Central bank digital currencies have taken flight globally, and China is boldly leading the way. How will China’s digital currency, the e-CNY, serve the political and economic agenda of China’s authoritarian government? What are its implications for the world economy, international security, and the leading role of the United States in global payments and finance? How might the e-CNY and its underlying and related technologies be adopted by other countries? How do we weigh the potential gains in efficiency against the risks to privacy and security? How should the United States respond? To answer these questions, the Hoover Institution brought together distinguished experts in national security, finance, economics, central banking, technology policy, and computer science. This volume presents their findings and proposes a pathway toward revitalizing US financial leadership on the international stage in the digital age. The United States must respond to a spectrum of key policy concerns raised by the e-CNY and improve incentives for innovation and competition in its own payment systems. It should expedite development of technology and standards for a possible digital dollar. And it should advocate for democratic norms of privacy, accountability, transparency, and security in shaping the global rules surrounding central bank digital currencies.
McDonald’s Shanghai accepts it. So do millions of other retailers in China. The digital yuan, or e-CNY, China’s central bank digital currency (CBDC), is muscling its way into a vast consumer market. Over 250 million Chinese people have already opted into it. On January 5, 2022, the day after its launch, an e-CNY wallet was the most downloaded app on Apple’s iOS App Store in China.
The e-CNY is also crossing borders. An experiment of the Bank for International Settlements, the m-CBDC Bridge, is enabling cross-border CBDC payments between Thailand, Hong Kong, the United Arab Emirates, and China. The Chinese telecom giant Huawei has also preinstalled an e-CNY wallet in its Mate 40 smartphone line, helping to extend the e-CNY’s reach into new markets.
Why is China deploying a CBDC? The e-CNY will be a digital substitute for paper money, grant more Chinese people access to the banking system, and provide Beijing with greater oversight and control of business and individual financial transactions. The e-CNY also enhances Beijing’s ability to exercise political control over Chinese society. In addition, China has a significant opportunity on the global stage to cement its international leadership of payment technology innovation and adoption, set economic norms and technical standards that align with its authoritarian governance system, and increase its ability to undercut the traditional dominance of the US dollar as a source of geo-economic and strategic influence. Over time, the spread of the e-CNY might diminish the role of the dollar as the world’s reserve currency and undermine the ability of the United States to deploy financial sanctions against rogue international actors.
China is not alone. Many countries, from South Korea to the Bahamas, have joined in the global CBDC gold rush. The United States, however, has held back. If Washington does not move quickly to adopt a more proactive strategy, it risks its leading role in global finance and financial technologies, eroding the strategic influence of the US dollar.
This volume analyzes these developments and provides a path for US policy makers to help ensure continued US leadership within the global financial system in the face of this potentially transformative new financial instrument. It remains agnostic as to whether the United States should ultimately adopt a CBDC but argues that, for both continued economic competitiveness and global influence, Washington must strive to lead in the digital currency revolution. Three broad recommendations stand out:
- The United States should launch a well-resourced CBDC research and development effort drawing on the talent of US government, private sector, and university actors to ensure privacy, prevent illegal payments, and provide for a competitive and innovative payment landscape. The Boston Fed’s partnership with MIT, Project Hamilton, is an early example of such collaboration.
- The United States should establish a strategic plan for payment systems in the US digital economy that provides for the development of data privacy standards and the integration of CBDCs, fast-payment systems, and private payment arrangements such as stablecoins.
- The United States should step up to lead the development of an international regulatory framework around digital currencies, including CBDCs, that prioritizes consumer protection, privacy, financial anti-crime compliance, financial stability, and the protection of monetary sovereignty.
About the Editors:
Darrell Duffie is the Dean Witter Distinguished Professor of Finance at Stanford University's Graduate School of Business, professor (by courtesy) at the Department of Economics, and Senior Fellow (by courtesy) at the Hoover Institution. Duffie is a fellow of the Econometric Society, a research fellow of the National Bureau of Economic Research, and a fellow of the American Academy of Arts and Sciences.
Elizabeth Economy is a senior fellow at the Hoover Institution at Stanford University and a senior fellow for China studies at the Council on Foreign Relations, where she previously served as the C.V. Starr senior fellow and director for Asia Studies for over a decade. Economy is currently serving as a senior foreign advisor in the Department of Commerce for the current administration. Economy is an acclaimed author and expert on Chinese domestic and foreign policy.
About the Contributors
Reena Aggarwal, Robert E. McDonough Professor of Finance, and director, Center for Financial Markets and Policy at McDonough School of Business, Georgetown University. Professor Aggarwal specializes in capital raising, IPOs, institutional investors, ETFs, market microstructure, financial regulation, corporate governance, ESG, and fintech.
Dan Boneh, professor of computer science and electrical engineering, Stanford University. Dr. Boneh heads the applied cryptography group and codirects the Stanford Center for Blockchain Research. His research focuses on cryptosystems with novel properties, cryptography for blockchains, and cryptanalysis.
Jared Cohen, founder and CEO of Jigsaw. He is an adjunct senior fellow at the Council on Foreign Relations and an outside adviser to Andreessen Horowitz.
Larry Diamond, senior fellow, Hoover Institution, Stanford University, and Mosbacher Senior Fellow in Global Democracy at the Freeman Spogli Institute for International Studies, Stanford University. Dr. Diamond is also a professor, by courtesy, of political science and sociology at Stanford. He cochairs the Hoover Institution’s programs on China’s Global Sharp Power and on Taiwan in the Indo-Pacific Region.
Darrell Duffie, Adams Distinguished Professor of Management and Professor of Finance, Stanford Graduate School of Business. Dr. Duffie is a senior fellow, by courtesy, of the Hoover Institution, Stanford University; professor, by courtesy, at the Stanford Economics Department; a senior fellow of the Stanford Institute of Economic Policy Research; and a research associate of the National Bureau of Economic Research.
Elizabeth Economy, senior fellow, Hoover Institution, Stanford University. Dr. Economy previously served as the C. V. Starr Senior Fellow and director of Asia studies at the Council on Foreign Relations for more than a decade. She is the award-winning author of four books, most recently The World According to China (Polity Press 2021) and a member of the Aspen Strategy Group.
Yaya J. Fanusie, chief strategist at Cryptocurrency AML Strategies and adjunct senior fellow at the Center for a New American Security. Mr. Fanusie is a former CIA analyst. Now in the private sector, he consults on anti-money-laundering work related to digital assets and conducts research on the national security implications of global fintech innovation.
Niall Ferguson, Milbank Family Senior Fellow, Hoover Institution, Stanford University; fellow, Royal Society of Edinburgh; and senior faculty fellow, Belfer Center for Science and International Affairs at Harvard. He is the author of sixteen books.
Hon. J. Christopher Giancarlo, former chairman of the US Commodity Futures Trading Commission. Mr. Giancarlo is senior counsel to the international law firm Willkie Farr & Gallagher and a cofounder of the Digital Dollar Project, a not-for-profit initiative to advance exploration of a US central bank digital currency. He is the author of CryptoDad: The Fight for the Future of Money (Wiley 2021).
Lauren Gloudeman, director for China at Eurasia Group. She covers China’s macroeconomy, property sector, and financial policies.
Zhiguo He, Fuji Bank and Heller Professor of Finance, and Jeuck Faculty Fellow, Booth School of Business, University of Chicago. Professor He is a financial economist with a specialty in macroeconomy, banking, and the Chinese economy.
Samantha Hoffman, senior analyst, Australian Strategic Policy Institute (ASPI). Her research explores the global implications of the Chinese party-state’s approach to state security. Dr. Hoffman is a coauthor of The Flipside of China’s Central Bank Digital Currency (Australian Strategic Policy Institute 2020).
Matthew D. Johnson, visiting fellow, Hoover Institution, Stanford University. Dr. Johnson is the research director of Garnaut Global and a coauthor of The Flipside of China’s Central Bank Digital Currency (Australian Strategic Policy Institute 2020).
Stuart Levey, CEO, Diem Networks US. Mr. Levey was the undersecretary of treasury for terrorism and financial intelligence in the Bush and Obama administrations (2004–11) and the chief legal officer of HSBC Holdings (2012–20).
Sigal Mandelker, general partner, Ribbit Capital. Prior to Ribbit, Ms. Mandelker served in a number of senior roles in the US government, including as undersecretary of treasury for terrorism and financial intelligence. She has held high-ranking positions in the US Departments of Justice and Homeland Security. She also clerked on the US Supreme Court.
David Mazières, professor of computer science, Stanford University. He leads the Secure Computer Systems research group and codirects the Future of Digital Currency Initiative.
H. R. McMaster, Fouad and Michelle Ajami Senior Fellow, Hoover Institution, Stanford University. Lt. Gen. (Ret.) McMaster served in the US Army for thirty-four years. He was the twenty-sixth assistant to the president for National Security Affairs and is the author of Battlegrounds: The Fight to Defend the Free World (Harper 2020).
Evan S. Medeiros, professor and Penner Family Chair in Asian Studies in the School of Foreign Service, Georgetown University. He previously served for six years on the staff of the National Security Council (2009–15).
Neha Narula, director, Digital Currency Initiative, MIT Media Lab. Dr. Narula leads research and development on central bank digital currency and securing decentralized cryptocurrencies. She received her PhD in computer science from MIT in 2015, where she published work on fast, scalable databases.
Monika Piazzesi, Joan Kenny Professor of Economics at Stanford University. Professor Piazzesi is a research associate at the National Bureau of Economic Research, where she was the director of the NBER Asset Pricing Program. She is also a fellow of the Academy of Arts and Sciences and the Econometric Society, and was a Guggenheim Fellow in 2015–16.
Matthew Pottinger, distinguished visiting rellow, Hoover Institution, Stanford University. Mr. Pottinger served at the White House for four years in senior roles on the National Security Council staff, including as deputy national security advisor from 2019 to 2021.
Eswar Prasad, professor, Cornell University; senior fellow, Brookings Institution; and research associate, National Bureau of Economic Research. Professor Eswar is a former head of the IMF’s China Division. His new book is The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance (Belknap Press 2021).
Raghuram Rajan, senior fellow, Hoover Institution, and the Katherine Dusak Miller Distinguished Service Professor of Finance, Booth School of Business, University of Chicago. Professor Rajan was the twenty-third governor of the Reserve Bank of India (2013–16) and vice chairman of the board of the Bank for International Settlements (2015–16).
Nadia Schadlow, visiting fellow, Hoover Institution, Stanford University, and senior fellow, Hudson Institute. Dr. Schadlow is a strategist and practitioner of national security who served as the architect of the 2017 National Security Strategy.
Richard Sokolow, managing director and director of research, Davidson Kempner Capital Management. Over the past thirty years, Mr. Sokolow has created and run global investment research teams for major multistrategy private investment funds and business intelligence firms. Prior to that, he worked as a Washington, DC–based investigative reporter.
John B. Taylor, George P. Shultz Senior Fellow in Economics, Hoover Institution, Stanford University, and Mary and Robert Raymond Professor of Economics, Stanford University. Professor Taylor served as a senior economist and member of the president’s Council of Economic Advisers, undersecretary of the treasury, and president of the Mont Pelerin Society.
Glenn Tiffert, research fellow, Hoover Institution, Stanford University. Dr. Tiffert is a historian of modern China and cochairs the Hoover Institution’s project on China’s Global Sharp Power.
Robert M. Townsend, Elizabeth and James Killian Professor of Economics, MIT. Professor Townsend is a theorist, macroeconomist, and development economist whose latest work is Distributed Ledgers: Design and Regulation of Financial Infrastructure and Payment Systems (MIT Press 2020).
Matt Turpin, visiting fellow, Hoover Institution, Stanford University. He served as a China director at the US National Security Council, in the Commerce Department, and for twenty-two years in the US Army.
Kevin Warsh, Shepard Family Distinguished Visiting Fellow in Economics at the Hoover Institution and lecturer at the Stanford Graduate School of Business. He is an adviser to the Duquesne Family Office and served as a member of the Board of Governors of the Federal Reserve System from 2006 to 2011.
Chenggang Xu, visiting fellow, Hoover Institution, Stanford University; visiting professor, Imperial College; honorary professor, University of Hong Kong; and research fellow, Centre for Economic Policy Research. Professor Xu was the Chung Hon-Dak Professor of Economics at University of Hong Kong and president of the Asian Law and Economics Association.