Beijing didn’t take Mark Zuckerberg lightly when he came up with his grand idea of a world currency, one that could meet the "daily financial needs of billions of people.” Nor is it ignoring the current buildup of excitement around stablecoin regulation in the U.S.
China’s powerful e-commerce firms and Hong Kong’s financial chops have prepared it well against the upcoming tsunami of digital dollars.
The Facebook founder’s 2019 Libra blockchain (renamed Diem) threatened to unleash a similar wave of dollarization, in which the greenback — or a synthetic payment unit dominated by it — would supplant local currencies.
China, which has long yearned to be free of the dollar’s hegemony, was particularly worried of being overwhelmed. So it readied an official, digital copy of the yuan that could compete against the Libra, while keeping monetary affairs firmly in state control. But after the Libra/Diem project was shot down by U.S. regulators, Beijing was spared the urgency to respond.
This time around, however, the challenge is more serious. President Donald Trump is hugely supportive of the crypto industry. Tether’s USDT and Circle’s USDC and all other 1:1 dollar clones will have U.S. regulatory backing. That may win them mass acceptance both at home and beyond America’s borders. Treasury Secretary Scott Bessent is not wrong; Such private instruments can be a tool of extended dollar dominance.
The U.S. debate around tokenized cash is mostly about commercial interests. Crypto upstarts — and even retail giants — are set to storm the moat of payment-industry stalwarts. Shares of Visa and Mastercard stumbled recently after the Senate passed the stablecoin act and Coinbase said it would allow USDC to be accepted by Shopify merchants. Amazon.com and Walmart are weighing their own tokens, according to the Wall Street Journal. With their retail deposits at stake, big U.S. banks won’t be far behind.
Outside the U.S., however, digital dollars are rightly being viewed as much more than a danger to the payment industry’s profit pools and the banking sector’s deposit base. They could be a potent geopolitical weapon. So what will Beijing do to fight it? The official digital yuan, a project that was accelerated in response to Zuckerberg’s Libra, isn’t exactly a bazooka. Even domestically, the use of the e-CNY has been rather limited.
Nor has it made much headway outside China. Monetary authorities in other countries that could have facilitated the exchange of e-CNY into their domestic legal tender, and vice versa, have lost interest in central bank digital currencies, particularly the retail variety. For China, which is already embroiled in a trade and technology spat with the U.S., all this makes for a dangerous vulnerability.
Legal bans on changing yuan into unauthorized crypto won’t keep out digital dollars. After all, China makes things for the world. A lot of these suppliers are small firms. If they start accepting virtual dollars on foreign websites to avoid the high fees and unfavorable exchange rates that plague traditional cross-border payments, Chinese households will invariably end up with crypto balances hidden from authorities’ view. They can spend this hoard not just on overseas holidays, education and fashion, but also on foreign real estate and Bitcoin. China’s capital controls could be shot and its freedom to set domestic interest rates might come under pressure.
Before any of this comes to pass, however, China will play the ace up its sleeve: Hong Kong.
Beijing has encouraged the special administrative region to become Asia’s premier digital-asset hub. By extending the protection of its securities law to the lawless world of tokens changing hands on public blockchains, the city has been steadily building up trust in crypto. It has 11 licensed virtual-asset exchanges. From August, it will have its own stablecoin law, which may be used by the likes of Standard Chartered and Ant Group, an affiliate of the e-commerce giant Alibaba Group Holding, to offer Hong Kong dollar coins. JD.com even has a working name for its token: JINGDONG.
Small Chinese suppliers on Alibaba or JD.com will be comfortable accepting payments from overseas customers in Hong Kong dollar stablecoins. Not only will they avoid hefty transfer fees, they will also know that the transactions have Beijing’s blessing. They will trust their money to be safe, held in custody at a regulated exchange in a city whose currency is pegged to the greenback. China may even encourage firms in Belt and Road countries to use these instruments. The next step in this journey will be digital tokens tied to the offshore yuan.
China is far from unprepared for the coming assault by American crypto bros. It has strong e-commerce platforms, well positioned to make the most of Hong Kong’s crypto-friendly fintech industry. The combination may be enough to keep dollarization at bay.
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