[EAI Special Report] The Future of US-China Competition and South Korea's Strategy I_④ US-China Digital Currency Competition: Digital Yuan vs. Digital Dollar

Editor's Note

In this Special Report, Lee Wang-hui, Professor of Political Science and International Relations at Ajou University, explains the intensifying competition between the US and China in the realm of digital currencies. The emergence of the first cryptocurrency in 2008 brought about significant changes in the international community. The author predicts that the competition to preempt the electronic currency market will intensify as China leads with the "digital yuan," while the US seeks to counter it. However, the author argues that it is too early to predict a final winner in the digital currency competition, given the unique advantages each country possesses.

※ The following is an excerpt. Please refer to the attached file above for the full text.

1. Introduction

Since the advent of Bitcoin, the world's first cryptoasset (加密资产), in 2008, over 2,000 types of virtual currencies have been traded. In June 2019, Facebook, along with 27 fintech companies, launched the Libra (天秤币) project, aiming to become a global currency. Not only IT companies and financial institutions but also central banks are actively exploring digital currencies (数字货币). Currently, central banks in Norway, the Eastern Caribbean, the Bahamas, Sweden, Switzerland, Singapore, the UK, Japan, China, Canada, Thailand, France, Hong Kong, and the European Union (EU) are considering issuing central bank digital currencies (CBDC; 中央银行数字货币). Among these, the central banks of Canada, the UK, Japan, the ECB, Sweden, and Switzerland formed a research group on digital currencies in January 2020 (Adrian and Mancini-Griffoli 2019; Nelson 2019; Kiff et al. 2020; Allen 2020; Bank of Korea 2019). Following the COVID-19 crisis, the scope and volume of digital currency usage are expected to increase due to the expansion of non-contact (untact) payment and settlement methods in financial transactions as a result of social distancing and lockdowns aimed at preventing virus transmission.

China is currently leading the digital currency development race (Wang 2019). The People's Bank of China, which has been developing blockchain (区块链)-based digital currency since 2014, began a pilot operation of its CBDC, the Digital Currency Electronic Payment (数字货币电子支付)—hereinafter referred to as the digital yuan—with major private financial institutions in late 2019. China's lead in the digital currency competition can be attributed to its experience with Bitcoin speculation. From 2013 to 2017, China was the largest mining and trading country for Bitcoin. Although China strongly regulated Bitcoin to address issues of amplified financial market instability and capital flight, the Chinese government actively encouraged blockchain development for fintech advancement (Lee Wang-hui 2017). In this regard, the digital yuan can be evaluated as a product of market experience and technological progress gained through trial and error in the cryptoasset industry.

The initial response from the United States to the digital yuan came not from the government but from the private sector. Facebook, the world's largest social networking service (SNS) company, launched its digital currency project, Libra, in June 2019, in collaboration with 27 fintech firms. In a hearing before the U.S. House Committee on Financial Services on October 23, Facebook CEO Mark Zuckerberg argued that Libra would help curb China's challenge to dollar hegemony.

China is moving quickly to launch a similar idea within months. Because Libra will be primarily based on the US dollar, I believe Libra will expand America's financial leadership in the world, as well as our democratic values and oversight. If the United States does not innovate, our financial leadership will not be guaranteed (Zuckerberg 2019, 1).

Despite Zuckerberg's warning about China, the U.S. government, Congress, and the central bank did not recognize Libra as a digital currency. This was due to serious concerns from the U.S. government and Congress about the negative impact of Facebook's monopolistic position on market competition and domestic politics, and from the central bank about the potential infringement on the exclusive right to issue legal tender. Amidst this opposition, Facebook shifted Libra in April 2020 from a digital currency intended for global circulation to a payment instrument usable within individual countries. Consequently, Libra is no longer in a position to compete with the digital yuan.

As the commercialization of the digital yuan approached, the U.S. central bank, which had maintained a reserved stance on CBDCs, announced the development of a CBDC—hereinafter referred to as the digital dollar. On August 13, 2020, Lael Brainard, a governor of the Federal Reserve, pointed out that "China is rapidly moving ahead with its own version of a CBDC" (Brainard 2020b). The practical development of the digital dollar platform was entrusted to the Federal Reserve Bank of Boston and the MIT Digital Currency Initiative.

CBDCs could become a crucial variable in determining the future of reserve currency competition. If the digital yuan succeeds in promoting the internationalization of the yuan, the global monetary and financial order could be divided into a dollar bloc and a yuan bloc (Bansal 2020). In such a scenario, the exorbitant privilege of the U.S. dollar, which has reigned as the reserve currency, would inevitably be significantly limited. Conversely, if the digital dollar is launched and counterbalances the digital yuan, the expansion of the yuan bloc would be difficult. For this reason, the competition between the U.S. and China to preempt the digital currency space will become more intense.

■ Author: Lee Wang-hui_ Professor of Political Science and International Relations at Ajou University. He holds a Ph.D. in International Politics from the London School of Economics, UK. His main research areas include international political economy and the relationship between corporations and states. His co-authored works include "The Belt and Road Initiative: China and Asia" (2016), "East Asian Regional Governance and Transnational Cooperation" (2019), and "Research on Measures for South-North-China Economic Cooperation" (forthcoming). His major articles include "The Geopolitics of the Belt and Road Initiative: Sino-Russian Cooperation vs. Alliance with Russia to Counter China" (National Security and Strategy 2017), "The Political Economy of Fintech (金融科技): Competition between the US and China" (National Strategy 2018), and "US-China Trade War: Resistance to Protectionism within the US and China's Lobbying Efforts in the US" (National Security and Strategy 2018).

■ Management and Editing: Baek Jin-kyung Researcher at EAI

Inquiries: 02 2277 1683 (ext. 209) j.baek@eai.or.kr

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