Western central banks are fighting a defensive battle against cryptocurrencies and the digital yuan. These are undermining the previous supremacy of the political West in the financial system. Why has the West become so defensive that it now has to let other forces impose the law of the land on it?
In January 2021, Augustin Carstens, the head of the Bank for International Settlements (BIS) – the central bank of central banks – was still of the opinion that the benefits of the digital euro for consumers were “limited”(1). He could only see a meaningful application as a means of payment “for banks and companies”(2).
The fact was then, as it is now, that the banking network in Europe is well developed for the supply of cash, and ATMs allow withdrawals around the clock. In mid-2020, even commercial banks were still asking “why ordinary consumers need a digital euro in times of real-time transfers and contactless card payments”(3). In addition, more and more people are using online banking, making cash and going to the bank seem almost completely superfluous.
This made the arguments of the proponents of the digital euro, which would enable faster and cheaper transactions, sound just as flimsy as the argument of greater security against bank failures. After all, bank deposits up to a value of 100,000 euros were already protected against failure by the banks’ deposit protection scheme. Until then, the ECB itself had not been particularly passionate about introducing a digital euro. Until mid-2020, the BIS had to “urge central banks almost on a monthly basis … to embrace digital innovations and challenges”(4).
The foundations of Western monetary policy had been shaken – unnoticed – by the development of blockchain technology. New financial instruments such as cryptocurrencies, the best-known of which is Bitcoin(5), were created on its basis. This and, above all, Mark Zuckerberg’s plans to introduce a private digital currency, Libra, put the central banks under pressure. In its original version, Libra in particular would no longer have been subject to regulation by national central banks. Thanks to the social network Facebook with its hundreds of millions of users, this private currency could have achieved global recognition.
As a result, the EU Commission came to the conclusion that “the digital euro is indispensable. Without a digital euro, the digital currencies of other countries or private cryptocurrencies would spread in Europe and push back the role of the euro”(6). It is therefore about nothing less than averting dangers to “the self-assertion of official monetary policy”(7).
The supremacy of Western financial power, especially that of the dollar, which has dominated the markets for decades, as well as that of the euro as the second strongest reserve currency, threatened to totter. Just how important the introduction of the European digital currency is to Western players is shown by the fact that even the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, urged that “the eurozone must not fall behind other countries”(8) in the upcoming decision on its introduction in October 2023. This unspokenly meant Russia and China in particular.
China is taking off
The growing lead of China and Russia in the field of digital currencies and the consolidation of their cooperation with each other, but also with other countries – especially the sanctioned ones – has led Western central banks to make feverish efforts to catch up.
China and Russia are not explicitly mentioned as the biggest threats. However, the cryptocurrencies that were previously considered to be under pressure have recently lost importance. Due to its sharp price decline, Bitcoin has lost much of its appeal to investors. Even Libra, which had been touted by facebook as another gift for the human family, has now been shown its limits by central banks and legislators. Zuckerberg’s plan was scrapped without a murmur.
The challenges posed by the digital yuan have grown. The Chinese currency is increasingly being used in global trade and is therefore challenging the dominance of Western reserve currencies. According to data from the SWIFT system, it has overtaken the euro for the first time in the area of trade finance. In terms of value, “5.8 percent of all trade finance transferred via the network was settled in yuan. The euro, on the other hand, accounted for 5.43 percent in September”(9), and these are only the settlements within the SWIFT framework.
While the West was unfamiliar with Bitcoin and blockchain thanks to its highly developed banking system, China was quick to recognize and exploit the advantages of this advanced technology. Financial products and applications emerged that offered a cost-effective way to expand the banking and credit system. Even in the most remote areas of China, goods and banking transactions could now be processed in this way without having to have banks located there.
This connection to the Chinese financial system contributed significantly to the development of rural areas and their economies. This was the most urgent task for China. The digital yuan was not launched to compete with the West, but to develop its own financial system and economic potential.
System rivalry and decoupling
Whatever you call it – derisking, decoupling, diversification of supply chains or something similarly innocuous – the US has certainly long regretted its political mistake of making the People’s Republic economically strong. They did not do this out of charity for China but in the interests of their own economy. China was actually only intended as a Western workbench for supplying the world market.
The country initially assumed this role. It wanted to advance its underdeveloped economy and raise the standard of living of its population. The country has succeeded in doing this better than the West had expected. Not only that. China is developing rapidly and economically outgrowing the political West. Without the People’s Republic, nothing would work in the Western world. And where attempts are made, everything becomes more expensive.
Another expectation of the West was not fulfilled either. If China could not be kept at the level of a colony to perform menial labor as the workbench of the world, then it should at least become a market economy based on the Western model. China allowed capitalism, but the Communist Party with its hundred million members retained its leading role in Chinese society.
As a result, the large state-owned enterprises continue to dominate the Chinese economy, and they are nowhere near as backward as the Western image of socialism would have us believe. “The majority of patents in China are applied for by companies that either belong to the state or are dependent on its instructions”(10). The country is becoming not only an economic rival, but increasingly also a technological one. This was not in the script either.
Now the West is trying to reverse this development. They want to contain China and hinder its economic development, even at the cost of damaging their own economy. The political situation between China and the US has become increasingly tense in recent years. With US President Donald Trump, the threats began to become more tangible. Tariffs were imposed, Chinese companies such as Huawei and ZTE were excluded from Western contracts, others were suspended from trading on US stock exchanges.
The Chinese probably soon realized that they would have to prepare for an intensification of the confrontation, even if they repeatedly tried to reach a trade agreement with the US. Although not yet directly affected, it had not escaped their notice that the political West was increasingly lashing out with sanctions.
In 2014, following the coup in Ukraine and the annexation of Crimea by Russia, when Putin was openly threatened with exclusion from the SWIFT system for the first time, China probably also saw the danger for itself and prepared for it. One of these preparatory measures was increased research and investment in the digitalization of the yuan as a guarantee of maintaining financial independence and invulnerability.
The 2022 Winter Olympics were the Chinese Sputnik effect. The country’s success in digitizing its currency was presented to the world for the first time. The digital yuan was the first tangible financial instrument to override the monitoring of trade flows by the Western SWIFT system. The sharp sword of Western sanctions began to become blunter.
But that is not all. The digital yuan can also be seen as a blueprint for other currencies to circumvent sanctions and replace the dollar. More and more countries are developing their own digital currencies and linking them to China and Russia. This means that the digitalization of currencies is coming from China and Russia and is spurring the progress of other countries.
This is because the political West does not yet have any digital currencies on offer. These have yet to be developed, while in Russia and China time is moving forward and with it the development of the economy through these modern systems. The political West now sees itself forced to take such steps if it does not want to fall behind in this area of such currencies.
But actually, the development of these digital offerings brings it few advantages, rather disadvantages. Unlike Russia and China, Western countries have long had a well-developed conventional banking and financial system, albeit with the corresponding costs for staff and buildings. Digitalization now brings additional costs for another payment system, which would not have been necessary given the existing financial infrastructure.
Added to this are social tensions. This is because the advantages of this new system are difficult to communicate to commercial banks and citizens. Banks in the West see this digital currency as competition for their own business model (11). And the mistrust of many citizens(12) tends to grow because they too cannot see the point of a digital currency for themselves. Instead, following their experiences since the financial crisis, many suspect that the intentions behind it are rather opaque and not in their interests.
(1) Frankfurter Allgemeine Zeitung (FAZ) vom 20.1.2021: Ein digitaler Euro in fünf Jahren
(3) FAZ vom 25.06.2020: Digitale Notenbanken
(6 FAZ vom 17.06.23: Der digitale Euro wird konkret
(10) FAZ vom 20.10.2023: China holt rasant auf