Last year, the PBOC seized the opportunity presented by the pandemic to rush its CBDC into the hands of Chinese consumers, conducting trials in three cities—Shenzhen, Suzhou and Chengdu—as well as the Xiong’an New Area near Beijing. Crucially, its design is two-tier, with the PBOC dealing with the existing state-owned commercial banks and other entities (including telecom and tech companies), not directly with households and firms. The abbreviation “DC/EP” (with the slash) captures this dual structure. The central bank controls the digital currency, but the electronic payment platforms can participate in the system, alongside the banks, as intermediaries to consumers and businesses. However, the easiest option for consumers will clearly be to withdraw “e-CNY” from bank ATM machines onto their smartphones’ e-wallets. The system even allows transactions to happen in the absence of an internet connection via “dual offline technology.” In 2018 I predicted there would soon be “bityuan.” I only got the name wrong.
This new Chinese system not only defends the CCP against the twin threats of crypto and big tech, while ensuring that all Chinese citizens’ transactions are under surveillance; it also includes an offensive capability to challenge the U.S. dollar’s dominance in cross-border payments. And this is where the story gets seriously interesting. Today, as is well known, the dollar dominates the renminbi in foreign exchange markets, central bank reserves, trade finance and bank-to-bank payments through the Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT). This financial superpower, fully appreciated and utilized only after 9/11, is what makes U.S. financial sanctions so effective and far-reaching.
The Chinese are creatively exploring ways to change that. Exhibit A is the Finance Gateway Information Service, a joint venture between SWIFT and the China National Clearing Center within the PBOC, which aims to direct all cross-border yuan payments through China’s own settlement system, Cross-Border Interbank Payment and Clearing. Exhibit B is the Multiple CBDC (mCBDC) Bridge project by the Hong Kong Monetary Authority and the Bank of Thailand to implement a cross-border payments system based on distributed ledgers, again using a two-tier system. Exhibit C are the cross-border transfers between Hong Kong and Shenzhen currently being piloted. According to Sahil Mahtani of the South African investment manager Ninety One, the ultimate goal of Chinese policy is “to create a parallel payments network—one beyond American oversight—thereby crippling U.S. sanctions policy.” In Mahtani’s words:
The expansion of a Chinese digital currency will ultimately pry open the U.S. grip over global payments, and therefore compromise U.S. sanctions policy and a significant measure of U.S. power in the world. … It is not that China’s digital currency is going to become the dominant standard of payments … But it could become one standard, creating a parallel system with which to avoid the long arm of U.S. regulation.
What does the United States have to offer in response? When Mark Carney, the former Governor of the Bank of England, argued for a “synthetic hegemonic currency” at Jackson Hole in 2019, he was politely ignored. When Mark Zuckerberg proposed a Facebook stablecoin, Libra, he was impolitely rebuffed. (Libra has been renamed “Diem,” but getting regulatory approval still looks like an uphill struggle. According to Tyler Goodspeed, who recently left the Council of Economic Advisers to join us at Hoover, “If you’re issuing very short-term liquid liabilities that are redeemable on demand for, say, dollars or euros, and you’re backing that commitment by holding highly liquid dollar- or euro-denominated bills, then I’m sorry to say it but you are a bank.”
Other countries are exploring creating their own CBDCs—60% of more than 60 central banks surveyed by the Bank for International Settlements last year. Cambodia and the Bahamas are already there. Even the European Central Bank has not said “non” or “nein,” though Bundesbank head Jens Weidmann is not alone in worrying that an e-euro might disintermediate Europe’s already ailing banks unless the Chinese two-tier model is adopted.
And the Fed? According to Chair Jay Powell, some of his officials are working with economists at the Massachusetts Institute of Technology to explore the feasibility of a U.S. CBDC. But, says Powell, “there is no need to rush.” Like his “What me, worry?” approach to inflation, this smacks of insouciance. China is seeking in plain sight to build an alternative international payments system to that of the U.S. dollar, and there’s no need to rush to meet this challenge? Nor any thought of actively integrating Bitcoin—a tried and tested decentralized form of “digital gold”—into the U.S. financial system, rather than treating it as a rather suspect parvenu?
If the future of money arrives as rapidly as I think it will, in the form of a widely adopted e-CNY, do not be surprised if all we can offer our kids are Robux.
Niall Ferguson is the Milbank Family Senior Fellow at the Hoover Institution at Stanford University and a Bloomberg Opinion columnist. He was previously a professor of history at Harvard, New York University and Oxford. He is the founder and managing director of Greenmantle LLC, a New York-based advisory firm.