Will the US Dollar’s Dominance Last?

When it comes to embracing the digital currency revolution, the United States is beginning to fall behind China and a number of other countries. Wariness about oversight, the potential for technological mishaps, and abuse of data are only some of the concerns central banks worldwide have raised over adopting digital currencies. For the U.S. Federal Reserve to be especially cautious about delving into central bank digital currencies is hardly surprising, and the Fed has every reason to be careful, given the U.S. dollar’s international standing as a global currency that remains second to none. Despite the Chinese economy’s surge over the past decade, the renminbi (RMB) still lags far behind in the world as the currency of choice beyond China’s own borders.

Yet in sharp contrast to the Fed’s more tentative approach, the Central Bank of China has been quick to embrace the concept of e-currency and is looking to replace physical cash. Is Washington being too cautious and taking a back seat in shaping the future of digital currency? Or is it actually being prudent by learning from the experience of Beijing and other governments?

Since 2020, Beijing has been steadily promoting the use of an alternative to cryptocurrencies such as Bitcoin by offering the e-yuan in select cities on a pilot basis. The goal is to have the digital currency more widely available by the Beijing Winter Olympics in February 2022, and the pilot program has been seen within China as a means not only to push back against cryptocurrencies, but also to boost efficiency of financial transitions with greater monetary policy control by the People’s Bank of China.

In Washington, China’s adoption of a central bank digital currency system has been viewed with apprehension, not least since it has been seen as a direct challenge to the dollar’s undisputable primacy to date. At the same time, concerns about digital surveillance and control or even abuse of financial data have drawn much attention outside of China’s borders. In short, more time has been spent in assessing the potentially more nefarious aspects of a government-supported digital RMB.

Yet the innovations brought about by digital currencies, including the digital RMB, cannot be ignored – it could revolutionize the financial sector. Certainly, one of the goals of digital currencies can be to boost the efficiency of transactions and include a larger part of the population in financial markets, both of which the United States needs. For instance, swift response from the Fed and central banks from major countries succeeded in keeping the global economy from collapse as a result of the COVID-19 shutdown, as some had initially feared. But the emergency payments and financial support to individuals provided by governments also brought home the fact that those who are the most vulnerable to the disruptions caused by the pandemic and therefore needed stimulus payments quickly are also the most likely to be part of the so-called unbanked population. Having central banks adopt digital currencies that allow direct transactions to individuals qualifying for federal financial support through mobile payment is not only efficient, but also can be part of a broader approach to reforming the banking system in order to make it more accessible.

According to the FDIC, over 14 million, or 6 percent of U.S. households, are unbanked because they do not have enough money to meet the monthly minimum balance requirement to have a bank account without having to pay a banking fee. Since digital currencies have the potential to integrate information on individuals’ financial needs and their mobile phones, directly depositing money through their phones would not only avoid cumbersome paperwork and delays caused by delivering physical checks by mail, but it also would avoid exposing recipients of financial assistance to the check cashing fees that are incurred as a result of not having a bank account.

Another aspect where digital currencies would lead to greater efficiency and social inclusion is in remittances. The United States is the single biggest provider of remittances in the world, accounting for about $150 billion of the $625 billion sent by workers back to their home countries, according to the World Bank. Yet the cost of sending money across borders is expensive, even when using banking networks. It is especially pricey when using private money order companies, which can take around 6 percent of total money sent in fees. Digital currencies could be part of the solution in pushing costs lower or eliminating transaction fees altogether, which would be a boon to countries such as Mexico and India, which are among the biggest destinations of money being sent from the United States.

As the Fed and Treasury proceed with caution about how and whether digital currencies could fit into the U.S. financial architecture, there is of course a need to assess how it would fit into the broader challenge of competing with China and pushing back against the prospect of the RMB challenging the predominance of the U.S. dollar. Yet at the same time, acknowledging the potential of central bank digital currencies to be part of the broader toolkit of promoting financial inclusion could be key to ensuring economic resilience within the United States. As Washington looks to develop a plan to further economic engagement in the Indo-Pacific, promoting financial inclusion and assessing the possibility of adopting a digital currency should be part of the economic leadership roadmap.