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Office Hours: Reena Aggarwal on Digital Currency in China and its Impact on the Global Economy

Countries across the world are actively exploring the potential of Central Bank Digital Currencies (CBDC), and China is positioning itself as the global leader in this new terrain. As the United States enters the race toward a digital currency, what are the implications of these new technologies on the world economy? What can other countries learn from China’s digital currency, and how should the United States respond? 

To address these questions, the Hoover Institution at Stanford University pulled together the brightest minds and leading experts in national security, finance, economics, central banking, technology policy, and computer science – including insights from Reena Aggarwal, Robert E. McDonough Professor of Finance and director, Psaros Center for Financial Markets and Policy – to present their findings and recommendations in a new report: Digital Currencies: The US, China, And The World At A Crossroads.

Reena Aggarwal, professor of finance and founding director of Psaros Center for Financial Markets and Policy

Aggarwal provides insights into her recent research on the internalization of the Chinese CBDC and its broader impact on the global financial market. 

What is a digital currency and why are countries considering it?

A CBDC is virtual money backed by the central bank of a country. CBDCs can make payment systems more cost efficient, allow central banks to manage and control monetary policy, provide an alternative to private cryptocurrencies and stable coins, and help with financial inclusion. CBDCs provide an opportunity to transform the future of money.

Which countries have explored or deployed CBDCs, and have they seen success in the sphere of payments technology innovation and adoption?

There are almost 100 countries that are in some phase of researching or deploying a CBDC. Countries like China, the Bahamas, and Nigeria are far along in the development of a CBDC while Sweden, Russia, Ukraine, Saudi Arabia, and UAE are in the pilot phase. It is too early to determine the impact of deploying a CBDC, but the stakes are too high with the rapid pace of innovation in digital currency to remain on the sidelines. Many emerging economies and an increasing number of advanced economies are moving aggressively to develop technological and regulatory frameworks for deploying their own CBDCs. 

To summarize the research in your report, how is the digital yuan, or e-CNY, setting new economic norms and technical standards in the digital economy?

China is the first major country to pilot a CBDC, referred to as the digital yuan or e-CNY. The first mover advantage and readiness will allow Beijing to be the leader in setting global standards and even providing the technology to other countries. China’s central bank is working with organizations like the Bank for International Settlements to develop cross-border payment systems even though China asserts that the e-CNY is for domestic purposes.

How will China’s deployment of the e-CNY affect the global economy beyond China?  

The digital yuan can potentially play a large role in internationalizing the Chinese currency and changing the geo-economic landscape. In the long-run, this can impact the dominance of the dollar. The current situation with sanctions imposed on Russia is a good example of what can happen. The growing role of China’s own payment system as an alternative to Society for Worldwide Interbank Telecommunication (SWIFT) to send payment orders can negate the impact of sanctions. Moscow itself has established its own payment system. Authoritarian countries, others wanting to avoid United States sanctions, and countries with strong relations with China are more likely to consider the adoption of the e-CNY or use it for cross-border payments.

What are your recommendations for United States policymakers and leadership as they face the rapidly advancing global financial landscape?

The United States must move with a sense of urgency to determine the appropriate role for a digital dollar. Recent events have made it even more clear that the United States needs to play a leadership role in shaping the global framework for digital currencies. CBDCs and payment systems being developed by other countries will have significant geopolitical consequences.