China’s pursuit of leadership in digital currency
Testimony before the US-China Economic and Security Review Commission in panel 4, "China’s Pursuit of Leadership in Digital Currency" of the hearing "An Assessment of the CCP’s Economic Ambitions, Plans, and Metrics of Success"
Many in Washington are concerned about what China's leadership in fintech and pioneering efforts to launch a new form of the renminbi (RMB), a central bank digital currency (CBDC), could mean for the United States and the role of the US dollar. In her confirmation hearing, multiple senators prodded Treasury Secretary Janet Yellen on China's digital currency and her plans to keep the US dollar and financial system on top. She said the United States "must be a leader" in fintech and digital assets and that, "[s]trategic competition with China is a defining feature of the 21st century." Yet, the US Federal Reserve has not committed to launching its own digital currency to take on the Chinese one currently undergoing trials. Should the United States be worried? My argument is that it should not, and that the Federal Reserve and Treasury have been right to proceed cautiously, with the idea of getting any digital currency plans "right" instead of "first."
China's fintech success has been impressive, but it remains mostly a domestic affair. Its fintech giants Ant Group and Tencent have achieved enormous valuations, but their attempts to gain users internationally other than Chinese tourists abroad have so far made few inroads, and national security concerns in jurisdictions around the world mean that this is not likely to change anytime soon.
Hype has far outpaced the reality in digital currencies, CBDCs, and China's digital RMB in particular. Cryptocurrencies like bitcoin are booming, but these are mostly for speculation, as they are ill-suited to large volumes of payment transactions. We are still at an early stage in which the benefits of CBDCs have not yet been proven in practice, and the risks (cyber, operational, financial) are serious enough that most central banks will be hesitant to issue any until these can be resolved with a high degree of certainty. China's eCNY efforts have similarly yet to prove they will be any cheaper, more efficient, more private, or more convenient than the existing domestic and international payment systems. Therefore, it is unlikely to represent any more a threat to the dollar's international dominance than the current forms of RMB, at least over the short and medium term. Nothing is certain over the long term, however, so the United States should continue to carefully monitor China's CBDC efforts and other digital currency innovations and incorporate any useful lessons to ensure that dollars and the payments systems that carry them remain competitive long term.