US Financial Hegemony: The Digital Yuan and Risks of Dollar De-Weaponization
As we enter the 2020s, the United States Dollar (“USD”) is entrenched as the most important currency—the preeminent global currency. The vast majority of global trade is conducted in USD; sovereign central banks retain USD as their majority reserve holding and crude oil is traded (mostly) in USD. Viewed as stable, freely convertible to other assets, a “safe storehouse” of value and offering an array of investment options, the United States is also viewed as governed by the rule of law with an independent judiciary. The unique status of the USD in the global financial architecture is both reflective and empowering of US global hegemony. Indeed, USD sanctions are so powerful they serve as an effective display of US power extraterritorially without resort to military intervention. Potentially disrupting the USD-led international financial order, an ambitious China wants the Yuan to be the next global currency. In recent years China has masterfully engaged in robust diplomatic economic cooperation with developing sovereigns, and burgeoning alliances incentivize economic alignment with China. This is similar to the coalition of interests the United States enjoyed in the decades following Bretton-Woods. Significantly, China—and even US allies— are incentivized based upon economic self-interest in evading the extraordinary sanctions power of the USD. A blockchain powered digital Yuan—the currency of the world’s second biggest economy (already digitalized to a far greater extent than the United States) might serve as an intriguing pathway towards a Chinese alternative to the USD. A digital Yuan may also expedite internationalization of the Yuan within the massive BRI initiative. To be sure, large and open US capital markets, political stability, and rule of law stand in stark contrast to China’s extensive capital controls, a less transparent disclosure architecture, and judicial deference to the ultimate authority—China’s single-party system, the CCP. However, crosscurrents of incentives to evade US financial hegemony coupled with a pragmatic reformation of China’s capital markets and courts, should not be discounted. An internationalized digital Yuan would dramatically affect global finance and political-economic governance with transformative implications. Although many Western policy-makers and scholars believe a Yuan-centric model will be a very long march for China—perhaps taking decades—the process may be substantially expedited by China’s drive, innovative technology, and backlash against USD sanctions overuse. Moreover, crucial reforms needed to internationalize the Yuan can be accomplished in a much shorter time span than decades. The digital Yuan—if successful—may dramatically reduce the Long March timeline. If past performance is any guide, China has demonstrated an ability to close gaps expeditiously while simultaneously wielding strategic patience for fulfillment of its strategic objectives.
Recommended Citation: Joel Slawotsky, US Financial Hegemony: The Digital Yuan and Risks of Dollar De-Weaponization, 44 Fordham Int'l L.J. 39 (2020).