The Looming Geopolitical Struggle for the Future of Payments

If rising U.S.-China tensions seem concentrated around Taiwan, tariffs and technology, it’s only because you’re not focused on the brewing geopolitical battle to reshape how money and financial assets flow through the global economy.

China has deployed a more deliberate strategy to shape this expanding flow of digital assets, relying on the digital yuan and a new consortium of central banks to test international payments on distributed ledgers. The United States, after years of indecision, has now landed on an alternative that relies on private firms to develop faster and cheaper payments mechanisms with dollar-linked stablecoins.

These two visions will compete against designs from other regional groupings and innovative applications that have yet to be invented, but Washington and Beijing have a lot riding on which currencies win more adherents on these new digital payment rails. The dollar’s reserve status seems secure as long as the United States continues to incubate the world’s largest and most innovative companies, but attractive alternatives for transactions could significantly weaken America’s geopolitical toolkit.

If you doubt the scope of the likely change ahead, remember that the flows of money have been under constant evolution with each chapter of innovation. Beads and shells offered convenience over barter. Coins and cash enabled trade far beyond the local marketplace. Bank accounts allowed commerce between distant partners without ever having to meet.

The promise of digital currencies is that money and securities will soon flow directly from buyer to seller without the costly mechanisms of correspondent banking and messaging services. And while people will always prefer to transact in a currency like the dollar, that’s a widely used unit of account or a reliable store of value, they may quickly lose patience if it doesn’t exploit revolutionary innovations as a means of exchange.

China’s digital yuan has been growing steadily since its launch in 2020 with the Beijing Olympics, and now services some 180 million wallets over 29 cities. Volumes are still small compared to the dominant private payment platforms Alipay and WeChat Pay, but it’s a key part of the government’s strategy to protect a direct role for itself in payments and to reinforce its ban on Bitcoin and other cryptocurrencies.

The e-yuan has also dovetailed nicely with the government’s efforts to boost the international use of Chinese currency, including through the Belt and Road Initiative to finance infrastructure in developing countries. The People’s Bank of China is one of the leading sponsors of the mBridge Project, a consortium of central banks developing an exchange that will allow the e-yuan and other central bank digital currencies to move and settle seamlessly across borders.

Initially established under the auspices of the Bank for International Settlements, the project also includes the central banks of Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia. While the BIS withdrew last year amid concerns about aiding sanctions evasion, the platform continues to develop, having processed $22 billion in cross-border transactions so far, each in a matter of seconds rather than days.

After years of floundering under the Biden Administration, whose top officials were still smarting from the loose regulation that triggered the Lehman Crisis, Team Trump has moved rapidly to roll out its alternative vision for regulating crypto currencies, although it’s less of a vision than a collection of domestic policy choices that clarify the regulation of stablecoins, establish a Strategic Bitcoin Reserve and permit retirement savings plans to invest in crypto currencies.

The president has also prohibited the Federal Reserve from any work on developing a digital dollar, even though 49 other jurisdictions have developed pilot digital currency projects and three have launched full-fledged programs. The “Anti-CBDC Surveillance State Act” passed the House of Representatives in July and awaits Senate consideration amid deep concerns by some of the president’s supporters about the Fed tracking and potentially blocking politically sensitive purchases.

Stablecoin flows are already overwhelmingly conducted in dollars, so it makes sense to build on this strength globally for retail payments and remittances. While there have been questions about the transparency and reliability of private stablecoin operators, the new regulations will doubtless help.

It remains unclear, however, just how dollar stablecoins will thrive in a world in which most other central banks are settling their large wholesale payments on jointly-operated government platforms. mBridge has an early start, but not all central banks will feel comfortable with a project dominated by the People’s Bank of China. The European Central Bank will want different controls over privacy settings and sanctions enforcement. France, Japan, Korea, Mexico and others are working on their own settlement system called Project Agora. Australia, Malaysia, Singapore and South Africa have Project Dunbar.

It may be some time before a dominant player or settlement system emerges that takes full advantage of digital currencies and distributed ledgers. More likely, the world’s financial plumbing may face a period of even greater complexity and fragmentation as new alternatives gather momentum alongside cumbersome legacy systems that must, of necessity, remain in place for now.

Even if the dollar’s reserve status looks durable, however, it may still be incumbent on the administration to develop a vision for how dollar stablecoins will operate alongside wholesale central bank digital currencies. At the very least, there may be room to at least study the advantages and disadvantages of a digital dollar issued by the Fed itself.

The dollar’s extraordinary advantages may still prevail as stablecoins as other countries build out their own digital central bank currencies and settlement systems. But amid so much transformation of the mechanisms that move money around the world, does it make sense to rely on a single strategy?

About the Author
Article authored by Christopher Smart, managing partner of Arbroath Group, the geopolitical strategy firm, and a former senior economic policy official in the Obama Administration