must pass through domestic intermediaries before being settled. That grants the U.S. Office of Foreign Assets Control (OFAC) the ability to assert jurisdiction over any U.S. dollar transaction and surgically trace dollar transactions back to a foreign bank account, company, or individual, and block the transaction. For example, in the ongoing 5G dispute between the U.S. and China, the U.S. could use this financial leverage to further disrupt China’s ability to secure the necessary inputs to develop its domestic semiconductor industry. Beyond preventing U.S. domestic companies from exporting materials to China, the U.S. can intervene in transactions along the semiconductor supply chain that use U.S. dollars. If Taiwan Semiconductor Manufacturing Company (China’s largest semiconductor supplier) purchases raw materials from a copper mine in Zambia, and the payment is settled in dollars, the transaction must go through intermediary financial institutions in the U.S. Since the U.S. can intervene in the transaction, the companies are forced to abide by U.S. regulations. This power has contributed to making U.S. sanctions on China’s semiconductor suppliers so effective, and this capability has been a major driver for China to seek alternatives to the current system.

Expert Q&A

Headshot of Ousmène Jacques Mandeng

Ousmène Jacques Mandeng

Director, Economics Advisory Ltd.

Q: Do you see the role of the dollar in international economy changing significantly in the future?

“The fact is we are moving towards an environment of increasing diversification by actors, by mediums, and by currencies. And in large part, this is because of the new technology we have, that gave rise to currencies like Bitcoin.”

It’s fair to say that the dollar has remained, despite everything, the dominant international currency. Have recent developments really changed that? Not necessarily, but the fact is we are moving towards an environment of increasing diversification by actors, by mediums, and by currencies. And in large part, this is because of the new technology we have, that gave rise to currencies like Bitcoin. And even though their impact is marginal, as of now, they are hinting towards new capabilities that are being developed that may shift away payments from the traditional rails and the traditional actors.

And that is, I think, what we are looking towards. Namely, an environment which may look quite different from the very bank-dominated, national currency-dominated environment we have seen to date. So, while the collapse of the Bretton Woods system in 1971 was a watershed event in disrupting what was then the belief that monetary cooperation is essential for international stability, we may be moving today towards another sort of disruption, but one in which national currencies may play a lesser role to determine the way payments are being conducted in the international economy.

Graphic 1

International Financial Messaging and Settlement

International financial transactions consist of two components:

  1. Secure messages detailing transaction instructions; and
  2. The settlement of the transaction between the appropriate parties through a clearinghouse.

The SWIFT system is the most common global system used for sending messages, but it is not used to settle transactions. Settling transactions in U.S. dollars communicated through SWIFT messages requires a partner bank, or a SWIFT message to be mapped to a messaging system that also settles dollar transactions. The two main settlement systems for dollar transactions are the Clearing House Interbank Payments System (CHIPS) and Fedwire systems.

International Funds Transfer Through the SWIFT System

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the world’s largest financial messaging network used by banks and other financial institutions to securely send and receive financial information, such as money transfer instructions. The dollar has also typically been the principal medium of exchange utilized by SWIFT customers, the main messaging network that financial institutions employ to send the messages necessary to then settle cross-border payments. (In 2020, the euro overtook the dollar as SWIFT members most transacted in currency.) Countries and industries rely on intermediary institutions such as SWIFT to communicate the necessary financial instructions, without which they cannot transfer money or settle payments across borders. In 2019, SWIFT’s global payments platform handled communications tied to $77 trillion in cross-border transactions across 11,000 financial institutions, accounting for 56 percent of the global total. Since 2014, dollar-denominated transactions have consistently accounted for roughly 40 percent of all transactions initiated through the SWIFT messaging platform, and under the SWIFT system, foreign banks have intermediary relationships with U.S.-domiciled financial institutions in order to settle those dollar-denominated transactions.

When a bank has branches in multiple countries, it can use only the SWIFT system to settle international transactions. SWIFT transfers the settlement instructions between banks, and the receiving bank can execute the transaction settlement internally.

New York, U.S.

Step 1: A New York executive instructs his bank to pay an aluminum company in the UAE for imported materials.


Step 2: The U.S.-based bank branch sends a message through SWIFT to its UAE-based branch.

Dubai, UAE

Step 3: The UAE-based bank branch receives the SWIFT message with payment instructions.


Step 4: The UAE-based bank settles the transaction and credits the aluminum company’s account.

International Funds Transfer Through the CHIPS System

The Clearing House Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and settles international payments and transactions in U.S. dollars. CHIPS is a private-sector clearinghouse that requires banks to have a physical presence in the U.S. and processes $1.2 trillion per day. CHIPS handles both messaging and settlement services, including 90 percent of all international dollar-based transfers, worth an average of $1.8 trillion per day, and it can interface with the SWIFT system. For international transactions, the SWIFT system is used for financial messaging, and CHIPS for transaction settlement. (CHIPS can be used for both messaging and settling domestic transactions.) The importance of CHIPS is derived in part from the U.S.’s position as one of the world’s largest financial hubs—five of the top fifteen financial centers are in the U.S., and New York is the number-one financial center in the world.

An international bank with a location in the U.S. can use CHIPS for both messaging and settlement.

Milan, Italy

Step 1: An Italian executive instructs his Italian bank to pay a U.S. technology supplier located in Miami.


Step 2: The Italy-based bank sends a SWIFT message to an intermediary U.S.-based bank in New York with access to the CHIPS system.

New York, U.S.

Step 3: The intermediary bank imports the information from the SWIFT message into CHIPS and sends the payment message to the technology supplier’s Miami-based bank.

Miami, U.S.

Step 4: The Miami-based bank settles the transaction and credits the technology supplier’s account.

International Funds Transfer Through SWIFT and the Fedwire System

Fedwire is a settlement funds transfer system operated by the twelve United States Federal Reserve Banks with nearly 10,000 member banks. Similar to CHIPS, Fedwire handles both messaging and settlement services, can interface with the SWIFT system, and is available only to U.S. financial institutions.

Two international banks can transact in U.S. dollars using a combination of the SWIFT system and the Fedwire system.

Bogota, Columbia

Step 1: A Colombian pharmaceutical company instructs its bank to pay a Chilean advertising agency.


Step 2: The Colombia-based bank sends a SWIFT message to a Miami-based bank with access to the Fedwire system.

Miami, U.S.

Step 3: The Miami-based bank converts the SWIFT message into a Fedwire message and sends it to the nearest Federal Reserve Bank of Atlanta.

Atlanta, U.S.

Step 4: The Federal Reserve Bank of Atlanta settles the transaction and credits the Chilean bank’s account.

New York, U.S.

Step 5: The Federal Reserve Bank of New York passes along the Fedwire message from the Federal Reserve Bank of Atlanta to the Chilean bank’s U.S.-based branch in New York.


Step 6: The Chilean bank’s U.S- based branch messages its Chilean branch with settlement instructions.

Santiago, Chile

Step 7: The Chilean-based bank credits the account of the Chilean advertising agency.

Source: U.S. Department of the Treasury—Financial Crimes Enforcement Network

The U.S.’s influence over dollar-denominated transactions, SWIFT, and domestic clearinghouses allows it to impose severe penalties for non-compliance, enforce sanctions, combat corruption, and track money laundering more effectively than any other country. While the U.S. does not have direct control over the SWIFT system, the U.S. was, for example, effectively able to pressure SWIFT into cutting off its services to Iran in 2018 and used data provided by SWIFT to track and freeze assets funding illicit activities after the 9/11 terrorist attacks. Once transactions enter the CHIPS system, OFAC can track them and freeze the accounts of companies or individuals and even exclude entire nations from accessing this infrastructure (as in the case of Venezuela and North Korea). In 2017, for example, U.S. authorities fined Germany’s Deutsche Bank $425 million for violating anti-money-laundering laws in a scheme that facilitated the transfer of $10 billion from Russia to banks in Cyprus, Estonia, and Latvia. Historically, U.S. authorities have been judicious in their application of economic sanctions, but since the 9/11 terror attacks, sanctions have assumed an increasingly central role in U.S. foreign policy. Under the former Trump administration, OFAC was particularly liberal in its usage of sanctions, targeting around twice as many entities per year as previous administrations. The recent increase in use of U.S. sanctions is a major catalyst driving efforts to evade U.S. control, disrupt the current international payments system, and construct a new global financial infrastructure.


The Expanding Scope of U.S. Sanctions and International Pushback

The use of sanctions as a geopolitical tool has a long history, but the impact and effectiveness with which the U.S. can use sanctions today is unique. While other countries can impose tariffs, embargoes, and other non-tariff barriers, they do not have the power to unilaterally restrict access to underlying international financial infrastructure. The U.S.’s ability to restrict access to dollar-denominated transactions grants it the ability to effectively enforce secondary sanctions—restrictions on a third-party individuals or organizations (usually banks) outside of the U.S.’s jurisdiction—thereby effectively expanding the scope of U.S. sanctions enforcement to encompass most of the globe. Since the early 2000s, the U.S. has been using its power to expand its sanctions regimes and has notably targeted sanctions at powerful countries such as China and Russia. A series of key events have served as catalysts for the expanding scope of U.S. sanctions, including the 9/11 terror attacks, Russia’s invasion of Ukraine, and the U.S.’s maximum pressure campaign against Iran. In the wake of 9/11, President Bush significantly expanded U.S. sanctions through executive orders, freezing assets on a range of individuals and organizations connected to the attacks, including Osama bin Laden and al-Qaeda. The Obama administration further expanded the use of sanctions, placing extensive sanctions on Iran in 2010 during negotiations on its nuclear program and sanctioning Russia after its 2014 invasion of Ukraine. International pushback against U.S. sanctions accelerated under the Trump administration, as Trump oversaw the most significant increase in U.S. sanctions to date, with additional sanctions placed on Iran, Venezuela, China, and Russia leading to an annual average increase of 52 percent in sanctioned entities from 2016 to 2020.

The Trump administration significantly expanded the use of secondary sanctions, used its influence in the financial system to exert leverage in negotiations to a greater degree than previous administrations, and combined the use of financial leverage with domestic economic tools such as export controls. As noted above, during the maximum pressure campaign against Iran in 2018, on top of enforcing existing sanctions, the Trump administration unilaterally pressured SWIFT into cutting off Iran’s access to interbank communications, effectively preventing Iranian banks from conducting international trade. Those measures contributed to a 6.8 percent drop in Iran’s GDP growth in 2019. In its efforts to apply economic pressure on Myanmar and Venezuela over human rights violations and to curb North Korea’s nuclear program, the U.S. similarly cut off those countries' government's access to dollar-denominated payment systems. These countries lack the geopolitical power to retaliate effectively, but U.S. sanctions on China and Russia have generated significantly stronger reactions. From 2017 to 2019, the Trump administration placed sixteen rounds of sanctions on Russian individuals or entities. They included completely cutting off Rusal, Russia’s largest aluminum producer, from the dollar payments system. (Congress has since lifted the sanctions on Rusal.) Russia responded aggressively to U.S. sanctions, cutting its share of USD reserves by 26 percent in 2018, partnering with China to promote the use of the renminbi (RMB) in international trade, and developing alternative payment messaging and settlement systems. Despite Russia’s response, the Biden administration continued this approach. In April 2021, the administration introduced new rounds of sanctions on six Russian tech companies in response to their involvement in the SolarWinds cyberattack and allegations of election interference by Russian officials.

China has similarly been a major target for U.S. sanctions under both the Trump and Biden administrations. Throughout its tenure, the Trump administration imposed significant economic restrictions on China, and in 2017, Treasury Secretary Steven Mnuchin threatened to completely cut off China’s access to the dollarized economy if it did not comply with UN sanctions on North Korea. In 2019, the Trump administration escalated its confrontation with China over concerns about the Chinese telecom company Huawei’s ties to the Chinese government and intellectual property theft, imposing sanctions and banning sales of Huawei and ZTE equipment domestically. In the final days of the Trump administration, the U.S. imposed an additional round of sanctions on 14 high-level Chinese officials over crackdowns on pro-democracy protestors in Hong Kong in late 2020. The Biden administration continued to pressure China by way of sanctions, export bans on U.S. technology, as well as travel bans and asset freezes on Chinese officials. In March 2021, alongside Canada, the EU, and the UK, the U.S. froze the assets of Chinese officials involved in the detention of Uyghurs in China’s Xinjiang region. The increasing use of U.S. sanctions as a geopolitical tool has prompted both China and Russia to begin pushes to end global reliance on the dollar system and develop alternatives to it.

We Want to Hear from You

What impact have U.S. sanctions had on dollar centrality? In your view, what risks does this pose to the U.S. and what can the Biden administration do to address them?

Expert Q&A

Headshot of Stephanie Segal

Stephanie Segal

Senior Fellow, Economics Program, CSIS

Q: What are the potential impacts of U.S. sanctions on dollar centrality?

“The U.S.’s use of sanctions, if not coordinated with others, can be a push for other countries to seek some alternative to the dollar.”

One of the reasons that the dollar has maintained its centrality, notwithstanding the fact that its fiscal position and external position have been deteriorating, is the lack of an alternative.

In addition, the U.S.’s use of sanctions, if not coordinated with others, can be a push for other countries to seek some alternative to the dollar. And we know that to be a motivation for some countries seeking an alternative to the dollar, and we see it, whether we’re talking about Venezuela or with the Europeans in response to the U.S. withdrawal from the JCPOA. So, for sure, use of sanctions is another factor. And now, what is gaining more traction is technology and the idea of technological progress also being relevant when we think about preferences for currencies and for payment systems.

And I do think now you hear more and more that technology could impact the desire of actors to transact in dollars. So, if there’s some alternative system that isn’t necessarily dollar-dependent, and if it’s more efficient, then might that be a more attractive currency?

Graphic 2

The Increasing Use of U.S. Sanctions Under the Trump Administration

Under the Trump administration, the U.S. used sanctions as a geopolitical tool more frequently, and new additions to OFAC's sanctioned entities list spiked to an all time high in 2018.

New additions to OFAC Sanctions Lists per year

405 Obama Administration
(January 2009–January 2017)

623 Trump Administration
(March 2017–March 2020)

Breakdown by countries +
Obama Administration
(January 2009–January 2017)
Trump Administration
(March 2017–March 2020)
Iran 655 962
Colombia 620 62
Mexico 521 131
Russia 469 257
Syria 271 326
North Korea 197 169
Panama 150
Ukraine 108 54
Lebanon 93 101
Afghanistan 86
Pakistan 71
Venezuela 273
China 98
UAE 59
Total 3,241 2,492

Source: U.S. Department of the Treasury—Office of Foreign Assets Control

Section 2

Challenges to the Dollar and Existing Financial Infrastructure

Over the past decade, most speculation over de-dollarization has focused on the idea that either the euro or the renminbi would overtake the dollar as the world’s reserve currency. Since the early 2000s, central banks have been increasingly diversifying their holdings, and the percentage of reserves held in dollars has decreased modestly over the past five years (from 65 percent to 59 percent). However, most central bank reserves and international transactions are still in dollars, and there is ample evidence to suggest that a change in the near term is unlikely. By the end of 2020, 59 percent of global central bank reserves were held in dollars, while the euro accounted for 21 percent, and the renminbi just 2 percent. However, in response to U.S. sanctions, China, Russia, and the EU have all begun to take measures to develop alternatives to the existing international financial infrastructure and weaken U.S. influence over the system. China and Russia are de-dollarizing their foreign exchange reserves and creating their own financial messaging and payment systems. China has launched extensive efforts to internationalize the renminbi—including issuing renminbi-denominated bonds, setting up offshore renminbi clearing centers, and signing currency swap agreements to conduct international trade in renminbi. Although these efforts are still at an early stage and have not yet made a significant dent in the role of the dollar, they are indicative of a widespread desire to diminish U.S. influence. Ongoing efforts to undermine the U.S.’s financial advantage could significantly alter geopolitical power dynamics and weaken U.S. leverage over major powers such as China and Russia while providing countries such as Iran and North Korea new opportunities to access international trade and markets.

Section 2
Key Takeaways

  1. The Current Situation

    No fiat currency is currently positioned to significantly challenge the dollar as a reserve currency, but China, Russia, and the EU are all developing alternatives to the current system. As challenges to the dollar system mount, there is evidence to suggest that the role of the dollar is weakening internationally, a trend that could accelerate the adoption of new payments infrastructure and financial instruments.

  2. Points of Contention

    Measures introduced to weaken U.S. control over the global financial system include de-dollarizing central bank reserves, creating alternatives to the SWIFT system, internationalizing alternative currencies, and introducing central bank digital currencies (CBDCs). These measures have not had breakout success to date, but many countries have a vested interest in continuing their pursuit of these efforts to circumvent U.S. influence through sanctions.

  3. What’s at Stake?

    As challenges mount, technological improvements and waning U.S. influence will put the dollar in a precarious position. While U.S. policymakers are beginning to take the threat of losing influence seriously, few concrete policy measures have been initiated to maintain dollar centrality.

Major Powers’ Efforts to Weaken U.S. Control Over the International Financial System

The impact of U.S. sanctions is driving countries to begin developing alternatives to the dollar system, led primarily by China, Russia, and the EU. China and Russia’s efforts are the most extensive, but there has been growing support among other nations such as India, France, and Saudi Arabia as well. The desire to use new systems is particularly strong among nations facing the most severe U.S. sanctions, such as Iran and North Korea, who have moved to using the renminbi as their primary trading currency. Efforts to undermine the dollar include the process of de-dollarizing central bank reserves, trading in alternative currencies, developing alternative financial messaging and payment systems, pushing for the internationalization of alternative currencies and, most recently, developing digital currencies. To date, both Russia and China have taken significant steps toward ending their dollar dependence and creating alternative systems that they are now pushing to internationalize.

Russia began de-dollarizing its central bank reserves in late 2013 in efforts to ameliorate the economic fallout from impending U.S. and NATO sanctions imposed for its offensive in Ukraine. Between 2017 and 2018, Russia replaced $101 billion of dollar reserves with renminbi and euro reserves, and in June 2021, Russia’s central bank (Bank of Russia) announced that it would remove all dollar assets from its sovereign wealth fund. After Visa and MasterCard suspended their services from Russian banks blacklisted by the U.S., in 2014, Russia introduced the National Payment Card System (now known as “Mir”). Mir acts as a clearing center for processing card transactions within Russia and is owned by the Bank of Russia. Although Mir is still accepted primarily only in Russia, the government is now pushing for broader international acceptance, most recently testing expansion into the UK. In addition, in 2015, Russia developed a domestic SWIFT alternative, the financial messaging system of the Bank of Russia (SPFS), which in 2020 handled 13 million messages among more than 400 member banks (primarily within Russia). Russia has had success in de-dollarizing its reserves, and it is starting to move its foreign trade activity away from dollars by signing currency swap agreements with like-minded countries such as China, Iran, and Turkey. (Currency swaps enable countries to trade in local currencies instead of dollars.) Despite these efforts, Russia’s alternative infrastructure has not been broadly adopted outside of Russia, and the ruble is not widely held as a reserve currency. Due to these limitations, Russia has expanded its efforts by working alongside China and supporting its efforts to develop alternatives to the dollar system.

China has pushed to internationalize the renminbi since the 2008 financial crisis, launching its first round of international renminbi clearing centers for international trade in 2009. China has begun to house renminbi clearing centers in major financial hubs such as the UK and Singapore, although nearly 75 percent of renminbi transactions are still cleared through Hong Kong. China is also promoting the use of the renminbi in international trade, signing 33 currency swap agreements for trade with foreign governments since 2009, the most of any country. (The U.S. has signed the second-most with 14.) These efforts have managed to increase the renminbi’s share of foreign exchange reserves and payments to roughly 2 percent of the global total, still miniscule but a strong start. In 2015, China broadened its efforts by introducing a domestic alternative to the SWIFT system, the Cross-Border Interbank Payment System (CIPS). Integrating CIPS into China’s Belt and Road Initiative (BRI)—China’s sprawling global trade and infrastructure development plan—has allowed it to expand rapidly, and it is currently in use by 980 financial institutions across 47 countries. Despite this success, CIPS still only processes $19.4 billion per day, compared to up to $6 trillion per day on SWIFT. Like Russia, China is decreasing its holdings of dollar reserves, while Russia has increasingly transferred cash into renminbi holdings. Most recently, in April 2021, China launched a digital renminbi, which it could use to facilitate international renminbi adoption.

While China and Russia are spearheading the most extensive efforts to circumvent the dollar system, efforts from the EU and other nations have picked up since 2018. After the U.S. cut Iran out of the SWIFT system in 2018, France, Germany, and the UK launched a SWIFT alternative in January 2019. The Instrument in Support of Trade Exchanges (INSTEX) was created to allow EU states to continue trading in a limited capacity with Iran, despite U.S. sanctions. In November 2019, six additional EU countries (Finland, Belgium, Denmark, Netherlands, Norway, and Sweden) joined INSTEX in effort to maintain the conditions of the Joint Comprehensive Plan of Action (JCPOA). To date, INSTEX has only been used to send financial messages facilitating the transfer of food and medicine and has not had a significant impact on the broader financial system. However, it has sparked renewed debate within the EU on moving away from the dollar system. A draft policy paper presented to the European Commission in January 2021 outlined steps for the EU to increase its monetary independence from the dollar, citing the unilateral sanctions imposed on Iran by the U.S. as one of the main drivers. The current draft calls for boosting the role of the euro internationally, curbing reliance on foreign clearing houses, and exploring the possibility of launching a digital euro. The European Commission also plans to increase trade in euro-denominated debt and commodities in order to move market activity outside of the purview of U.S. sanctions.

China, Russia, and the EU have launched the most high-profile alternatives to the dollar system, but other countries are also seeking alternatives in limited capacities. India joined the EU in efforts to find alternative ways to trade with Iran, and it has supported joining a BRICS (Brazil, Russia, India, China, and South Africa) payment system that would support trading in local currencies among member nations. Saudi Arabia has also raised the possibility of moving its oil trade out of dollars, a move that would significantly weaken U.S. influence over global trade flows and boost the prospects of nations such as China and Russia, which have long sought to use their domestic currencies for trading oil. Previous attempts to undermine the dollar’s influence (such as China’s attempts to internationalize the renminbi) have not gained significant traction while existing alternative systems are in their infancy and do not yet have widespread adoption. China is still in the process of making necessary reforms that would facilitate internationalizing the renminbi, such as relaxing its capital controls, promoting its domestic financial markets, and enhancing financial regulation. Internationalizing the euro faces similar challenges, as the incomplete integration of EU banking sectors and capital markets has hindered wider international adoption. Due to these challenges, unseating the dollar will not be easy and will take time, but the proliferation of countries seeking an alternative to the dollar system shows a clear desire for change.

Expert Q&A

Headshot of Yaya J. Fanusie

Yaya J. Fanusie

Adjunct Senior Fellow, Center for a New American Security

Q: What do you see as the main threats to the dollar centrality? What are the major risks to watch for the U.S.?

“The risk for the United States is not that that currency exists, but it’s that a whole new system develops which nations choose and prefer to use, whether it’s the Chinese system or some other alternative cross-border system that China has more influence in.”

I’m looking at financial technology innovation. The spoiler alert is that much, if not most, of this innovation does not threaten the place of the dollar or the dominance of the dollar in the short term.

The dominance is not a one-dimensional thing. It’s not based on the technology of the global banking system or the technology of American FinTech. It’s not a technological dominance that allows the dollar to be what it is. There is a broader economic and political dimension, a long history, the whole U.S. economy. There’s so much about why people want access to the U.S. market and want access to dollars and other geopolitical factors. All those things aren’t going to just change because now there is a payment instrument that has less friction; that there’s Bitcoin, or China, or maybe even Russia, or whoever comes up with a new value transfer system or new CBDC. Those things aren’t necessarily going to displace the U.S. dollar’s power position.

The risk for the United States is not that that currency exists, but it’s that a whole new system develops where nations choose and prefer to use either, whether it’s the Chinese system or some other alternative cross-border system that China has more influence in. If other countries decide, You know what? That’s better. For whatever reason, we want to start using that for cross-border transactions, I don’t think that’s going to happen very quickly or easily.

The U.S. must pay attention to the standards conversation, to other countries deciding to do CBDCs and exploring them, even though this is just an exploration and experimentation stage. So, these things aren’t immediate threats, but they do fit into the long-term dynamics that could impact the dollar and impact the U.S.’s position. But it would probably be accompanied by other, bigger shifts, additional shifts, geopolitical shifts for it to really be a threat.

Graphic 3

Global Foreign Reserves Composition

Since 2000, the share of global reserves held in U.S. dollars has steadily declined, from over 70 percent in the earily 2000s to 59 percent in Q4 2020.

Source: International Monetary Fund

Composition of Russia's International Reserves

In response to 2018 sanctions from the Trump administration, Russia cut its share of dollar reserves and increased its euro and renminbi holdings.

Source: Central Bank of Russia


Graphic 4

SWIFT Alternatives

In response to U.S. sanctions, China, Russia, and the EU have all developed domestic alternatives to the SWIFT system.

Countries Ownership Structure Financial Network Number/Volume of Daily Transactions
Cross-Border Interbank Payments System (CIPS) China Public Designed to supplement 15 renminbi offshore clearing centers (in addition to Hong Kong and Macau), along with the overseas branches of the major state-owned commercial banks (ICBC, BOC, and CCB). Processed 135.7 billion yuan ($19.4 billion) a day in 2019
Instrument in Support of Trade Exchanges (INSTEX) France, Germany, UK, Belgium, Denmark, Netherlands, Norway, Finland, Sweden Public INSTEX is itself a clearinghouse. “On March 31, 2020, INSTEX completed its first transaction—for about $540,000 worth of medical equipment, but the vehicle has been dormant since.”
System for Transfer of Financial Messages (SPFS) Russia Public 404 financial institutions connected to SPFS, including 23 banks in Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan, and Switzerland. 5 million messages exchanged in 2018

Sources: Brookings, Reuters, INSTEX, Federation of American Scientists, Russian Council, NSPK

The Current Status of the Dollar and Challenges to Dollar Supremacy

Traditionally, a country’s economic dominance has been a key factor in determining the strength of its reserve currency. At present, the dollar remains the principle currency of international commerce—roughly 60 percent of foreign exchange reserves are in dollars, and approximately half of all cross-border loans and international debt securities are dollar-denominated. The market for U.S. government securities remains the deepest and most liquid in the world, and during the 2008 recession and the more recent economic shocks associated with COVID-19 in 2020 the dollar served as a safe haven asset for international investors. Foreign governments hold over a third of outstanding U.S. government securities, a proportion much greater than in other developed economies. Nevertheless, the U.S. economy’s ever-shrinking proportion of global output and disruptions to the financial system are prompting fundamental questions about the dollar’s staying power as the global reserve currency. The U.S.’s share of global GDP fell from 40 percent in 1960 to 24 percent in 2019, and over the same period, China’s output increased from 4 percent to 16 percent.

Today, the dollar has three main rivals: the EU’s euro, Japan’s yen, and China’s renminbi. Accounting for 21.2 percent of official foreign exchange reserves, the euro is arguably the second-most important currency in the world. The euro has several attributes that make it an attractive alternative to the dollar. For example, the euro’s Economic and Monetary Union (EMU) has a large internal economy and is central to global trade. Europe’s deep and liquid financial markets, as well as the policy predictability afforded by the European Central Bank (ECB), make the euro a compelling international medium of exchange. Yet, the euro faces structural weaknesses that complicate its ability to challenge the dollar. The eurozone’s unique institutional structure as a monetary area without a corresponding fiscal union undermines the supervisory and regulatory power of the ECB. The yen, which constitutes six percent of official foreign exchange reserves and is the world’s third-largest reserve currency after the euro and the dollar, faces similarly substantial barriers to internationalization. These barriers include onerous regulatory requirements, uneven liberalization of domestic financial markets, and ongoing economic stagnation. In addition, raw materials—which today still tend to be invoiced in dollars—constitute a significant share of Japan’s imports. For these reasons, barring significant unforeseen geopolitical or technological developments, neither the euro nor the yen is likely to challenge dollar hegemony anytime soon. The same cannot be said for the renminbi.

According to most metrics used to evaluate a currency’s international importance, China’s renminbi remains well behind the dollar, euro, and yen. At the end of 2020, only 2.2 percent of official foreign exchange reserves were held in renminbi, lower than not only the dollar, euro, and yen, but also the pound sterling. Yet, the renminbi is viewed as the dollar’s greatest long-term threat because of China’s record of robust economic growth since the 1980s, its rapid integration into the global economy, and its centrality in international trade. (China is now a larger trade partner than the U.S. in 128 countries.) As evidenced by the creation of CIPS, the launching of the digital renminbi, and previous attempts to internationalize the renminbi, China’s efforts to undermine the dollar are also more aggressive and explicit than those of other countries. The IMF’s decision to include the renminbi in its basket of Special Drawing Rights (SDR) currencies in 2016 suggests that these efforts are beginning to bear fruit. (The SDR is an international reserve asset that the IMF distributes to supplement member nations’ existing reserves; its value is determined by five currencies—the dollar, the euro, the yen, the renminbi, and the pound.)

The renminbi still faces several economic and political challenges to widespread international adoption as a global trade, investment, and reserve currency. Currently, China assertively controls its capital account, meaning that there are strict conditions and some outright restrictions placed on flows of foreign capital into and out of the country. A country’s capital account (sometimes referred to as “financial account”) consists of the financial flows generated from foreign direct investment, portfolio investment, cross-border loans (and other investments), and the country’s use of foreign reserves as it relates to the country’s currency exchange rate. In China’s case, the central bank also intervenes to control the renminbi’s exchange rate, buying or selling renminbi to keep its exchange rate below what its free-floating market value would be. (This, in turn, makes Chinese exports cheaper and more attractive.) These factors contribute to investors’ hesitation to trade in renminbi and limit its ability to become an international currency. A lack of market-determined interest and exchange rates, mature and liquid financial markets, and predictable legal frameworks continue to undermine the renminbi’s ability to become a more attractive investment vehicle than the dollar.

China also faces the challenge of an uncertain future in Hong Kong. Hong Kong serves as the main channel through which foreign investment enters the Chinese market, with two-thirds of overall foreign direct investment capital flows moving into and out of China through Hong Kong. Hong Kong is the world’s largest offshore renminbi center, providing clearing, settlement (over 70 percent of global renminbi transactions are settled in Hong Kong), financing, and asset management services in renminbi. China’s introduction of its National Security Law in June 2020, and the subsequent protests, have created an uncertain future. Under the National Security Law, individuals and companies can be legally tried in mainland China, a move that vastly expands the CCP’s influence. In response to the law’s passing, international companies are considering moving operations from Hong Kong, with the American Chamber of Commerce finding that over 40 percent of international companies, led by financial firms, are now considering moving operations out of Hong Kong. A diminishing role for Hong Kong as an international financial center would significantly set back China’s efforts to internationalize the renminbi and globalize its economy.

Formidable as these challenges may be, China’s, Russia’s, and the EU’s sustained attempts to seek alternatives to the dollar are slowly making headway, and the introduction of central bank digital currencies (CBDC’s) could significantly bolster their efforts. Additionally, questions over the ability of centralized systems such as SWIFT to keep up with technological advancements have emerged. In 2016, a string of cyberattacks targeted banks by subverting their SWIFT accounts. The most successful attack resulted in the theft of $81 million from the Bangladesh Central Bank. Despite new cybersecurity measures adopted in 2018, fraud and cybercrime through SWIFT have continually risen steadily since 2016, with four out of five SWIFT members reporting at least one incident of fraud since 2016. Security concerns over existing systems and the potential for digital currencies to both increase transaction speed and lower costs (by cutting out the need for intermediaries) are driving interest in expediting their adoption. A widespread transition to the use of digital currencies could diminish dependence on the current dollar-dominated global infrastructure, even without a country directly overtaking the U.S. economically. For China, the recent pilot launch of a digital renminbi could expedite capital account liberalization and financial market development, while providing a vehicle to trade directly in renminbi and circumvent international intermediaries such as SWIFT. Russia and the EU are both exploring launching digital currencies of their own, creating novel opportunities to move away from dollar reliance. While the existing CBDC infrastructure is in its infancy, concurrent and sustained efforts over time from China, Russia, and the EU hold the potential to erode the influence of the dollar in the long run.

We Want to Hear from You

What could you foresee as being the most significant impacts from a diminishing role for the dollar, and what opportunities or risks does that create for your organization / sector?

Expert Q&A

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Dr. Maria Shagina

Postdoctoral Fellow, Center for Eastern European Studies at the University of Zurich

Q: What level of collaboration are we seeing between China and Russia to undermine the dollar?

“We still have two different systems, the Chinese and Russian SWIFT alternatives. I have not seen any collaboration in terms of merging the systems or coming up with a third alternative.”

As I understand, those were just statements, and it remains on the level of statements that Russia and China will collaborate against this western front of sanctions and weaponization of sanctions. We still have two different systems, the Chinese and Russian SWIFT alternatives. I have not seen any collaboration in terms of merging the systems or coming up with a third alternative. Usually, when it comes to Russia–China collaboration, one system emerges as superior and, in this case, even the Russian media, along with many analysts, say that there is more potential to use the Chinese system to rival the SWIFT system. . . . But this creates a dynamic where Russia is a junior partner, something which irritates Russia.

Potentially, Russia will use the Chinese system if it’s forced to, but I don’t see that happening except in a worst-case scenario. Talking about the currencies themselves, the euro is gaining from this political rivalry. Looking at the composition of the currencies in (Russia’s) cross-border payments and in the national welfare fund, the share of the euro has increased significantly.

Section 3

The Domestic and International Implications of China's Digital Renminbi

In April 2020, China became the first major economy to launch a central bank digital currency (CBDC), introducing a digital version of the renminbi, formally named the Digital Currency Electronic Payment (DCEP). The DCEP is a direct digital substitute for liquid renminbi currency now in circulation. Despite still only being available domestically, and in limited supplies, the launch of DCEP already has widespread implications both within China and internationally. China will now serve as a test case for other countries’ adoption of CBDCs, and, if successful, the DCEP could accelerate renminbi internationalization, strengthen China’s existing alternative financial infrastructure, and give the country a first-mover advantage in developing the underlying technology and standards for future CBDCs. Critically, in the long-term, it could provide an alternative source for financing international trade and business for China and other nations facing U.S. sanctions. China has already started to create the necessary infrastructure for rapidly bringing foreign countries into the DCEP ecosystem. Adoption of the DCEP will also help China enforce greater domestic control­—transactions can be centrally tracked and traced, and the DCEP could be integrated into existing technologies and systems that China uses for domestic surveillance, such as smart cities and the social credit system. Today, China exports its surveillance tools to a wide range of nations around the globe, such as its facial recognition technology. In addition to the financial attributes of digital currencies, the technology underlying the DCEP could serve as a tool and framework for other governments seeking to enhance their domestic surveillance capabilities. To date, the U.S.’s response has been cautious and slow, and the Fed is only now beginning to explore the idea of introducing a digital dollar.

Section 3
Key Takeaways

  1. The Current Situation

    China’s introduction of the DCEP could eventually undermine dollar supremacy internationally, but the international and domestic implications of the new digital currency go well beyond traditional challenges to the dollar. Significant hurdles for widespread adoption remain, but the DCEP’s development and introduction provide China a distinct first-mover advantage to influence the international norms and patent the underlying technologies for future CBDCs.

  2. Points of Contention

    The DCEP provides a framework for China to introduce a transaction system entirely divorced from the dollar internationally and to simultaneously tighten control and oversight of its population domestically. In combination with China’s wide-ranging challenges to the current system and the potential for other countries to follow suit, the DCEP represents a new type of threat to the current dollar order.

  3. What’s at Stake?

    The DCEP could lay a foundation for state oversight in the way that other Chinese technologies—such as facial recognition and smart cities—previously have, while simultaneously weakening the U.S.’s ability to enforce global sanctions. The U.S.’s slow response to developing a digital dollar, due to privacy concerns and regulatory hurdles, could lead to a significant loss of influence over the future of the international financial system.

Breaking Down China’s Digital Renminbi

Currently, over 80 percent of the world’s central banks are exploring the possibility of introducing a digital currency, but the People’s Bank of China (PBoC) is the first major economy to do so. (The Bahamas and Cambodia have also launched digital currencies.) Inspired by the emergence of decentralized digital currencies, such as Bitcoin, China’s central bank began exploring the possibility of launching a domestic digital currency in 2014. Unlike other digital currencies, which allow anonymous decentralized transactions and have free-floating value, China’s digital currency has a centralized governance structure, is pegged to the renminbi at a one-to-one ratio, and allows the PBoC complete transaction oversight. In April 2020, China began a limited domestic rollout of the DCEP, distributing small quantities of digital currency through a lottery system across four cities—Shenzhen, Suzhou, Chengdu, and Xiong’an (a satellite city of Beijing)—that resulted in 4 million transactions totaling 2 billion renminbi ($300 million). China is now conducting larger-scale trials, distributing 40 million renminbi ($6.2 million) in digital currency to Beijing residents in June 2021. Continued success of the DCEP is unlikely to immediately impact the international standing of the dollar, but there are still many wide-ranging domestic and international consequences from its launch.

The DCEP significantly enhances the ability of the CCP to oversee and control its financial system, collect data, and set standards and patent technology for the development of future CBDCs. It creates a Chinese alternative to decentralized digital currencies (cryptocurrencies), stablecoins (cryptocurrencies whose value are pegged to a fiat currency), other foreign CBDCs, and China’s domestic payment services, such as Alipay and WeChat, which move control of financial flows away from the CCP. Cryptocurrencies are extremely popular in China, which generates an estimated 75 percent of global bitcoin mining activity, and the launch of the DCEP coincides with the government’s crackdown on cryptocurrency activities. One of the major draws of decentralized currencies is the ability to transact anonymously largely due to the underlying blockchain technology, which allows for a decentralized governance structure. (Cryptocurrencies will be broken down and analyzed in Part II of this series.) In contrast, although the DCEP will likely make use of blockchain technology, its transactions are fully traceable, and data is collected and stored across three central data centers. The authentication center stores the identities of all DCEP users, the registration center stores ownership and transaction records, and the big data analytics center uses historical and real-time data to analyze and track financial flows. China has referred to this structure as providing “controlled anonymity,” meaning that transactions could be hidden from commercial banks and other third parties but that the currency issuer (the PBoC) would ultimately have visibility into every transaction. In practice, by moving financial flows toward this centralized architecture, the CCP would ultimately have complete oversight into any financial activity conducted using DCEP, both domestically and internationally.

The CCP views the ability to oversee financial flows as critical to maintaining national security and pursuing its policy goals of fighting corruption, money laundering, terrorist financing, and tax evasion. Of course, it would also be a crucial tool in gaining greater political and economic dominance as it seeks to strengthen its role as a global superpower. The tremendous amount of data generated could be used to improve AI systems and, indeed, prevent fraud and counterfeiting, and improve fiscal and monetary policymaking. For example, China could use data-driven analysis to surgically target stimulus packages to low-income groups or more accurately adjust interest rates. However, what the implementation of those policies will look like in practice has raised concerns, due to the CCP’s interpretation of how these activities are defined. For example, the CCP has justified the repression of its Uyghur minority in Xinjiang as a terrorist- prevention measure, and widespread adoption of the DCEP would allow the government to surgically target specific financial activities, even beyond China’s borders. (For example, the CCP could prevent remittances from Uyghurs who have left the country). The ability to collect financial data could also be integrated into existing infrastructure, such as China’s social credit system.

Critically, to date, China has filed more than 80 patents related to technology used in developing the DCEP with China’s patent office, the China National Intellectual Property Administration (CNIPA). Establishing CBDC standards on privacy, security, transparency, central bank coordination, tax disclosure, and the degree of state control for financial technology would help China lay the groundwork for pushing renminbi internationalization as well as ultimately establishing alternatives to the current U.S.-dominated system. There are still significant hurdles toward achieving these objectives, particularly concerning cross-border payments and international adoption, and the DCEP is still in the early stages of its development. Additionally, attempts to internationalize the DCEP are likely to receive significant pushback eventually, particularly from the U.S. if it begins to perceive the DCEP as a threat to the dollar’s dominance.

Expert Q&A

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Dr. Samantha Hoffman

Senior Analyst, Australian Strategic Policy Institute

Q: What is China’s plan for internationalizing the DCEP?

“A lot of the conversation in the U.S. and elsewhere has focused on the currency, and instead I’m more interested in the implications of the technology itself and the expansion of the technology and the standard-setting process.”

A lot of the conversation in the U.S. and elsewhere has focused on the currency, and instead I’m more interested in the implications of the technology itself and the expansion of the technology and the standard-setting process. So, what happens in terms of domestic standard-setting, and more generally in the context of the PRC, is that according to regulations around the technical standards-setting, at the central level, technical committees are established, and they often include private companies and government entities. They could include, for instance, PLA, research institutes, or a ministry of public security research institutes, if you’re talking about something like facial recognition systems. And then those standards are set at a central level. . . . And essentially then, those standards are what’s required to be met for a company to win a domestic project. And then those standards get exported globally.

Now, DCEP is obviously a slightly different, because you’re talking about a PBoC led project where companies like Huawei and Alibaba and others are participating in helping the central bank with the technology development, according to those companies’ own claims. So, it is something slightly different, but the same concept applies. And so, this is a state-driven standard-setting process where those standards are what’s going global. . . . So, going back to the example of the way that you might flag something that would be considered a risk, a terrorist-financing risk, the issue is the way that that’s defined in the PRC context. Obviously, “terrorism” is a loosely defined term globally anyway, but in the PRC context, you’re talking about something very specific that counters the value systems of global democracy.


Headshot of Michael Pettis

Michael Pettis

Senior Fellow, Carnegie-Tsinghua Center and finance professor, Peking University

Q: Do you see CBDCs as a conduit for China to speed up renminbi internationalization?

“If China really wants the renminbi to become a major currency on par with the dollar, it’s clear what it needs to do: It must reform domestic financial markets in a way that makes it difficult for the government to intervene in the currency and to control inflows and outflows.”

A European central banker gave a speech yesterday, saying that Europe must hurry up to develop its own digital currency, otherwise the euro will be overtaken by the renminbi. That’s nonsense. When you consider that China comprises 16 percent of global GDP and roughly 20 percent of global trade—it’s the biggest trading country in the world—the 2.5 percent share of all currency transactions done in renminbi is negligible. There’s a reason for this: You have neither the flexibility in the Chinese financial and trading system that you need nor the transparent governance. If China really wants the renminbi to become a major currency on par with the dollar, it’s clear what it needs to do: It must reform domestic financial markets in a way that makes it difficult for the government to intervene in the currency and to control inflows and outflows. More importantly, because what the world wants from its dominant currency is for it to absorb excess global savings, China must be able and willing to run large trade deficits. But Beijing is unwilling to accept any of those conditions—especially large trade deficits—because healthy domestic demand is pretty limited. That’s why the renminbi won’t become a major global currency for many more years, and why digitizing the currency will have little impact on speeding up that process.


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Co-Pierre Georg

Associate Professor, University of Cape Town

Q: What has been the U.S.’s reaction to DCEP and the need to develop a digital dollar?

“I think the position of the U.S. government is still developing, and it’s not clear yet which way they are going to lean. The Boston Fed and the MIT Digital Currency Initiative are evaluating a digital dollar due to their close geographical proximity, but it is not clear what the New York Fed’s position and the overall position of the Federal Reserve system is going to be.”

The shift towards the digital economy, which has grown faster than the real economy over the past 15 to 20 years, means there is a huge chunk of value that will be up for grabs. This is strategically important, and if the U.S. won’t develop a digital dollar, the risk is that private actors like Facebook’s Libra develop alternatives beyond the direct control of the government. This could put the leading role of the dollar for the world economy in jeopardy. Startups building innovations also need to decide which platform they are building on. Without a digital dollar, many of them will simply go to China and build on the Chinese CBDC. It gives them access to a gigantic customer base. Sure, there’s no privacy in that system, but it’s China, so there is no privacy anyways, and for many startups that’s a price they are willing to pay, much to the detriment of the U.S.

The DCEP will be tasked with handling 300,000 transactions per second and, if successful, would become the largest repository of financial data in the world. The DCEP is not a cryptocurrency, as it is centrally managed, and as its value is directly tied to the renminbi, it is meant to replace renminbi currency circulating in cash only. Consumers will use digital wallets to transact in DCEP, which need only be linked to a phone number to be functional. However, the more strongly linked to an individual a wallet is (e.g., through bank accounts, phone numbers, and other apps), the higher the transaction limit granted will be.


Back End Architecture

The DCEP relies on three major data centers to store, track, and analyze data generated from the DCEP.


Two-Tiered Distribution System: Centalized Control and Distributed Management

Under the two-tiered distribution system, the PBoC will serve as the first-tier handling currency issuance, and state banks, commercial banks, and digital payment systems will serve as the second tier distributing DCEP directly to end users.

Source: Australian Strategic Policy Institute


Controlled Anonymity: DCEP is Partially Anonymized but the PBoC Retains Full Oversight

Different actors will have varying levels of access to data generated by the DCEP. The PBoC will have complete oversight, while commercial banks and counterparties exchanging DCEP will have varying levels of visibility.

Accessible Information Accessible Information
Accessible Information Inaccessible Information
Accessible Information Partially Accessible Information
Identity Information Financial Trading Information (Trading Elements) Financial Trading Information (Trading Scenarios) Derivative Information Information Access
Central Bank Accessible Information Accessible Information Accessible Information Accessible Information All Clients
Counterparty Inccessible Information Accessible Information Accessible Information Inccessible Information Counterparty
Agents Inccessible Information Accessible Information Inccessible Information Partially Accessible Information Own Clients
Commercial Banks Accessible Information Inccessible Information Inccessible Information Partially Accessible Information Own Clients

Source: The People’s Bank of China

Integrating the Digital Renminbi Internationally and the Potential of Central Bank Digital Currencies

China has several advantages in launching a CBDC that could speed adoption domestically. It is already one of the most cashless economies in the world, thanks to the ubiquity of e-payment companies WeChat and Alipay. Its governance structure also allows it to face fewer regulatory hurdles regarding privacy. Finally, China has one of the most advanced domestic fintech industries. The DCEP is being rolled out through a two-tiered system, in which the PBoC issues digital currency, but its distribution leverages Chinese banks and e-payment providers. (Alibaba and Tencent have already partnered with the PBoC to distribute digital currency and Huawei has developed a digital wallet for DCEP on its phones.) Established transmission channels and the ability to integrate the public and private sectors will aid domestic distribution, but internationalizing the DCEP will be a significantly larger challenge.

There are numerous mechanisms through which China could promote international use the of the DCEP. China has worked to established trade relationships with over 60 countries through the BRI, and Chinese investment in those countries is estimated to be over $200 billion. China could leverage those trade relationships to speed international adoption by forcing or incentivizing BRI trade contracts to be settled in DCEP. China is partnering with other countries and traditional institutions such as SWIFT to promote the DCEP. (The PBoC is partnering with SWIFT on a joint business venture, the Finance Gateway Information Services Co., focused on information system integration and data processing.) In February 2021, China began discussions on developing protocols for the cross-border use of digital currencies with central banks in Hong Kong, Thailand, and the United Arab Emirates. China has also been in discussions with Russia about developing a digital currency transaction ecosystem within the BRICS countries, and its 2021 Free Trade Agreement (FTA) with Mauritius integrates the development of an renminbi clearing and settlement facility, which could potentially serve as a gateway for introducing DCEP transactions into the country, and eventually into Africa more broadly. The Asian Infrastructure Investment Bank (AIIB), established by China in 2016 and currently lending $96 billion across its 86 member countries, could serve as an additional vehicle for lending DCEP internationally. China could begin denominating loans through the AIIB in DCEP or integrating DCEP trade provisions into bilateral trade deals. Finally, the PBoC has partnered with payments systems WeChat and Alipay to launch the DCEP domestically, and both companies have plans to expand globally.

An internationally accepted Chinese digital currency could allow China to circumvent the SWIFT system, evade U.S. sanctions, and eventually compete directly with the dollar. International adoption would allow China to begin circumventing U.S. sanctions even if the U.S. dollar maintains its dominant position. With physical currency transactions, the messaging and settlement elements of a transaction are separate, creating the need for intermediaries such as SWIFT. The DCEP would allow for both messaging and settlement capabilities in renminbi, eliminating the need for a third-party intermediary. With digital currency, transactions would be settled directly between the two transacting parties. Thus, the U.S. would be unable to interfere in transactions between China and countries using DCEP.

While the CIPS system allows countries to transact directly in renminbi, the direct transactions possible using DCEP will be both faster and cheaper. These elements could serve to attract countries and incentivize them to transact in DCEP, particularly in low-income countries. The path to internationalizing a digital currency is likely to face pushback from the U.S. if it begins to see it as a threat to the dollar. However, beyond the technological innovation used in the DCEP, China is today significantly better positioned to promote renminbi internationalization than in 2009—it is now a larger and more global economy with a stronger banking sector and financial system.

While there has been discussion amongst economists and policymakers that the DCEP could potentially speed up renminbi internationalization, the DCEP is likely to face the same fundamental economic hurdles: China’s capital account is still tightly controlled by the CCP, the renminbi is not fully convertible, China’s exchange rates are not completely free-floating, and Chinese capital markets are much less developed than those in the United States. Despite these challenges, the DCEP would provide China with major international advantages, even if it were only used in a limited capacity. DCEP allows complete insight into monitoring international transactions denominated in the currency, and the data generated from these transactions will be immensely valuable. Additionally, China could be more willing to liberalize its capital account if the CCP were granted greater insight and control over DCEP-denominated financial inflows and outflows. In this sense, the DCEP could potentially provide China a route toward liberalizing its economy, while simultaneously gaining more control over its financial sector. The DCEP’s success would allow China to gain these advantages gradually, without needing to completely replace the dollar as a reserve currency. Even if the dollar continues to be used as the primary reserve currency, the existence of significant viable alternatives would weaken the U.S.’s ability to use this status to enforce sanctions and use financial leverage in negotiations.

Expert Q&A

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Jeffrey Frankel

Professor, Harvard University

Q: What are the main challenges to renminbi internationalization, and do you see CBDC allowing China to internationalize its currency and challenge the dollar?

“And there’s been a bit of . . . I don’t want to say schizophrenia, but a bit of a conflict in the minds of Chinese policymakers for some years, and on the one hand, they want to internationalize renminbi, but on the other hand, they don’t want to fully liberalize the financial markets.”

I won’t say that can never happen. It’s not written in stone that the U.S. should be the top international currency. And we have the precedent of a pound sterling which was the unquestioned international currency in the late 19th and early 20th century, even for quite some decades after the U.S. economy had passed the British economy. But then eventually with a lag, the dollar passed the pound as the number-one international currency, and the pound has continued to decline by various measures of international currency.

I don’t think it’s going to happen anytime soon that the renminbi would challenge the dollar. And just to put it in perspective, by various measures, the renminbi has been rising rapidly, and it’s now by various measures fifth, seventh, or eighth on the list of international currencies, depending on when you look at foreign exchange reserves or what’s used for invoicing, trade, or the volume of trading, on the foreign exchange market. Various measures, and none of them have China in the top four, let alone the top one or two. It’s China’s choice, largely, that they don’t have financial markets . . . that are as deep and as liquid and certainly not as open as U.S. does, or even Britain or euro land.

And there’s been a bit of . . . I don’t want to say schizophrenia, but a bit of a conflict in the minds of Chinese policymakers for some years, and on the one hand, they want to internationalize renminbi, but on the other hand, they don’t want to fully liberalize the financial markets. And they tried some ways of squaring that circle, which haven’t really been that successful, like making it easier for foreign central banks to hold their currency. Basically, if you’re not ready to remove your capital controls, then you’re not really committed to internationalizing your currency, is what I would say. The same tension applies to the issuance of a digital currency by the People’s Bank of China: It could make the renminbi more attractive, but that would be at the expense of losing some of the insulation that capital controls give. I am not sure how much sense it makes for the Chinese authorities to design clever ways around the barriers that they themselves have put up to international financial integration.


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Josh Lipsky

Director, Atlantic Council GeoEconomics Center

Q: What are the main challenges to renminbi internationalization, and do you see CBDC allowing China to internationalize its currency and challenge the dollar?

“This is much more about control and data surveillance for the Communist Party than it is about internationalization.”

So, I see it a little differently. This is often talked about in the West as they want to internationalize the yuan, and so the digital currency is a way to do that, and you can make some arguments for that, including through the Belt and Road and other contracts where we see them forward-looking five, ten years, denominating some of this debt, which used to be in dollars, into digital renminbi. And that’s one way they would start to internationalize the renminbi more than they are currently. But the counterargument, and what I sort of believe, is that this is much more about control and data surveillance for the Communist Party than it is about internationalization. And you only need to think about how this could be used, and the tradeoff within the party, to understand that. So, my colleague, Yaya Fanusie, often makes this point, and he says, “Imagine a situation where a company like Nike criticizes what’s happening in Xinjiang, and the PBOC says, ‘We’re turning off digital yuan in people’s wallets so they can’t be spent at Nike within our borders.’”

Would that help internationalize the yuan, or would that make Western companies even more hesitant to do business and invest in China going forward? I think it’s the latter, but I think the party would take that trade-off, because they prefer the control and the internationalization over the long term. Would the party like to have both? Sure, but it’s not the primary objective behind the CBDC.

Q: Do you see China’s agreements with other countries through BRI as attempting to facilitate adoption or use of the digital renminbi?

“I do think it’s very likely in the coming decade that we will see digital renminbi, and digital renminbi to denominate its Belt and Road contracts and other debt.”

I do think it’s very likely in the coming decade that we will see digital renminbi, and digital renminbi to denominate its Belt and Road contracts and other debt. And they will use that through the contracts to basically insist that countries pay them. And when countries say, “We don’t have the reserves for that,” or “We don’t have the infrastructure for that,” China will say, “We’ll happily build that for you.” Right? So that’s basically what’s going to happen. . . . The question is: Does that threaten the dollar in any large-scale way? What percent of global trade is that? And can China move beyond their Belt and Road debt into all their bilateral debt into digital renminbi, especially when they’re not just dealing bilaterally, but when they’re bringing other countries in, and those countries aren’t as comfortable maybe saying, “We’re happy to do this in digital renminbi”? So, I do think it’s their ambition. My questions are: How quickly can they scale that up? And what pushback do they get from countries as they try?

Development of the DCEP began in 2014 and has progressed to large-scale trials and partnerships with China’s major financial institutions and largest private-sector payment companies.

  1. 2014 The BPOC starts initial research on developing the DCEP.

  2. December 2019 DCEP begins to be actively tested in select cities using commercial banks and telecom companies for initial distribution and transaction.

  3. April 2020 The first DCEP prototype image appears online.

  4. June 20, 2020 Announcement that DCEP's back-end architecture is complete.

  5. July 8, 2020 Chinese ride-sharing company DiDi Chuxing signs with PBOC to explore using digital currency for travel.

  6. July 2020 PBOC reportedly reaches agreements with Chinese companies Meituan Dianping (food delivery), Bilibili (video sharing), and ByteDance (Tik Tok's parent company).

  7. August 5, 2020 All four major Chinese banks are confirmed to be testing DCEP implementation.

  8. August 14, 2020 The Ministry of Commerce releases a policy-planning document outlining DCEP expansion to all major urban centers, including Hong Kong and Macau.

  9. August 15, 2020 Xinhua refutes rumors that DCEP testing will be expanded, pilot cities to remain Chengdou, Suzhou, Xiong'an, and 2022 Beijing Winter Olympic Games.

  10. August 31, 2020 Two more Chinese banks join DCEP consortium: China Postal Bank and China Citic Bank.

  11. September 3, 2020 Australian media confirms that DCEP is being used in some pilot locations as a wage supplement.

  12. September 14, 2020 PBOC official states that laws will eventually require PBOC to be accepted everywhere in the country and that issuance will be controlled by major commercial banks.

  13. October 2020 The PBOC hands out $1.5 million in DCEP to 50,000 Shenzen residents in its largest commercial test of the DCEP to date.

  14. April 10, 2021 The Industrial and Commercial Bank of China (ICBC) and Alipay activate DCEP digital wallets on their mobile app, the first integration of DCEP payments into established financial apps.

  15. May 11, 2021 Alibaba’s online grocery service and food delivery units and Hema grocery stores, are included in China’s digital yuan pilot program.

  16. May 11, 2021 Zhejiang E-Commerce Bank, based in Hangzhou, becomes the first private bank in China to begin testing the DCEP.

  17. May 12, 2021 After a successful domestic test of the DCEP by the the Hong Kong Monetary Authority, talks begin for cross-border testing between Hong Kong and China.

  18. June 2021 The PBOC announces that it will hand out $6.2 million in DCEP to Beijing residents, the most significant expansion of its DCEP pilot tests to date.

Sources: Garnaut Global, CNBC, Bloomberg, China Daily, Caixin Global

Conclusion

The emergence of China as a global economic power, the development of breakthrough new financial technologies and declining U.S. influence are driving geopolitical shifts and generating new challenges to the international financial system. Fifty years after President Nixon ended the gold standard, the world is once again experiencing transformative shifts in both the dollar’s international role and the way money is fundamentally understood. Driven by perceived U.S. sanctions overreach, many countries are seeking traditional alternatives to the dollar system. While progress has been slow in this regard, new technologies are being explored by the world’s central banks, and the digitization of global currency and international transactions is beginning to accelerate. China is the first major economy to launch a digital currency, but many powerful countries will likely follow soon. Notably, the U.S. has been slow and hesitant to embrace the idea of a digital dollar. While the Fed is now exploring the possibility of doing so, its approach and tone toward adoption have been significantly more cautious than those of other major economies. While CBDCs hold transformative potential, they are far from the only digital currencies competing for widespread international adoption.

The development of blockchain technology and the rise of the de-centralized cryptocurrencies it enables, such as Bitcoin and Ethereum, poses a separate, and potentially groundbreaking, new threat to the current financial order. Widespread adoption of cryptocurrencies could undermine government control of the money supply and move major segments of international economic activity out of government purview. The ability to transact anonymously with cryptocurrencies, outside of regulatory or government oversight, has led to widespread crackdowns on cryptocurrencies in China. (The DCEP is in part designed to outcompete cryptocurrencies.) Other actors have embraced cryptocurrencies. Countries such as El Salvador and Paraguay are encouraging their widespread use, and numerous private-sector actors have moved to develop their own cryptocurrencies, such as Facebook’s Diem. As government and private-sector actors use emerging technologies to redefine the very nature of money, the future of the global financial system is more uncertain than ever. While the dollar remains the world’s dominant currency today, geopolitical and technological forces are colliding to pose new and unprecedented challenges. In Part II and Part III of FP Analytics’ The Future of Money Power Map series, we will explore and analyze de-centralized cryptocurrencies, private-sector digital currencies, and CBDCs’ ability to redefine the global financial landscape and determine what the future of money will hold.

We Want to Hear from You

In what ways does China's digital renminbi launch pose a challenge to the dollar? What measures should the U.S. and other countries take in response?


Written by Christian Perez, with research and interview support from Ian Hutchcroft. Edited by Allison Carlson. Copyedited by David Johnstone. Art direction and design by Sara Stewart. Development by Andy Baughman and Ash White. Creative direction by Lori Kelley. Illustration by Doug Chayka for Foreign Policy.

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