Earlier this week, I told Marketplace’s David Brancaccio that the Fed might not have all the time in the world to finesse its feelings about central bank digital currency (CBDC). Some of you countered that CBDC is so consequential that it warrants nothing faster than due, deliberate reflection. However, digitalization is an inexorable disrupter that owes no allegiance to legacy institutions. And, when wielded in the hands of a determined foe – as may well befall CBDC – digitalization is still more dangerous to those who think time is on their side. If CBDC supremacy were solely a matter to be settled by the global central banks and payment systems, then the Federal Reserve could design CBDC at its own pace to its own carefully-selected design. However, China knows that CBDC is no mere payment-system refinement. It is also a weapon of formidable power in the new, “soft” warfare that largely defines the super-power battleground. Thus, the longer the Fed waits, the more dangerous the international financial system.
As with many grand old institutions, the Federal Reserve is taking its time innovating because it believes the market awaits its pleasure. Its responsibility as the arbiter of the globe’s reserve currency also weighs upon it so heavily that getting a digital dollar right outweighs the merits of having one fast as far as the Fed is concerned. However, just as unquestioned American strength in the South Pacific is no more, the Fed’s unilateral dominance has taken a beating. The longer it waits, the weaker it gets.
You might not think so if you contemplate only the rarified precincts of central banks and cross-border payments on which the Fed is focused. But digitalization redefines not just the way the citizenry in each nation interacts with everyday commerce. As my book describes in detail, digitalization also changes the fundamental nature of money because, for the first time, consumers on their own have dominant channels through which commerce and finance are offered and various currencies that may or may not also be money to spend. In countries such as China where the sovereign lords have power down even to who provides day-to-day household products and how money moves through every corner of the economy, digitalization is a formidable force not only redefining commerce and finance, but also the will of the state.
China isn’t just some tinpot dictatorship with a non-convertible currency and an autocratic financial system. It’s a nation with 1.4 billion consumers and hundreds of millions of workers on whom global trade in goods and commodities already depend and on which service linkages are also becoming increasingly intertwined. It’s also a nation with a major chip on its shoulder due to fears about a restless majority, its own ambitions, U.S. sanctions, and ideological zeal. CBDC in China is thus a tool of the state, a state determined to supplant the U.S. and, along the way, over-power U.S. sanctions and the other tools with which the U.S. seeks to exert the dollar’s geopolitical might.
The Fed thus faces a determined enemy empowered by a nation in which digital transactions have become the norm where a CBDC is already supplanting traditional currency. China’s rapid adoption of this formidable weapon doesn’t mean it will win if the Fed moves more slowly – some super-weapons fizzle out as the U.S. Defense Department and taxpayers relearn all the time. Still, ignoring so determined an enemy with such a powerful economy and an already-operable CBDC is a dangerous exercise in superpower self-satisfaction.
Despite the Fed’s power across the wholesale payment system, China has something the U.S. can’t match: 1.4 billion consumers and investors. This gives it a formidable platform from which to launch CBDC without slowing down for the niceties of personal-data protection and private-sector intermediation that trouble the Fed. Further, China has 1.4 billion consumers and investors to whom thousands of businesses want access and on whom global commerce increasingly depends. The yuan isn’t freely convertible nor is the Chinese currency anything close to a reserve, but the nation nonetheless has tremendous economic power.