China could reduce reliance on US dollar and avoid sanctions with digital currency apps

The People’s Bank of China has rolled out a digital currency app that will allow users in 10 of the country’s major population centers to create e-wallets and make purchases using a digital version of the country’s currency, the renminbi.

Unlike cryptocurrencies such as Bitcoin and Ethereum, the digital form of the renminbi is controlled by the country’s banking system and can be regulated by a much higher level of government oversight.

By introducing the pilot version of this digital currency system, China is ahead of the United States when it comes to deploying a government-backed digital payment method. At the moment, the United States is still in the research phase as the popularity of unregulated cryptocurrencies continues to rise.

As crypto goes mainstream and 39 countries enter the development, pilot and launch phases of their digital currencies, the United States may see its dollar become less influential.

Since the US dollar is currently the main world currency, China often has to use dollars in international trade. However, Scott Kennedy, senior adviser and chairman of Chinese business and economic administration at the Center for Strategic and International Studies (CSIS), said News week that the rise of digital currencies could potentially allow China to largely get rid of the dollar as an intermediate currency when entering into agreements with its allies.

China could see greater economic independence through its use of digital currency. Here, Chinese President Xi Jinping is seen on a video screen as he addresses the United Nations General Assembly on September 21, 2021 in New York City.
Photo of Mary Altaffer – Pool / Getty Images

“The vast majority of (China’s) financial flows are in dollars,” Kennedy said. “But if a central bank wanted to hold renminbi, a digital currency might make that a little easier to do.”

If digital currencies do facilitate trade without using the dollar as an intermediate currency, China could end up with greater financial autonomy when reaching deals with its allies, which could also allow it to avoid sanctions. Americans when conducting business that is against American interests.

Kennedy said China could use its digital currency to avoid performing financial transactions through the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which could allow it to avoid U.S. sanctions.

SWIFT is a secure communications system that allows banks to electronically send money abroad for business transactions. Although the bank is independent from the United States, it is mainly supervised by the Group of 10 which includes Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. these nations are often aligned, SWIFT has in the past followed American demands, such as when it kicked out the Iranian central bank in 2012.

Kennedy said China’s digital currency could allow it to trade outside of SWIFT, allowing it to evade any potential future U.S. sanctions.

“(China) wouldn’t need this SWIFT interbank communication system. It’s the only way for the United States to actually stop any of these transactions,” Kennedy said. “There are many different types of economic and political power that can arise from the world using your currency. “

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