There are billions of financial transactions happening right now between consumers, businesses, and governments around the world. The vast majority of these transactions are denominated in U.S. dollars. As the world’s reserve currency, the dollar serves as the unit of account for most global trade and foreign exchange transactions. Simply put, there is no currency more important to the functioning of the world economy than the dollar.
As a result, the U.S. has spent the last 75 years in the driver’s seat of the global financial system incurring a range of economic and geopolitical advantages. U.S. consumers have enjoyed low interest rates and cheap imports for decades, spawning one of the world’s highest standards of living. In turn, the U.S. government has been able to sustain large trade deficits without inflation and successfully advance its national security interests through economic sanctions which prevent nations from accessing the dollar for cross-border transactions. For years, adversaries have sought to bypass the Western financial system with little success.
However, the reign of dollar supremacy is not guaranteed. China is now preparing to take the most ambitious step yet to internationalize an alternative currency to the dollar. In April, China’s central bank became the first to pilot a national digital currency for the renminbi, known as the e-RMB. The renminbi represents the most viable currency to dethrone the dollar due to the size of China’s economy and its integral role in the global supply chain. If successful in its vision to create an alternative to the dollar, China could shift the paradigm of the global economy into a new era – one with a duopoly of reserve currencies that would have a significant impact on international competition.
In this new era, imagine that the U.S. comes to learn that North Korea is trying to acquire uranium from Iran for its nuclear weapons program. The U.S. would issue new sanctions, but North Korea and Iran would have shifted much of their global trade into using the new Chinese digital currency thus allowing them to circumvent the dollar payments system. Now the sanctions are ineffective at damaging North Korea or Iran’s economy in order to change their calculus, and the U.S. no longer has the visibility to track and shut down illicit financial flows going to purchase nuclear materials.
The U.S. is currently unprepared for a scenario like this. As COVID-19 accelerates the digitalization of the world economy, the U.S. cannot afford to fall behind China in the sphere of digital currency. China’s brand of techno-authoritarianism, if successfully applied to money, would pose a fundamental threat to the rules-based world order that the dollar underpins. The U.S. must act now by developing a “digital dollar” – a new national, central bank digital currency issued by the Federal Reserve.
Rather than letting other nations dictate the terms of a digital world economy, the U.S. would lead the way by modernizing the dollar’s underlying technological infrastructure. Advancements that enable the programmability of money could unleash innovative new functions like customized privacy and data ownership (e.g. preventing the selling of payment data), consumer wallets for the unbanked (e.g. direct government assistance payments), or frictionless peer-to-peer cross-border payments and currency conversions (e.g. remittances).
Amidst the global economic turmoil caused by the pandemic, the dollar’s role as an anchor of economic stability is more important than ever. A digital dollar presents an opportunity to future-proof the dollar’s role as the world’s reserve currency by spurring new innovations and operational efficiencies while also reinforcing U.S. values of transparency, rule of law, and privacy in a world soon to be dominated by competing digital currencies.
About The Author
Chetan Hebbale is currently a graduate student at the Johns Hopkins School of Advanced International Studies (SAIS) in Washington, D.C. focused on international economics, climate change, and sustainability.
Prior to this, he spent over 4 years at Deloitte Consulting working on technology and strategy projects at the CDC and U.S. Treasury Department.
He is a native of Atlanta, GA and attended the University of Georgia.