China appears on the brink of launching its own digital currency. To keep pace, should the U.S. consider creating a digital dollar?
After more than five years of research by its central bank, China became the first major economy to be actively testing a national digital currency.
This development highlights that China is likely way ahead of the United States in the development of a crucial link in the emerging digital world economy. U.S. policymakers so far seem unprepared for the impact of digital currencies while China will partner its digital yuan and strong electronic-payment platforms (such as Alipay and WeChat) to expand its influence and reinforce its capacity for economic leverage over countries in Africa, the Middle East, and Southeast Asia.
A digital dollar initiative could tie the strength and stability of the U.S. dollar with the convenience and power of secure digital technology.
There will be resistance since financial institutions and technology companies will likely see a threat to their proprietary digital payments solutions and regulators such as the U.S. Federal Reserve and legislators will have to carefully coordinate changes to insure data privacy and security.
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The challenges are significant, but the risks of inaction are far greater.
Why the U.S. Needs a Digital Dollar
It is inevitable that monetary systems are headed toward greater digitization that could put them out of reach from American regulators. We either adapt or fall behind, with painful consequences to America’s position in the world.
I say this because the world is in the midst of negotiating the standards and guidelines for the emerging digital economy and digital trade that could so0n become more important than trade in goods. Will it be open or closed? Will data flow freely or be government controlled? Once again, the U.S.-China rivalry will play out, with Japan and Europe more than holding its own.
The United States has used its recent trade negotiations to promote an open global digital economy. The Trans-Pacific Partnership (TPP) negotiations had broken new ground on digital trade, and the U.S.-Japan Digital Trade Agreement included provisions that guarantee that data can freely move across borders. There are also important digital trade negotiations at the WTO.
China’s approach to digital trade reflects its basic instincts to control and restrict data flows. This attitude is captured in one phrase: cyber sovereignty.
China’s closed strategy to digital trade is also part of a diplomatic effort to build a coalition of countries that share their strategy. Then the Chinese government can leverage its control over domestic companies to execute a campaign of surveillance, propaganda, and disinformation in their strategic interest.
America and its partners need to put in place legislation that protects national security and prohibits the transfer of sensitive personal data to jurisdictions that lack the transparency, accountability, and due process necessary to guarantee privacy.
The Chinese extreme authoritarian approach creates barriers to coordinating internationally and responding to the global threats. After making substantial progress on digital trade rules with Canada, Mexico, and Japan, the United States should focus now on the European Union.
It is time for a U.S. digital dollar.
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