Will China’s Digital Yuan Be a Threat to US Dollar Dominance?

Will China’s Digital Yuan Threaten US Dollar Dominance?

The concept of money is constantly evolving. Many countries are now experimenting with central bank digital currencies (CBDCs). There was a strong concern that U.S. dollar may be in danger and discussions about the potential advantages of a digitized dollar were started, following the announcement of China’s digital yuan.

For the U.S., while the emergence of CBDCs would be an innovation, it, however, “will not be a leap from pre-digital money to digital money”. California Berkeley Economist Barry Eichengreen, in a recent talk with Fintech Beat, stated, that “digitization of currencies” is not a new move, adding:

“In terms of who would benefit from it, the incumbent international currency – the US Dollar, really has a dominant market share in terms of cross-border transactions and moving from a wholesale digital dollar, where banks can digitally move dollars across borders to a retail digital dollar wouldn’t effect the cross border use of the dollars very much, I think, one way or another.”

Regarding the example of the People’s Bank of China (PBoC), Eichengreen said that the creation of a digitized version of the fiat would be good for the states wanting a larger digital role for their currency and that the issuance of a CBDC and encouraging companies, banks, and people to use it for cross-border transactions, “could give them a leg up” when it comes to competing with the US dollar on the global stage.

The US dollar has been a dominant international payment currency for quite a long time now. As some reports indicate, from 2012 to 2019, the dollar’s share of cross-border payments intermediated through SWIFT messaging network has risen by 10%, reaching 40%. Dollar’s grip in the share of global payments has been strong, but the new wave of digitization was speculated to change the dominance and this could bring in the US institutions could be under stress as it is still behind when the current progress with CBDC is concerned.