The Impact of CBDCs on Global Economic Order

China's Pursuit of Financial Dominance

The realm of finance is undergoing a profound transformation, propelled by the emergence of cryptocurrencies and the advent of Central Bank Digital Currencies (CBDCs). These digital innovations are reshaping the landscape of global economics and challenging established norms in monetary policy.

In this dynamic environment, one nation stands at the forefront of this evolution: China, with its ambitious pursuit of the Digital Yuan. This analysis provides an overview of the geopolitical and economic implications of CBDCs, with a particular focus on China's strategic maneuvers and their potential ramifications on the international financial system.

Cryptocurrencies are essentially digital money that operates outside the purview of government control. Bitcoin, the first of its kind, emerged in 2009, paving the way for a proliferation of digital currencies. Presently, there are thousands of cryptocurrencies collectively valued at over $2 trillion. What sets them apart is the accessibility afforded by computer technology that's open to everyone, devoid of governmental oversight.

People mostly use cryptocurrencies to invest and save money, not to buy things. The value of cryptocurrencies goes up and down a lot, so they're not great for saving long-term, but they can be better than some weak national currencies. While some businesses have begun to embrace cryptocurrencies as a form of payment, governments are expressing concerns about potential issues they may pose. Consequently, authorities are contemplating the implementation of regulations aimed at safeguarding the interests of the public.

Because of the growing popularity of cryptocurrencies and worries about the risks, governments are thinking about making their own digital money.

Central Bank Digital Currencies (CBDCs) represent digital currency issued and overseen by governments or central banks. Distinguished from conventional digital currencies utilized by banks, CBDCs are accessible to all individuals, not solely financial institutions. Moreover, they enable transactions without reliance on credit card companies. Governments can leverage CBDCs for various purposes, including direct disbursement to individuals and incentivizing saving or spending behaviors.

The development process and technological infrastructure of CBDCs will be under governmental control. Unlike other cryptocurrencies, CBDCs may not be universally accessible, as their usage is subject to governmental regulations. While some governments are independently creating their CBDCs, others are collaborating with private enterprises in their development endeavors.

A few countries, like six Caribbean nations and Nigeria, have already introduced CBDCs, and many others are trying them out. Each country has its reasons for wanting CBDCs, like making sure people can still use their money as fewer people use cash or helping people who don't have bank accounts.

The Geoecomics of Digital Yuan

China has been diligently pursuing the development of a Central Bank Digital Currency (CBDC) for almost a decade, positioning itself as the frontrunner among major economies to implement a retail CBDC on a large scale. This strategic move places China in a prime position to influence global standards and procedures governing this transformative financial landscape, with ramifications extending beyond data privacy and security concerns.

The emergence of new global payment mechanisms enabled by CBDCs could potentially challenge elements of the international financial system that bolster U.S. financial dominance and uphold established norms of international conduct. Key vulnerabilities include systems like the SWIFT messaging service, which is pivotal for facilitating cross-border financial transactions and integral to enforcing U.S. financial sanctions.

CBDCs have the potential to disrupt facets of the international financial system that have historically favored the United States, thereby augmenting its global influence. The dominance of the U.S. dollar as the preferred reserve currency endows America with strategic benefits, from reduced borrowing costs to leverage over global norms via sanctions enforcement. Consequently, the advent of CBDCs presents both opportunities for states seeking to challenge the prevailing order and vulnerabilities for those entrenched within existing frameworks.

The digitization of currency may empower governments to expand the international reach of their currencies, bypassing intermediary entities such as credit card companies, SWIFT, or mobile payment platforms through real-time settlement mechanisms. Moreover, the proliferation of CBDCs could foster the development of localized cross-border payment infrastructures, bolstering reliance on national currencies.

China has signaled its intent for CBDCs to reshape international financial dynamics, with a particular focus on challenging the global supremacy of the U.S. dollar. Leveraging its position as the world's second-largest economy, China aims to ensure international compatibility with its CBDC while fostering reliance on its national currency. Through strategic partnerships and initiatives, China seeks to establish new rules for CBDCs, exerting influence over major economic partners and political allies.

Despite limited disclosure regarding the specifics of its e-currency technology, China's closed-source approach has sparked concerns regarding privacy protections and transparency. The People's Bank of China (PBOC) adopts a "two-tier" system, collaborating with commercial banks and other institutions for token issuance and distribution. However, the centralized nature of China's political and legal regime raises apprehensions regarding privacy and data security, compounded by the CCP's extensive control over information flows and utilization.

In light of geopolitical tensions, safeguarding data security assumes paramount importance in CBDC design. Given the potential for CBDC transaction records to become targets for adversaries seeking strategic leverage, stringent measures are imperative to prevent unauthorized access and mitigate risks posed by nation-state actors and criminal elements. While CBDCs hold promise for facilitating seamless cross-border transactions, they also entail the risk of fragmenting international payment systems, potentially fostering a Chinese sphere of financial influence aimed at circumventing U.S.-led financial sanctions.

In response to evolving dynamics, SWIFT has recognized the imperative to enhance transaction efficiency and transparency. Collaborative ventures with Chinese entities underscore SWIFT's efforts to adapt to changing market realities. Concurrently, China explores alternative pathways, including direct integration of its digital currency system with global entities and participation in initiatives like the mCBDC Bridge Project, signaling its intent to redefine international payment paradigms.

The advent of CBDCs poses a disruptive force that could potentially recalibrate established norms underpinning Western financial hegemony. China's strategic positioning as a CBDC pioneer allows it to gradually reshape aspects of the international financial system in alignment with CCP interests, thus challenging the prevailing order shaped by Western powers.

CBDCs offer China an ideal tool for population control, given the government's centralized oversight. However, achieving global dominance hinges on various factors, notably the willingness of other nations to adopt it. There's a possibility of a new bloc emerging, one that is willing to embrace the digital yuan, which could lead to the fragmentation of the world into distinct blocs and spheres of influence. Undoubtedly, geopolitical tectonic shifts are already underway.