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HomeGeopolitical CompassEast Asia“E-breakout”? Weaponised Interdependence and the Strategic Dimensions of China’s Digital Currency

“E-breakout”? Weaponised Interdependence and the Strategic Dimensions of China’s Digital Currency

Author: Marc Lanteigne

Affiliation: Associate Professor of Political Science, UiT-The Arctic University of Norway (Tromsø, Norway)

Organization/Publisher: Institute of International Relations (Tsinghua University)/ The Chinese Journal of International Politics (Oxford University Press)

Date/Place: Volume 15, Issue 2, Summer 2022 / Beijing, China

Type of Literature: Journal Article

Number of Pages: 22

Link: https://academic.oup.com/cjip/article/15/2/140/6564441

 

Keywords: Globalization, Cryptocurrency, Digital Currency, China, Economic Warfare

 

Brief:

 

The main purpose of this article is to analyze the role of digital currencies in the geopolitics of economic warfare between great powers. The key question that the author is addressing is whether the new digital currency issued by the People’s Bank of China has the potential to develop into a global standard that can be used for international transactions. 

The author writes, “As of early 2022, there were reportedly more than 16,200 other cryptocurrencies in circulation, including widely traded brands such as Ethereum, Dogecoin, Cardano, Tether, and XRP.” El Salvador became the first nation to declare Bitcoin as legal tender in September 2021. Central Banks have been exploring the possibility of digitalizing their currencies. Only a handful of Central Bank Digital Currencies (CBDCs) are in circulation right now. These include the Sand Dollar (Bahamas), the first CBDC to launch formally in October 2020; the DCash programme, overseen by the Eastern Caribbean Central Bank since March 2021; and the eNaira (Nigeria), whose chaotic debut was in October of that year. 

The renminbi, China’s national fiat currency, has been struggling to achieve the status of a global reserve currency. Despite US pressure to prevent the yuan from entering the elite club of reserve currencies, in late 2015 the IMF nonetheless added the renminbi to the Special Drawing Rights (SDR) currency basket, thus bringing the yuan closer to its coveted acceptance as a global reserve currency. Despite this victory, the gap between the yuan and its competitors remains significant. The author writes. “By the third quarter of 2020, 59% of global currency reserves were in US dollars (as opposed to 2.7% in renminbi), albeit down from over 70% since the turn of this century, according to the IMF. And although the renminbi’s gains in cross-border financial transactions in 2021 represented 2.7% of the market that year, surpassing the Japanese yen to become the fourth most traded currency internationally, the US dollar retained pole position at 41%.”

Beijing has been very keen to develop high-technology and also keep a close watch on its top IT firms so as to prevent them from using their powerful tools to dominate the market or be an avenue of external control. China has implemented moves towards more effective regulation of these sectors in order to prevent major technology firms from straying too far from central supervision. Regulating cryptocurrencies has followed Chinese policy in this regard. Owing to the price volatility and decentralised and unpredictable nature of cryptocurrencies, Chinese authorities are wary of their use within the country. After a series of slow prohibitions against cryptomining, in September 2021, the People’s Bank of China formally banned all cryptocurrency transactions and interdicted any foreign exchanges from providing crypto services to citizens in China, reiterating that cryptocurrencies did not carry the same legal status as fiat currencies. In its place, the Chinese made headway in being the first great power to announce working on its own CBDC, the eCNY.

The author believes that although China is years away from being able to institutionalize the eCNY both domestically and internationally for cross-border transactions, China is on a pathway to create alternative strategic depth in the international finance system, whereby it will be able to avoid being subject to global financial pressure in case of sanctions or further tariffs by Western powers. 

The author interprets Beijing’s moves towards digitalization within a broader framework of “decoupling”. The West is keen on creating separate digital zones of influence split between China on the one side and its allies on the other. Until the trade wars between China and the US during the Trump administration, China and the US were part of a single global system.  However, over the last two decades, the US has increasingly moved towards “weaponized interdependence.” Meaning the US and its allies utilize the interdependence created through an asymmetric network of multinational firms for its own interests. “Panopticons” or actors such as the US gain advantage from essential, broad-ranging knowledge gained from network activities. Along special “nodes”, certain actors develop the ability to restrict or withhold access or information from others. These become chokepoints along the network. Powerful states can use these chokepoints to coerce other states. This is seen by others as the weaponisation of certain aspects of economic interdependence.

The author of this article assumes a realist position in geopolitics between China and other world powers. He has a critical view of globalization and the interdependence between states in the global financial system. He is also positive regarding the ability of China to project financial power. He assumes that China will inevitably bypass the current system and be able to create an alternative financial option for itself and insulate itself from sanctions or any other economic warfare tools its competitors may throw at it. This article makes it clear that if the pattern of economic diversification continues, China will de-seat the United States as having currency supremacy. The conclusions of the author are modest and are soundly supported by the evidence provided. It has become self-evident that globalized financial capital does not provide the same advantages to all states. Wealthier states benefit from globalization while developing countries cannot leverage labor power since labor cannot move along the networks of globalization in similar ways. Emerging economies are caught in a struggle to both support development so that means they must try to create more equitable relations between the rich and the poor, yet as they develop, global structures allow them to project power similar to rich countries. The system has a very conservative impetus to disincentivize emerging economies from disrupting the very system that potentially may allow them to also enter into the elite club of dominant economic powers. According to this article, China is no exception. Chinese authorities are not trying to disrupt the global order in order create a more equitable future. Rather, the Chinese are first attempting to protect their own economic interests by creating a digital currency that may insulate them from threats. Because Chinese trade is global, this currency also will have to be useful to facilitate that trade. 

An unintended consequence of this will be that the global financial system will either have to fully accommodate China as a dominant power or make room for two systems. In either case, developing countries or weaker states will be in a difficult position. In the first scenario, China will end up behaving much like the current dominant powers. In the second scenario, developing countries will be forced to choose between camps. The segmented nature of the future world will restrict the room to maneuver in order to secure self-interest. As the West pushes towards decoupling, the first priority of weaker states will be to secure the neutrality or reject camp politics.

 

By: Üveys Han, CIGA Senior Research Associate



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