The Biden team sees potential threat from China’s digital Yuan plans

Photographer: Yan Cong / Bloomberg

The Biden government is stepping up its investigation into China’s plans for a digital yuan, while some officials are worried that the move could kick off a long-term bid to overturn the dollar as the world’s dominant reserve currency.

Now that China’s efforts to expand digital currency, Treasury officials, the State Department, the Pentagon and the National Security Council are stepping up their efforts to understand the potential implications.

U.S. officials are less concerned about an immediate challenge to the current structure of the global financial system, but are eager to understand how the digital yuan will be distributed and whether it can also be used to circumvent U.S. sanctions, the people said state of anonymity.

A Treasury spokesman declined to comment. A spokesman for the National Security Council did not respond to a request for comment.

The People’s Bank of China has built trial issuance of a digital yuan in cities across the country, making it on track as the first major central bank to issue a virtual currency. A broader rollout is expected for the Beijing Winter Olympics next February, which will give the effort internationally.

Many key details of the digital yuan are still in check, including details on how it will be distributed. China’s recent establishment of a a joint venture with SWIFT, the messaging connection that most cross-border settlements go through today, suggests that a digital yuan could possibly work within the current financial architecture rather than outside.

U.S. officials have been reassured that China’s intention is not to use the digital yuan to evade U.S. sanctions, according to people familiar with the matter. The dollar’s current dominance in cross-border transactions gives the US Treasury the power to cut off a large part of a business or even a country’s access to the global financial system.

China’s officials said the digital intentions of the digital yuan are to replace banknotes and coins, reduce the incentive to use cryptocurrencies and dominate the current electronic payment system run by the private sector. Ant Group Co. see Alipay in TenCC Holdings Ltd. See WeChat Pay. The PBOC has been working on the digital yuan for years, also called the e-CNY, which set up a specialist research team in 2014.

Here’s how a central bank’s digital currency can work: chart

“To provide a backup or redundancy for the retail payment system, the central bank must act” and provide digital currency services, Mu Changchun, director of the PBOC’s digital currency research institute, said at an event last month.

The PBOC is also exploring the potential of using the digital yuan in cross-border payments, with the introduction of a project studies the issue with a unit of the Bank for International Settlements together with the United Arab Emirates, Thailand and the monetary authority of Hong Kong.

The people familiar with the discussions say the Biden government has no plans to act to counter long-term threats to China’s digital currency. However, the Chinese plans have given renewed impetus to efforts to consider the creation of a digital dollar, they said.

Congressmen have also become increasingly interested in a digital dollar, and are aware of China’s moves, and asked Federal Reserve Chairman Jerome Powell and Finance Minister Janet Yellen during hearings earlier this year.

Powell said in Fed, the Fed looked “very closely” at a digital dollar. “We do not have to be the first. We have to get it right. ”

Yellen has shown interest in researching the viability of a digital dollar, a shift from a lack of enthusiasm among her predecessor, Steven Mnuchin.