China Digital Yuan – Impacts of Weaponizing the USD

A continuation of my blog on Digital Dollar and CBDCs (Mar 2021). Conflict in the Ukraine and the economic sanctions on Russia, central banks and payment systems have created a “weaponization” of the USD. As a result, I see the China’s digital yuan taking off in next 18 months beginning with energy related payments with the middle east. While not impacting consumer payment networks, the shift will substantially impact USD hegemony and ability to impair funds flow of participating markets and geographies.

My friend Richard Turin has a book on this topic (Cashless: China’s Digital Currency Revolution), and was recently interviewed by CNBC on the shift of trade flows toward the Digital Yaun. As Richard stated today this is not a 0 or 1 binary flip, even a small change in USD’s role as reserve currency will have substantial repercussions.

China likely has a long term strategic plan, of which energy related payments are likely the key consideration. This combined with the ME frustration in recent US moves as a “partner” has established a desire of key oil producers to spread their risk in reserves and the mechanisms for settlement. This was the topic in last week’s WSJ article Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales and Bloomberg’s Saudi Switch to Yuan Seen as Symbolic, Not True Threat to Dollar

Where I disagree with content of both articles is the theme that this is not “a big deal”. While we are not likely to see Yuan based contracts grow to more than 1%-2%, and several ME countries have their currencies pegged to the USD, the establishment of an alternative is a major event. Providing countries with an option is not only an alternative “network” is it also establishing an alternative reserve and settlement book on the ledger of the central bank.

Once the Digital Yuan is established in energy, the ubiquity of demand will ripple through other central banks. Thus the ripple effects leading to the establishment of eCNY as a legitimate USD alternative in other trade flows. This growth will not be a “big bang”, but a 10 yr transformation.

As an outgrowth of this transformation could consumer payments be impacted? Not likely in a 10 yr view, as there are few long term “consumer contracts”. Payment instruments are in consumer control. While Chinese consumer purchases out of China could drive adoption, this GDV pales in contrast to energy and supply chain flows.

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