By now, it is common knowledge that China plans to launch a Central Bank Digital Currency (CBDC) in its bid to gain better insights into usage and improve the efficiency and speed of remittances. China’s goal is for this CBDC to enter the Western world and become an important part of future financial infrastructure. Given the West’s apprehension of Chinese controlled infrastructure, is it possible for China to one day be in control of the base for financial settlement across the world?
In 1944, the biggest countries in the world met at Bretton Woods, New Hampshire to carve out an entirely new financial system. The need to bring monetary firepower under the direct control of humankind, rather than delegating it to the precious metal called gold was deemed a necessity. Countries were losing control of their economies and more control was necessary to guide the world into a particular direction.
As with all things run by humans, it slowly slipped out of their grasp and cascaded into the economic machine we see before us today.
The United States was unofficially sworn in as the leader of the new free world. Their currency, the U.S. dollar, would become the world reserve currency for settling debts, claims, and any other form of payment. Trade between India and Kuwait is not settled in Kuwaiti dinars or Indian rupees – it is settled in dollars.
Now, China is trying to break this hierarchy and bring a 75-year-old system crashing down by asserting its dominance. Nobody can argue that China lacks the resources to pull off such a show because they most certainly don’t. But the real question is whether the world will trust China with so much power after everything that has happened?
You see, America, the United States, was the land of the free. People loved the idea of the “American dream” and were enamored by the prospect of being able to go somewhere and open themselves up to lush opportunities. Moreover, the United States government – at least at the time – wasn’t authoritarian.
China’s CBDC will certainly do well within their own borders. It might even be pushed onto smaller countries like Sri Lanka that owe China more than just money. But to think that the United States and the European Union will ever let a Chinese form of currency become the world reserve is laughable.
Today’s financial situation has escalated to a level where nobody wants to use innovation from everywhere else. Europe and Asia are still relatively open to outside innovation, but North America, especially the United States, is mostly unwilling to do so.
A digital dollar can certainly become the world reserve currency, simply because the dollar already is the world reserve currency. However, for the sake of removing the massive concentration of power in North America, Mark Carney’s idea of a global digital currency becoming the global settlement base is a much more coherent idea.