Blokkx Ltd November 2019
China’s digital central bank currency has displaced the dominance of the US dollar in the global financial system, North Korea is using the E-Yuan to build nuclear missiles and has hacked the SWIFT system in a cyberattack in which several billion US dollars were stolen — a setting staged by high-ranking political and economic officials in a war game scenario. The issue was the possible threats posed by a Chinese CBDC that could redistribute global power. The scenario shows: In an emergency, the USA is sitting on a shaky chair.
At the Institute of Politics of the Harvard Kennedy School on Tuesday, November 19, the public could watch a particular chamber play. High-ranking representatives from politics and business have designed a scenario that simulates a currency war between China and the USA. Two opposing positions met to counteract the fall of a global change of power with different means.
The scenario: Participants played members of the National Security Council (NSC) meeting in 2021 to discuss potential threats to the US from China’s introduction of a digital central bank currency (CBDC). A few days earlier, North Korea successfully conducted a missile test funded by the digital yuan to circumvent US sanctions. Hackers also gained access to the SWIFT network, stealing billions of dollars.
The axes of political and economic supremacy have reversed. China has displaced the USA in the financial sector. The participants played through the consequences of a redistribution of political power and the means available to the USA against such a threat.
A question of national security
Neha Narula, Director of the Digital Currency Initiative at MIT Media Lab, played an advisor to the US President. For her, “the competitiveness of the US dollar is a question of national security”. So far, the US dollar has had “incredible significance”, partly because the US can “arm” it by imposing economic sanctions, she said. This dominant position of the US currency “could change if suddenly another currency becomes more interesting”.
High-ranking representatives of US policy
Among the highly decorated participants were among others:
- Eric Rosenbach, former Pentagon Chief of Staff and former Defence
- MinisterAshton Carter, former Defence Minister
- Lawrence Summers, former US Secretary of the Treasury and Harvard Professor of Economics
- Gary Gensler, former secretary of state at the US Treasury Department and
- Meghan O’Sullivan, former deputy advisor on national security.
The scenario did not only serve to entertain the audience. The purpose of the crisis discussion was rather to draw the public’s attention to possible threats and to illustrate potential dangers for world politics. Narula commented:
I hope that the simulation will make people think about what the effects of digital currencies are and that people will think about it now and not later. I think it could almost serve as a template or guide to get the conversation going on these issues.
The E-Yuan threatens US power
According to Lawrence Summers, former US Treasury Secretary, the US still can act because of its supremacy in the global financial system. Since other nations are pegged to the US dollar as a reserve currency, the US could use sanctions to steer the development of other countries. However, the introduction of China’s digital central bank currency could shift the balance of power. The political stability is therefore endangered from the US point of view.
Primarily with regard to North Korea, China represents a key position and is regarded as an extended arm of Western influence. That is why former Finance Minister Summers said:
Our ability to disastrously sanction North Korea depends on Chinese cooperation […] that was true before the digital yuan, and that is now true in the presence of the digital yuan.
However, the US could lose its dominant position to other nations, said Gensler, who in the simulation played the president’s assistant for economic policy. Russia has already begun to take over China’s Cross Border Interbank Payment System (CIPS), strengthening its strategic position as a trading partner.
The USA no longer King of the Hill
O’Sullivan, who played the vice-president in the simulation, argued that the US must move out of isolation and deepen trade relations with other nations. For her, the path of the USA as the sole world power was not the right one. Instead, the “path of branching the world economy” had to be followed.
Although Washington could take measures to strengthen its financial dominance temporarily, the danger of a global turning away from the US dollar through the emergence of a Chinese CBDC would remain. The balance of power could be distributed in such a way that “the USA is no longer King of the Hill”, O’Sullivan said and added:
We may already be in a world where we are not financially dominant, certainly not in every area, and so we need to think about what to do with the rest of our foreign policy instruments.
Summers added that the US could not influence this state of affairs by merely introducing a digital central bank currency:
If we have our digital yuan, digital dollar, national Venmo or whatever, it will not affect the ability of other currencies.
Threats to SWIFT
Throughout the discussion, it was repeatedly noted that the US bases its sanctions policy on the SWIFT system. SWIFT is an organization that operates a telecommunications network that is used by more than 11,000 banks worldwide, and that is instrumental in stabilizing the global financial sector.
Towards the end of the simulation, North Korea stole three billion US dollars from the SWIFT interbank messaging system. Instead of investing in a weak US dollar, this is driving other nations to invest in the digital yuan. The E-yuan would undermine the dominance of the US dollar globally.
This hacker attack is not a purely hypothetical scenario. In the past, SWIFT hackers have already captured millions of dollars. Summers said:
At the moment, we have a network that doesn’t work very well.
According to Summers, the US should strengthen the SWIFT network rather than consider a US central bank digital currency. In his view, another nation’s currency would not pose a threat to the US.
Europe is a museum
The development of a separate E-Dollar could be “the worst idea in the world”, as it could waste resources and focus attention on avoiding the problem, Summers said and added:
Let’s be honest here in the conference room. Europe is a museum, Japan is a nursing home, and China is a prison, and we don’t have to worry that these currencies pose some significant threat to us. A hardened SWIFT that is safe must be our top priority.
Ashton Carter, who in the simulation occupied his old post as defence minister, said he saw no reason for a digital currency to replace the SWIFT system. The US should continue to stabilize the system it has been working on for decades.
A glimpse into the glass ball
In the discussions between the participants, it was above all the opposing positions that came to the fore, on the one hand, in favour of the development of a US central bank currency and, on the other, in favour of strengthening the SWIFT system. The arguments weigh heavily on both sides.
The direction of US policy should also be decided soon. The scenario has shown one thing: Time is of the essence. From the US perspective, the threat is real and could move in the near future as a result of China’s CBDC efforts and North Korea’s powder keg. If the US wants to retain the power to act in the international financial system, it must set the course now — if it is not already too late.