A cold war is brewing in the financial world. America is losing its dominant position to countries exploring alternative currencies. Both CBDCs and the Euro are poised to make their mark on the industry.
From Innocent Beginnings…
Everyone looks at the world’s leading economy for guidance, yet the United States may lose that situation in the near future.
Several cracks have appeared in this facade. The first major “blow” was dealt when CIPS was introduced. CIPS, or Cross-Border Inter-Bank payments System, is a rival to Swift, commonly used in the Western world. The CIPS initiative is intended for clearing and settlement in cross-border RMB payments. China considers this to be a major tool for revolutionizing finance.
What most people don’t realize, is the impact CIPS can make. It encompasses participants in 6 continents, including the likes of Russia. Although it doesn’t facilitate the transfer of use, it is a key payment rail to increase global adoption of the yuan. Back in 2019, the network processed nearly $20 billion per day, which is roughly three times the volume of SWIFT.
To a Currency Cold War
Although the CIPS concept may not seem like an immediate “threat” to the US Dollar, the reality may be very different. Russia and China are looking to take their existing financial working relation to the next level. A financial alliance -of sorts- is being built, as both countries want to erode their reliance on the US Dollar.
Instead, both countries seek out the most unlikely ally of them all. The Euro is now a prominent currency for trading dealings between these two countries. An effort to ditch the greenback was expected, thanks to a long-standing partnership. After all, CIPS was only the first brick in the foundation. Russia and China also have a currency swap deal, allowing them to sell currencies to one another outside of the global market system.
Slowly but surely, we have witnessed the development of a “front” against the US Dollar. If the Eastern world reduces its reliance on the greenback, there is no telling what will happen exactly. Thanks to the introduction of CBDCs, shifting away from the Dollar may become even easier.
Ignorance of CBDC Development is Ill-advised
Keeping in mind how CIPS is designed to internationalize Yuan usage, the coming years will prove rather interesting. China is clearly leading the race when it comes to creating a central bank digital currency, or CBDC. A successful trial through “red envelopes” has been completed, effectively putting this digital currency in the hands of consumers. A further sign of how far ahead China is compared to other nations, especially the United States.
On the other side of the world, a CBDC does not appear to be a topic of discussion as of yet. I find it baffling how disinterested the United States approaches the concept of digital currencies today. If the country aims to avoid a “currency cold war”, the time for action is now, rather than tomorrow. Their lack of appreciation for this new technology and modern money will eventually cause a lot of problems.
In early September, news leaked of how the European Union wants to create a “digital currency watchdog”. Such a decision doesn’t surprise me, as there are several initiatives underway. While Facebook’s Libra has gotten some attention, there is also the topic of traditional currencies to consider. With a digital yuan now entering the mix, a watchdog to monitor it all will not be an unnecessary luxury either.
Europe is now taking digital currencies a lot more seriously. While no one expects a digital Euro to be introduced, there are genuine concerns over preserving financial sovereignty. Internal trouble is brewing too, with multiple member states drafting their own rules. For the time being, the EU’s stance on CBDCs remains unclear. However, its policymakers are at least keeping a finger on the pulse.
An Explosive Political Powder Keg
Making matters worse is how the United States is effectively “aiding” countries such as China to step up the development of their alternative solutions.
Earlier this week, the United States imposed sanctions on Russian and Chinese firms for dealing with Iran’s missile program. A smart decision, on paper, but another push toward a digital yuan, CIPS, and who knows what else in reality. The US is heading down the course of isolationism, rather than defending its position as the leading financial nation.
Alienating the nations that have been openly developing solutions to avoid the US Dollar as much as possible creates a powder keg. If China managed to break away from the United States and do its own thing -which seems more likely by the day- it will create a template for other nations to follow.
Whether one wants to admit it or not, China is gunning for the CBDC “throne”. The nation is very successful in this effort, as it meets virtually no resistance. With a change of power in the US on the political frontlines and the lack of a clear policy on technology or CBDCs, the future of America may be in dire straits.
No one can deny China has been a slumbering powerhouse for decades. Its CBDC will gain global traction, as millions of China live outside of China. Combined with the China-Russia relationship, a SWIFT rival processing more volume, and an unclear political direction in the US, the economic balance of power can shift a lot quicker than people imagine.