If money is politics in an era of shifting geopolitical sands, central bank digital currencies (CBDCs) and the underlying infrastructure will be a crucial chip in the competition between China and the West, claims Brunello Rosa, head of consultancy firm Roubini & Rosa Associates, in his book Smart Money: How Digital Currencies Will Shape the New World Order. A former Bank of England economist who teaches at the LSE and Bocconi University and advises a UK parliamentary committee on CBDCs, the Italian thinker has an inside view of how technology shapes the emerging monetary order. In an exclusive interview with World Finance’s Alex Katsomitros, Rosa argues that China’s digital renminbi is part of a ploy to undermine the western monetary system in tandem with its Belt and Road Initiative, whereas President Trump’s digital dollar ban and culture wars over privacy and ‘programmability,’ the ability of CBDC issuers to automatically set conditions for their use, may set the US back.
The Political Landscape of CBDCs
The rise of central bank digital currencies (CBDCs) is not merely a technical adjustment; it has significant political implications. As Rosa points out, CBDCs can enhance China’s efforts to internationalize its currency, the renminbi. Furthermore, privacy concerns associated with CBDCs are inherently political; currencies symbolize national sovereignty, and any changes to them prompt political scrutiny and debate.
Privacy and Programmability Concerns
The capacity to monitor transactions raises valid concerns; however, traditional financial institutions already engage in transaction tracking. Central banks, conversely, are often seen as providing better privacy assurances. While an authoritarian regime could misuse transaction data, the technology itself is not to blame—it’s the governance that poses the risk. Programmability in CBDCs, which allows for automated conditions on spending, also raises questions. Although there are fears of government oversight in personal expenditures, these concerns may be overstated. Programmability could enhance financial transactions but could also be misused, similar to how nuclear technology can be harnessed for both energy and destructive purposes.
Shifts in US Cryptocurrency Policy
The current US administration has embraced cryptocurrencies, diverging from President Trump’s stance against a digital dollar. Unlike China’s state-backed approach to CBDCs, the United States is focusing on regulating stablecoins and other cryptocurrencies. However, the long-term stability of the digital asset market may depend on establishing a foundational CBDC to enhance trust and reliability.
The Role of Stablecoins in Global Finance
There’s a consensus that stablecoins could play a critical role in maintaining the dollar’s status as a global reserve currency in the digital age. China has made significant advancements with its state-backed digital renminbi, while the US is banking on stablecoins. However, for stablecoins to be effective, issuers must maintain sufficient liquid assets to ensure their peg to the dollar, often relying on U.S. Treasuries, which sustains their demand amidst rising skepticism about US financial stability.
The Impact of Retail CBDCs on Commercial Banks
Concerns are mounting that retail CBDCs could disrupt commercial banking by encouraging individuals to favor safer central bank accounts over traditional bank deposits. Nonetheless, the risks are limited as commercial banks will still manage customer relationships and credit. Moreover, some European nations are exploring limits on CBDC holdings to mitigate potential disruptions. Ultimately, banks will need to innovate and adapt to the new financial landscape.
Smart Money and Resource Competition
Rosa notes a clear connection between the concept of “smart money” and the global competition for resources. China’s initiatives, such as the Belt and Road Initiative and the Digital Silk Road, are designed not only to enhance physical infrastructure but also to develop digital payment systems and technological frameworks that support its economic ambitions.
The Endgame of De-dollarisation
Post-World War II, the US deliberately ran current account deficits to establish the dollar as the global reserve currency, a strategy the current administration is now cautious about. In contrast, China prefers to maintain a current account surplus, avoiding the vulnerabilities associated with an open capital account. China’s focus on technological advancements in digital payments may allow it to establish the renminbi as a reserve currency without the need for a current account surplus.
Potential Risks for China
Should China fail to achieve its goals through peaceful means, there is a risk of increased geopolitical aggression. While historically non-expansionist, the potential for military ventures could emerge if economic prosperity falters, although this scenario is not deemed likely.
Can the West Compete with China’s Advancements?
Catching up to China’s decade-long lead presents significant challenges. However, the EU has demonstrated that rapid progress is possible when focused on a common goal. While the EU aims for a 2027 launch of its CBDC, the US may face setbacks due to the presidential ban on a digital dollar, potentially wasting valuable time in the competitive landscape.
Differentiating Liberal and Authoritarian CBDCs
The technology behind CBDCs provides issuers with extensive control over transactions, posing governance challenges. While anonymity is difficult to guarantee, it is crucial to protect individuals’ rights to spend without undue government interference. Authoritarian regimes might exploit CBDCs for surveillance, but ultimately, the responsibility lies with the governance structures in place, not simply the technology itself.
The Need for a Cooperative Monetary System
For a cohesive global monetary system, individual countries must work towards interoperability in their CBDC solutions. Without cooperation, the landscape could become fragmented, complicating money transfers and creating barriers to efficient financial transactions.
The Viability of a Global CBDC
The concept of a digital version of Keynes’s Bancor, proposed to address trade imbalances post-World War II, remains unlikely to materialize. The absence of consensus on who would issue and manage such a currency, coupled with ongoing challenges to Bretton Woods institutions, suggests that a digital Bancor is improbable. Instead, the financial ecosystem may evolve towards various private-issued stablecoins, reminiscent of a “free banking” model, which could pose risks as identified by the Bank for International Settlements.
