Could China’s Digital Currency Unseat the Dollar?

(Source foreignaffairs.com)
Imagine the United States has received intelligence from the Mossad that Iran is procuring essential components for nuclear weapons and missile programs. U.S. economic sanctions on Iran remain in place, but Iran has shifted much of its international commerce to a new yuan-based system—a Chinese digital currency that allows Tehran to avoid dollar transactions and thus evade U.S. financial institutions. As a result, Iran’s oil sales to China, India, and Europe are up, providing the Iranian regime with critical revenue streams that U.S. authorities cannot monitor. And when Iran decides to move quickly toward the development of nuclear weapons and new medium-range missiles to deliver them, the United States can no longer turn to sanctions as one of its primary means of responding to the threat. This scenario may seem far-fetched given the long-standing dominance of the dollar. But in late April, China reached a significant milestone: after more than five years of research by its central bank, China became the first major economy to conduct a real-world test of a national digital currency. The pilot project, which is occurring in four large Chinese cities, is a clear sign that China is years ahead of the United States in the development of what is likely to become a central component of a digital world economy. U.S. policymakers are unprepared for the consequences. The advent of digital currencies will degrade the efficacy of U.S. sanctions, limiting the country’s options to respond to national security threats from Iran, North Korea, Russia, and others. It will also hamper the ability of U.S. authorities to track illicit financial flows. And China, meanwhile, will use the combination of its digital yuan and strong electronic-payment platforms (such as Alipay and WeChat) to expand its influence and reinforce its capacity for economic coercion in Africa, the Middle East, and Southeast Asia.