The discourse about international economic power is further enhanced by the development of digital payment systems, which have sparked a worldwide competition to implement a central bank digital currency (CBDC). Currently, over 80 percent of central banks worldwide have undertaken efforts pertaining to national digital currencies, as stated in a research by the Atlantic Council.44 While digital payment systems have been around for some time, the concept of a Central Bank Digital Currency (CBDC), issued by a central bank and backed by fiat currency on a one-to-one basis, has introduced new possibilities for financial diplomacy.

In 2014, the Central Bank of China took the initiative to create a specialised task force to do research on digital currencies. They also established the Research Institute of Digital Currency, making them one of the pioneers in this field. China's objective in doing so was to facilitate the global adoption of the yuan, which has seen significant stagnation since 2015. China aims to enable the digital yuan to be utilised for cross-border payments, without the need for banking middlemen. This would effectively circumvent the US financial system and reduce vulnerability to US sanctions. The trial programme for the CBDC was launched in April, targeting a specific region. It is expected to be widely used by the time Beijing holds the Winter Olympics in 2022.

While there are doubts about the significance of a Central Bank Digital Currency (CBDC), this platform differs from other digital currencies by removing the requirement for an intermediate function in the conventional banking system's verification process before a transaction is finalised. Under this novel framework, the digital yuan, which would be fully supported by the paper yuan on a one-to-one basis, would facilitate a direct transaction between the central bank and external entities, resulting in a significantly streamlined and effective procedure. The potential applications of this Chinese digital currency are many and provide a glimpse into the possible uses of AI in its implementation. The world naturally expects a response from a US government that is ill-prepared for such a transformation. If implemented before receiving a response from the United States, this move might have significant worldwide implications. China is employing a new tactic to diminish the global relevance of the US dollar and its authority to impose sanctions. China's future prosperity will depend on its ability to effectively utilise influential Chinese corporations such as Tencent and Ant Financial. These companies currently boast over one billion users each for their digital wallets, both within and outside of China.

By examining the recently introduced bills in the US Congress that aim to transition to the widespread adoption of a digital dollar, and considering the extensive research that China has reportedly conducted for the launch of its own digital renminbi, it is logical to deduce that the United States lags behind in its ability to develop and utilise a Central Bank Digital Currency (CBDC). Although the Chinese government, with its authoritarian structure, has the distinct advantage of being able to prioritise an issue and mobilise its populace to find an effective solution, the United States has challenges in achieving the same level of efficiency within its own economic sectors.

In the current digital age, it is crucial for the United States to establish strong alliances and enduring connections with private-sector expertise in order to successfully execute impactful technical advancements. Regrettably, there have been only a limited number of these agreements in the recent past, and the US government may have difficulties in creating a reliable and secure infrastructure for the digital dollar in the upcoming years without them. While there may be doubters about the future of digital money, China's emergence as a strong economic force and its ambition to establish a rival currency to the US dollar, perhaps leading to a global shift towards a variety of currencies, is expected to have an impact on US decision-making.

References:

• Agur, I., Ari, A., & Dell’Ariccia, G. (2022). Designing central bank digital currencies. Journal of Monetary Economics, 125, 62-79.
• Auer, R., Cornelli, G., & Frost, J. (2020). Rise of the central bank digital currencies: drivers, approaches and technologies.
• Fung, B. S., & Halaburda, H. (2016). Central bank digital currencies: a framework for assessing why and how. Available at SSRN 2994052.