#Washington Watch: As China’s digital yuan project gains steam, chances may rise for bipartisan embrace of digital dollar

The Financial Times reported in October that the Chinese government is pressuring McDonald’s
MCD,
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to expand the number of locations at which it accepts digital yuan for payment, beyond the 270 locations in Shanghai where it already does. The FT also cited a source familiar with the situation that Nike
NKE,
-1.17%
and Visa
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-0.65%
are being pressured by the government to integrate the digital yuan into their operations.

So far U.S. officials have remained sanguine about the digital yuan and its implications for the U.S. economy and its geopolitical standing, but recent successes may force them to reconsider, according to Robert Greene of the Carnegie Endowment for International Peace.

“The digital renminbi likely will become the backbone of a meaningful cross-border payments [system],” Greene, an expert on Chinese financial-sector trends, told MarketWatch. “There are Chinese officials calling for the renminbi to serve as the regional currency of Southeast Asia, and the digital renminbi could facilitate that.”

The Bank of International Settlements, an international financial organization owned by the world’s largest central banks, published research in September that said that central bank digital currencies could reduce the time needed to make cross-border payments from days to just seconds and cut associated costs by about half.

Last week, the BIS reported the “successful” results of an experiment using digital versions of the euro and the Swiss franc to settle international transactions between commercial banks in France and Switzerland as part of its ongoing experiments with central-bank digital currency called Project Jura.

“Project Jura confirms that a well designed wholesale CBDC can play a critical role as a safe and neutral settlement asset for international financial transactions,” said Benoît Cœuré, head of the BIS’s Innovation Hub, in a statement. “It also demonstrates how central banks and the private sector can work together across borders to foster innovation.”

Steve Pavlick, head of policy at Renaissance Macro Advisors, told MarketWatch that divergent views in Congress on whether and how it supports the Fed issuing a digital dollar will rest on developments abroad.

“Opposition and animosity to China is one of the few bipartisan forces there is right now,” he told MarketWatch. “There is a strong desire to preserve the dollar’s supremacy. If there’s a way to do that without the unintended consequences of hurting your domestic finance industry,” consensus could be built around the issue, he added.

Jonathan Dharmapalan, CEO of eCurrency, a California company that provides technology to central banks that plan to issue digital versions of their currencies, told MarketWatch in an interview that China’s ongoing deployment of its digital currency will soon make plain the advantages of offering access to digital yuan to buyers of Chinese-made products.

As it stands now, most foreign purchases of Chinese exports pay for those goods in U.S. dollars. “China wants to eliminate that process,” Dharmapalan told MarketWatch. “Retailers outside of China will be able to convert to digital renminbi without ever having to run to a bank to do it. With China being the supplier of the world, essentially, they’d love for everything to be bought and sold as soon as possible in renminbi.”

To be sure, there are major political hurdles a digital dollar faces before it advances beyond its current experimentation phase. The Federal Reserve Bank of Boston has been working with the Massachusetts Institute of Technology for the past 18 months to develop open-source code that would enable private parties to begin pilot projects that could demonstrate a digital dollar’s utility.

The Fed has promised a report that will examine the benefits and risks of issuing a central bank digital currency, but it remains unfinished despite Chairman Jerome Powell’s assurances in September that it would be released “soon.”

The delay could reflect internal disagreements at the central bank over the wisdom of a digital dollar or concern over creating a political firestorm amid a confirmation process for Powell and several forthcoming nominations from President Joe Biden to the Fed Board of Governors, Renaissance Macro’s Pavlick said.

Pavlick added that tension over Democrats’ desire to see the Fed and other financial regulators take on issues ranging from climate change to workforce diversity and Republicans’ fears that a digital dollar could destabilize the domestic banking industry could force digital-dollar policy to take a back seat.

Proponents of a digital dollar, therefore, will have to emphasize its importance in the face of geopolitical rivals, like China, using central bank digital currency to lower transaction costs and and draw its neighbors more tightly to its economic orbit.

“The most powerful tool we have against Russia and China are our economic sanctions,” Pavlick said. “So anything they can do to reduce their dependence on the dollar makes digital currencies more attractive.”