Yuan to Go Digital?

When El Salvador officially recognized cryptocurrency, it’s economy took a big downward plunge. The People’s Republic banned these private digital exchanges very quickly (or did they?). Since 2007, short on banks, Kenya tried a digital currency experiment that was wildly successful; it effectively created a mobile banking system based on cell phones. With the pervasive spread of mobile phones, virtually everyone in the nation had a de facto bank account in their hands, able to charge their phone with “money” (M-Pesa) from local vendors, which rapidly replaced the use of cash almost everywhere by almost everybody.

Meanwhile, back in the “Old World,” the United States, blockchain cryptocurrency exchanges became the new darling of the “I’m a tekkie, and you’re not” world, where sheer speculation made billionaires with warp speed. But crypto has had a rough year, with many currencies plummeting in value and exchange platforms collapsing. But FTX seemed like an exception, both in its stability and in Sam Bankman-Fried’s reputation. However, “SFB” – as he is less-than-affectionately called – left the world of political power from huge campaign contributions and found himself in a jail cell under thunderclouds of federal indictments. Bankrupt. The entire modern crypto world shuddered. Would it come back? Differently… or the old boyz just making some “adjustments”?

Indeed, as the federal government struggled with applying an appropriate regulatory scheme to crypto – was it a commodity, a security or “other”? – some economists wondered how a nation could even allow a parallel and often untraceable currency to circumvent transparency (hello, fraudsters) and render central bank monetary and fiscal policy planning ineffective. While the US dollar is based on the full faith and credit of the United States as a whole, the “faith” that underlies most crypto is just that, pure faith looking more like a Ponzi scheme than an easily comprehensible digital alternative currency. Can that be fixed?

Political realities – primarily the tension between the United States and China – were pushing PRC policymakers to take another look at different kind of crypto, one that is an official currency alternative of a major world power. China. Beijing has long resented the rise of the US dollar as the world’s major reserve currency – the international currency reference point. Global commodities and international banking are, for the most part, predicated on dollar denominated transactions. Russia, now lumbered under massive layers of international economic and financial sanctions, has focused heavily on how to sell its products (mostly fossil fuels) and circumvent the Ukraine-war-driven sanctions imposed by NATO and other countries.

Behind the scenes, quietly, the PRC has been looking at a structure that both circumvents the sanctions we have imposed on Russia and dilutes the value of the US dollar as the major reserve currency. What if a crypto alternative were part of China’s basic currency? And so… “The buzz around the e-cny, China’s central-bank digital currency, has been loud. The country’s policymakers have been credited with leading a revolution in state-backed digital money starting in 2019. Many other central banks have followed China’s lead. But the development has all been local. The People’s Bank of China (pboc), the central bank, has said next to nothing about using the digital currency abroad. In fact pboc officials have emphasised that the current focus of e-cny use is within China…

“This has not stopped the speculation about it spreading abroad. Cryptocurrency and decentralised-finance specialists say it is only a matter of time before China expands trials into markets where the country does lots of trade. They also suggest that sanctions on Russia could speed up the process.

“Xi Jinping, China’s president, and other senior leaders in the country view their reliance on the American-backed global financial system as a chronic weakness. America has demonstrated recently that it is willing to cut foreign banks off from the most important global financial messaging system, swift, if they disobey its orders. In particular, in 2022 America and its allies told swift, which is based in Belgium, to stop doing business with several Russian banks after Vladimir Putin’s invasion of Ukraine. Leaders in Beijing can easily imagine similar sanctions being imposed on their banks if China dared at some point to invade Taiwan, the self-governing island it views as part of its sovereign territory.” Don Weinland, The Economist, November 18th.

Generally, international banks have employed the SWIFT currency exchange system for decades, but Russia has been gyrating to find smaller inter-nation banking relationships to circumvent international banks. Just before the end of 2022, China’s Xi had another virtual meeting with Vladimir Putin, underscoring his desire to amp up China’s relationship with Russia and to distance its financial system from the structure that Xi sees are dominated by the United States. And that’s about the time that China’s e-cny digital yuan began accelerating the in the PRC.

Most Americans do not appreciate how the dollar’s preeminence as the primary global reserve currency has kept their international buying power strong while allowing the federal government to run up massive deficits based on international borrowings. The clock is ticking. The dollar has some serious enemies. Would a “blended” currency reserve, including the dollar, the pound sterling, the yen, the yuan and the euro work? Is that even possible? Is that still good for us? Time will tell, but there is nothing automatic about the dollar as an international reference point. Without that, Americans would pay higher prices for international goods and probably higher taxes to support deficit interest.

I’m Peter Dekom, and the whorls of global economic complexity often pass by most Americans, who do not realize our necessary connection to the rest of the world.