What Does China’s Digital Yuan Mean for the U.S. Global Financial Order?

Susan Chen

The People’s Republic of China’s (PRC) recent crackdown on trading and mining cryptocurrencies serves to pave way for its prospective digital yuan (e-CNY). In line with the PRC’s tightening monetary policy, the e-CNY will be a central bank-issued digital currency that will replace some paper bank notes and remove them from circulation.


The People’s Bank of China’s (PBOC) July white paper reveals significant developments in the e-CNY ahead of its expected official debut in 2022. Pilot projects have been run in six major cities across the PRC, including Shanghai and Beijing. Trial usage of e-CNY digital wallets have been tested by 20.8 million individuals and 3.5 million businesses for AUD$7.2 billion in transaction value.


The PRC’s progress developing its digital currency remains far ahead of any other major economy. Countries like the United States and the United Kingdom are still in the research stages of developing their own digital currencies. The U.S. is particularly concerned that the PRC may utilise its first mover advantage to facilitate international adoption of the e-CNY.


The primary national security concern for the U.S. is that the e-CNY will erode their global financial control. PRC officials have made it clear that the e-CNY will eventually be used to enhance monetary sovereignty by creating an alternative global money transfers platform free from U.S. intervention.


Most cross-border transactions between financial institutions currently occur on SWIFT, a Belgium-based messaging network monitored by the U.S. government through its National Security Agency. Although SWIFT is not formally subject to U.S. decision-making power, the U.S. nonetheless holds significant leverage over SWIFT.


In the past, the U.S. has threatened to punish SWIFT board directors by freezing assets or limiting travel if they did not terminate ties with sanctioned countries. Following a fallout over nuclear deal talks with Iran in 2012, the U.S. compelled SWIFT to impose sanctions on Iranian banks by blacklisting and freezing transactions. The U.S. made similar threats to SWIFT regarding Russia in 2014 following the Ukraine crisis, which negatively impacted the Russian economy and led to the depreciation of the rouble.


The e-CNY used alternatively to the SWIFT system allows faster transfers and eliminates transaction fees from traditional banking intermediaries. More importantly, it could allow international transactions to bypass SWIFT and facilitate direct transactions with people, businesses, and countries subject to U.S. sanctions. Recently, PRC officials and firms have been sanctioned by the U.S. government for human rights offences. Any bank found to be servicing sanctioned parties is at risk of further financial sanctions, such as blocked foreign exchange transactions and laws to prevent U.S. investment in the bank. The PRC has long sought a practical payment process that is stable, accessible and not under U.S. control. Fostering the use of the e-CNY outside of the SWIFT platform is an important national defence measure for the PRC.


In 2015, the PBOC attempted to create a SWIFT alternative called CIPS. There was little incentive to adopt CIPS and its lack of large financial clients mean there was minimal uptake. It is likely that the e-CNY will be better received as there are low barriers to onboarding and it isn’t conditional on international financial clients. A recent joint venture between the PBOC and SWIFT may have yet unforeseen consequences for the rollout of the e-CNY, however, it is the latest example of Beijing’s exploration of the global use of its digital currency and its desire to internationalise the yuan. It is anticipated the digital currency will be used between Belt and Road Initiative (BRI) participants. Currently, 138 countries are formally affiliated with the BRI. If successful, the e-CNY may provide a workable alternative to the SWIFT platform, allowing the PRC and its partners to trade in yuan.


But employing a SWIFT alternative is not only attractive for BRI participants or those sanctioned by the U.S. In 2019, the United Kingdom, Germany, and France collaborated to create INSTEX, a clearing house that would allow EU countries to transact with Iran without U.S. penalties. However, institutions have been hesitant to use INSTEX as it makes them vulnerable to secondary U.S. sanctions. All trading nations are to some extent affected by U.S. sanctions, primarily through their banks and financial institutions. However, there is a possibility that individual businesses will be able to use the e-CNY to trade and more easily avoid U.S. sanctions by hiding in the multitude of transactions occurring in the digital currency. If this occurs, the U.S. will be unable to effectively sanction or even identify each individual business.


However, countries that choose to bypass SWIFT and use the PRC’s digital currency will continue to face the problem of one country regulating their international financial transfers. A PRC-controlled system would also subject its users to monitoring by a foreign government.


The e-CNY nonetheless offers practiced prototyping insight for the 80 countries in the process of designing their own digital coin. The Bank for International Settlements, the global body for central banks, has also expressed a need for banks to cooperate between their digital currency projects. China aims to lead this progress. Many countries have long sought a non-U.S. dominated system, and the introduction of more national digital currencies makes this more practical and feasible than ever before. While this many mean a paradigmatic shift in current financial practices, it is an important step for countries that seek to defend their business interests and reclaim monetary sovereignty.


Susan Chen is an intern at China Matters. China Matters does not have an institutional view. The opinions expressed are the author's alone.