Donald Trump is threatening to reignite the U.S.-China trade war even as the world teeters on the brink of the worst recession since the Great Depression of the 1930s.
Now, Trump has been warned China-led central bank digital currencies pose a “great threat” to U.S. geopolitical power and U.S. dollar hegemony—and China could “win the race” before the U.S. even starts.
“[The U.S. dollar] is by far the most dominant currency anywhere in the world, and it will always stay that way,” Trump declared last year in a Twitter tirade against Facebook’s newly revealed libra cryptocurrency and bitcoin, a scarce digital asset that’s not backed by physical goods or a government.
A new report from Wall Street banking giant JP Morgan suggests otherwise.
“There is no country with more to lose from the disruptive potential of digital currency than the United States,” a group of JP Morgan analysts wrote in a report this week, finding “this revolves primarily around U.S. dollar hegemony.”
“Issuing the global reserve currency and the medium of exchange for international trade in commodities, goods, and services conveys immense advantages,” the report authors, including the bank’s chief U.S. economist, Michael Feroli, and head of U.S. interest-rate derivatives strategy, Josh Younger, wrote.
Central bank digital currencies, sometimes called CBDCs and often inspired by bitcoin’s blockchain technology, have become a popular topic of discussion among world leaders and central bankers in recent years with China by far the closest to issuing a fully digital version of its yuan—something that’s expected to happen at some point in 2020.
Central bank digital currencies are expected to work just like regular coins and notes issued by central banks but exist entirely online. Instead of printing or minting currency, central banks would issue digital dollars via online accounts—similar to the commercial banking apps that have exploded in popularity in recent years.
“Though free-floating cryptocurrencies and private stablecoins have struggled to gain traction, central bank digital currencies are, in many ways, a compelling alternative,” JP Morgan’s report, titled You say you want a revolution: Considering central bank digital currency, found, adding “the incentive to offer CBDCs is strongest for the richest nations, given their preeminent position in global financial markets.”
While JP Morgan found the U.S. dollar is unlikely to be replaced as the world’s reserve currency in the near future, digital currencies pose a more immediate threat to the “more fragile” aspects of dollar dominance such as cross border payments.
However, the JP Morgan report flags a fundamental problem: “A retail CBDC runs the risk of absorbing large quantities of bank deposits” and risks “disrupting fractional reserve monetary systems.”
JP Morgan analysts dismiss this problem, arguing digital currencies can be developed with “a minimum of disruption while preserving their benefits.”
But some feel this risk is being downplayed.
“The threat to the dollar’s global dominance is even greater than JP Morgan suggests,” warned Glen Goodman, a financial author and trading veteran who made a name for himself by successfully navigating stock markets during the 2008 global financial crisis and has been closely following the development of central bank digital currencies.
Goodman thinks the fundamental changes wrought by central bank digital currencies could mean an overhaul of the world’s financial system, with China and its predominantly state-run banks relatively unconcerned with upsetting the global status quo.
“After several years of development, China is now within spitting distance of achieving a fully operational digital yuan. Meanwhile, America doesn’t even have a project in development. By the time the U.S. gets off the starting blocks, China may have already won the race.”
Meanwhile, others have also warned China is already “years ahead” of the U.S. in developing what will become a “central component of a digital world economy.”
“U.S. policymakers are unprepared for the consequences [of a digital yuan],” Aditi Kumar and Eric Rosenbach of the Belfer Center at the Harvard Kennedy School wrote this week Foreign Affairs, pointing to the problems a digital yuan will mean for the U.S. in enforcing economic sanctions on the likes of Iran and calling for the creation of a “digital dollar initiative.”
“Ultimately, and inevitably, monetary systems are headed toward greater digitization and independence from U.S. intermediaries,” the pair wrote.
“China’s digital yuan could be exactly the solution that both allies and rogue nations seek.”