The greatest threat the digital yuan poses to the United States is that it endangers the international financial system America has led since World War II. //

Communist China became the first major economy to create a government-sanctioned digital currency — digital yuan. Such a move will significantly impact the great power competition between the United States and China and may reshape the dollar-dominated global financial structure forever.

When Xi Jinping, the Chinese Communist Party General Secretary, talked about returning China to a world superpower status, he always envisioned China’s currency (the yuan) would achieve a global reserve currency status akin to what the U.S. dollar has enjoyed since the end of World War II. //

Yet, despite the Chinese government’s relentless efforts, the Chinese yuan currently accounts for only 2 percent of global foreign exchange reserve assets while the dollar’s dominance remains unchallenged. Close to 90 percent of foreign-exchange transactions entail U.S. dollars, and more than 60 percent of all global central-bank reserves are held in dollar-denominated assets. China’s digital yuan, however, presents a challenge. //

The biggest threat the digital yuan poses to the United States is that it presents an alternative to the existing international financial system America has led for two generations. Individuals under U.S. sanctions will avoid suffering any financial pain by using digital yuan to access their assets thus rendering typical economic sanctions toothless.

America’s adversaries, such as North Korea, Iran, and Russia, will likely use digital yuan to exchange money, settle trades, and engage in weapon sales or other illicit activities. Doing so will enable them to bypass the existing financial system entirely, meaning American intelligence agencies won’t be able to monitor such activities and hurting the ability of the United States and its allies to anticipate potential threats before they metastasize. //

There are at least three things the United States should be doing in responding to the digital yuan. First, the Security and Exchange Commission should approve the existing requests to launch exchange-traded funds focusing on cryptocurrencies. Such funds will bring an inflow of fresh capital, stimulate the development of digital currencies and digital assets, and make them more accessible to the general public.

Second, the Fed should consider accepting some of these well-established cryptocurrencies into the U.S. financial system. Some well-known businesses such as Tesla and the Dallas Mavericks basketball team have already announced they would accept specific cryptocurrencies such as bitcoin or dogecoin as an alternative means of payment. As more businesses embrace digital currencies every week, the Fed may ultimately not have much choice but to adopt at least some type of digital currencies. If that’s likely to be the case, it’s better to do so now rather than later.

Finally, the Fed can issue a digital dollar as long as there are sufficient privacy protections in place to prevent some ambitious politicians from using the digital currency the way the CCP does as a means to control the American people.
Competition produces better goods and services at lower prices. The more free-market choices of digital currencies we can offer, the less likely China’s digital yuan will replace the U.S. dollar and gain international dominance as the CCP intended.