Author: Mr. X
Regardless of who wins the White House, China’s economic and geopolitical rise will continue to dominate global politics. Among its ambitions is to roll out a digital version of the yuan. Bloomberg reports that it will be the “first sovereign token to reside exclusively in the ether.” This is part of a larger play by China to challenge the dollar’s supremacy as the world’s reserve currency. In this, it is joined by Russia. Both nations now use the dollar less than 50 percent of the time in bilateral trade, in what some call a “financial alliance.”
China far outpaces the United States when it comes to mobile payments. An estimated 81 percent of Chinese consumers use Alipay, while just 9 percent of American consumers use Apple Pay. To maintain control over digital payments, the Chinese government must deploy a currency that it can track and control. China is making leadership in blockchain technology a priority, attempting to lay out global guidelines that will link nations together, much like its Belt and Road initiative.
The United States is far behind in this effort despite calls from Senator Tom Cotton, a noted China hawk, that the United States needs a digital dollar that is “better than Bitcoin” and “better than a digital yuan.” Facebook’s initiative to launch a Libra cryptocurrency for its users did not impress regulators. Visa applied for a digital dollar blockchain patent in May, but it’s unclear whether it is close to producing something real.
Why does this matter? A digital currency that allowed capital transfers more swiftly than existing currencies could potentially displace the dollar. A digital currency accepted as the “reserve currency” and backed by a central bank would give the nation which controlled it enormous power and credibility. The COVID-19 pandemic will also accelerate the move to digital currency, as cash payments may be discouraged due to fear of disease transmission.
There are important political ramifications as well. Digital currency allows government officials to track payments, which could potentially crack down on criminal networks, terrorists, and human trafficking. Of course, it also dramatically reduces privacy. The Chinese, who already live under a state-run “Social Credit System” which incentivizes or punishes behavior depending on the state’s opinion, may be used to this.
It’s difficult to imagine Americans abandoning cash in favor of a trackable, digital currency unless it is mandated. Even if it is, it may give a second life to Bitcoin, Monero, and other less controlled cryptocurrencies, as well as gold, silver, and other stores of value. At the same time, in terms of economic efficiency, Americans’ attitude of “Don’t Tread On Me” could cost the USA the advantage when it comes to producing a digital currency that will be accepted by the world.
China is successfully consolidating its hold on its territory. The Uighur Muslim and Tibetan minorities are being ethnically displaced; the Hong Kong protest movement has been crushed. A de facto alliance with Russia gives the Chinese a powerful ally to check Japan and India. However, there is one final barrier to regional power that China may not be able to breach – Taiwan. Fifty American senators from both parties submitted a letter to President Trump on Thursday, urging him to sign a comprehensive trade agreement with Taiwan. Thus, of course, would infuriate China, which considers Taiwan part of its territory. After seeing what happened to Hong Kong, it’s difficult to imagine President Joe Biden or a triumphant President Trump abandoning the island to the People’s Republic.
There may also be a more cynical reason for defending Taiwan. America’s political system seems broken and dysfunctional to the rest of the world. It will remain that way no matter who wins the election. It’s doubtful that the American political and economic elite will be able to pursue a national objective such as achieving blockchain supremacy and issuing a workable “digital dollar” before China. Instead, America’s best bet may be to forthrightly defend Taiwan, hoping to bait the People’s Republic into a rash action before it achieves economic and technological supremacy.
Whether or not the United States government (under whatever president) signs a trade agreement with Taiwan will reveal American intentions. Traditionally, the most dangerous time in geopolitics is when a rising power (China) confronts a falling power (America). America’s best bet in this situation may be to bait China by pledging to defend Taiwan’s right to exist even in the face of Chinese bluster.
There are also partisan considerations at work. President Trump needs to show strength if he wants to regain lost ground over the next month. A President Biden would need to counter accusations that he has been soft on the Chinese Communist Party. The currency wars between a digital dollar and digital yuan may reset the entire international order for the next century. However, they may be preempted by a more old-fashioned kind of war if a falling America and aggressive China see no other option to settling the Taiwan question except through force. If you want to see how this scenario will play out, be less concerned about who is leading in blockchain technology and pay more attention to what the United States Navy is doing in the Pacific.