China’s Devotion to CBDC Development: Challenging the U.S. Dollar Dominance amid Sino-U.S. Tensions

✔ What is Central Bank Digital Currency (CBDC)?

CBDC stands for Central Bank Digital Currency, referring to the digital form of an official currency issued by a central bank. Unlike conventional cash or electronic deposits, CBDC represents a digital currency directly issued by the central bank. It means that the government creates coins as currency in denominations like 1,000 or 10,000 won.

📌 Why is the U.S. not issuing CBDC?

The approach to developing Central Bank Digital Currency (CBDC) in the United States and China has significant implications as part of their strategic competition in the global economy.

The United States is considering the conflicting relationship between maintaining the dollar’s dominance and developing CBDC. Currently, the U.S. dollar plays a dominant role in international trade and financial markets. Especially, as the world’s primary reserve currency, the dollar holds tremendous influence when purchasing commodities like oil. Even Koreans need to convert to dollars when investing in crude oil. In the end, everyone worldwide has to convert to dollars to buy oil.

If CBDC were to replace the widely used dollar, it would be discomforting for the U.S., which is why the U.S. government holds a negative view of CBDC.

The dollar provides significant advantages to the U.S., and the U.S. might prioritize reinforcing its impact and international trust to support its economy, potentially overlooking CBDC development.

Source: Costfoto | Barcroft Media | Getty Images

In contrast, China is actively pursuing its own CBDC project, experimenting with a digital version of the yuan in various stages. Experts believe that the People’s Bank of China is likely to become the first central bank to fully launch a CBDC.

📌 Why is China devoted to Central Bank Digital Currency (CBDC)?

China’s devotion to CBDC stems from its desire to diminish the status of the U.S. dollar and challenge the U.S.’s position by making China’s CBDC a global reserve currency. Recently, China has been threatening the dollar by using the yuan to settle payments with communist or friendly countries like Pakistan and Russia for oil. Further detailed reasons include:

  • Promoting Internationalization: By using digital yuan as a reserve currency, China can encourage the use of its own currency in international payments and transactions, enhancing China’s economic influence and wider acceptance of its currency worldwide.
  • Strengthening Global Status: The status of a reserve currency is a critical factor representing a country’s global influence and credibility in the international financial market. Therefore, if China gains reserve currency status, its political, economic, and financial influence is expected to be strengthened on a global scale.
  • Enhancing Financial Independence: Since the U.S. dollar currently plays a crucial role in the international financial system, there is a risk of being influenced by U.S. financial sanctions or policies. Through CBDC, China can protect its economy and minimize external influence.
  • Expanding Economic Benefits: CBDC can innovate and streamline financial transactions and payment systems, facilitating digitalization of China’s economy and leading to expanded economic benefits through technological innovation.

📌 Sino-U.S. Tensions and Central Bank Digital Currency (CBDC) Summary

The development of CBDC raises more complex issues than just digitizing currency. As currencies have significant implications on nations’ governance and global influence in the global economy, the introduction of CBDC requires strategic and political considerations.

The U.S. and China’s approaches to CBDC development can be interpreted as competing for the future financial system. The U.S., already positioned at the center of the global financial system, aims to maintain and enhance the dollar’s dominance to protect its dollar hegemony. On the other hand, China seeks to secure future economic advantages and increase global influence by issuing CBDC, intending to innovate its existing financial structure.

Ultimately, the adoption of CBDC necessitates thorough discussions and exploration. Regardless of the direction taken, careful consideration and international cooperation are essential. CBDC will be a crucial element shaping the future of the global economy, and proactive responses and adaptations to such changes are vital. As the U.S. and China pursue their respective strategies at the moment, countries worldwide should carefully consider the impact and possibilities of CBDC adoption and respond actively to this critical juncture.

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