The U.S. Needs a Better Digital Dollar

"China is giving the U.S. a run for its money. The recent launch of a digital form of the Chinese yuan -- bolstered by a disruptive new technology -- threatens the dominance of the U.S. dollar and American hegemony. U.S. policy makers should heed the moment and respond with a strengthened form of the dollar in service to the national interest.

The greenback is trading at its strongest level since 2002, up more than 10% year-to-date against most major currencies, including the yuan. U.S. authorities, however, shouldn't misread the dollar's strength. American output has fallen, just not as far or fast as that of our big trading partners. The Federal Reserve is raising rates belatedly to slow inflation, but there is a high price still to be paid for high prices.

China's currency weakness is a function of the country's economic travails. Economic output and productivity are considerably weaker than official statistics claim. Its businesses are retrenching and its exports are flagging. Its people are getting old faster than they are getting rich. The yuan's frailty is also a result of China's policy choices. In recent years, efforts to persuade foreign investors to add the yuan to their holdings have had limited success. Heightened capital controls and an unreliable rule of law haven't made for an attractive alternative to the U.S. dollar.

Enter the game-changer of cryptocurrency. Don't be deceived by the thousands of private cryptocurrencies masquerading as money in some form of circulation. Many of these schemes are fraudulent, and most are worthless. Cryptocurrency is a misnomer. It isn't secretive and it isn't money. It is software. And it is a significant technological breakthrough that poses promise and peril for the American-led global financial system. In the hands of a powerful sovereign such as China, the new software is an effective way to launch the yuan into the big leagues.

That's why China's new central bank digital currency, called e-CNY and launched in April 2020, is so consequential. China's e-CNY will be the technology backbone for most wholesale transfers among the People's Bank of China, financial firms and foreign institutions. If foreign businesses want continued access to the vast Chinese market, they will be compelled to use the digital currency and its wholesale payment network to conduct business. When fully implemented, e-CNY will also be the dominant retail protocol, eventually handling most personal financial transactions. China's central planners will have a powerful tool to monitor transactions and enforce compliance with government directives.

China's sphere of influence is expanding in Asia, Russia and the Middle East. Its leaders envision e-CNY as a parallel international payment and currency network to that of the West. If a new bipolar world emerges -- by some imprudent mix of Chinese force and American fatigue -- the dollar's dominant role could be undermined. Decoupling the world's two largest economies wouldn't be limited to imports and investment, munitions and might. It could well include the rise of a powerful alternative reserve currency.

Absent leadership by the U.S., authorities in China -- with a decidedly different view of the public good -- are trying to use the new technology to erode America's global standing. The Fed and Treasury should cease to play the slow game while China builds a new digital monetary and financial architecture. America's other big trading partners won't wait around while U.S. authorities consider incremental reforms. The status quo is neither satisfactory nor sustainable.

One option, popular among some in Washington, is for the U.S. to create a dollar copycat of China's digital yuan. The Fed would intermediate wholesale and retail payments, including as the direct counterparty to U.S. consumers. This is at odds with the American ethos of privacy from government intrusion. The specter of state surveillance of individual spending is dangerous. The interface with citizens should rest with the private sector.

The Biden administration appears to promote another alternative: Give the government's imprimatur to privately issued stablecoins. I am skeptical that a host of private cryptocurrencies are sufficiently strong and reliable proxies for the U.S. dollar. I also doubt that bank-like regulation of private stablecoins would ensure their stability in stressful times, absent government bailouts.

So what to do? The U.S. should announce the essential design features of a digital dollar to be used exclusively for wholesale transactions. The existing wholesale payment system is slow, cumbersome, opaque and expensive. The new regime would more effectively intermediate payments among the government, financial firms and foreign central banks. Settlements would be made faster. Payments would be cheaper. Cross-border transfers would be seamless. Money creation would be more transparent.

A currency reigns supreme until it doesn't. The new digital dollar would strengthen the currency for a new era, and bolster America as leader of the global economic system. Compared with China's e-CNY, the proposal has superior attributes of sovereign control, monetary soundness, financial innovation and individual privacy. The U.S. and its allies need sound and stable money to escape a period of weak output, high inflation and geopolitical conflict. A digital dollar backed by America's full faith and credit would be an important part of a reformed financial and monetary architecture.

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Mr. Warsh, a former member of the Federal Reserve Board, is a distinguished visiting fellow in economics at the Hoover Institution." [1]

1. The U.S. Needs a Better Digital Dollar
Warsh, Kevin. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 21 Nov 2022: A.17.