The Foreign Service Journal, April 2023

22 APRIL 2023 | THE FOREIGN SERVICE JOURNAL Playing Catch-Up with China’s Fintech Strides FOCUS ON DIGITAL CURRENCY: A NEW FRONTIER FOR DIPLOMACY T he People’s Republic of China (PRC) is implementing a long-range strategy to challenge U.S. dominance in international finance without directly trying to compete with the U.S. dollar in the short run. China is a few years into a pilot of its central bank digital currency (CBDC), a digital version of the Chinese yuan or renminbi. While still in its early stages, the pilot shows part of the PRC’s approach to global economic competition: to advance and gain influence in technologies that it deems will be strategically important in the future of global commerce. Financial technology (fintech) is one of those areas. By prioritizing digital financial innovation, the PRC is not seek- ing to make the yuan immediately more attractive than the dollar. Rather, it is aiming to lead a global push for alternative payment rails running on new technology that would, over time, obviate the need to go through U.S. banks, or to at least reduce the need to go through financial infrastructure and institutions highly influenced by the United States. The United States’ best response to this PRC strategy is a strong offense of digital finance innovation in its own right, because the future of money will likely depend on how fintech evolves. Yaya J. Fanusie is a former CIA analyst. He is the director of policy for anti-money laundering and cyber risk at the Crypto Council for Innovation. He is also an adjunct senior fellow at the Center for a New American Security. The evolution of financial technology will likely determine the future of money, not to mention the world balance of power. China’s work on digital currency is a pointer. BY YAYA J . FANUS I E Fintech and National Security The United States has led the global financial system for more than 70 years. It maintains this position of primacy because of the strength of the U.S. dollar in international currencymarkets and the high relevance of U.S. banks in facilitating cross-border trade.The dollar is the leading global reserve currency. Any foreign bank that wants to operate broadly in the global financial community needs access to dollars and, thus, needs U.S. banking relationships.This gives the U.S. tremendous leverage in economic statecraft and gives U.S. financial coercion tools like sanctions their potency. In 2016 I began looking closely at the national security implica- tions of new technologies like cryptocurrencies and blockchain. My research inquiries first focused on non-state actors, like terror- ist groups using Bitcoin and other digital tokens. But I soon found that U.S. adversary nations like Russia, Iran, Venezuela, and China were also exploring blockchain. In some cases, politicians in these states claimed openly that they wanted to use blockchain systems to evade U.S. sanctions. Early attempts were not so fruitful, with Venezuela being a perfect example. In late 2018, the Nicolas Maduro regime created a simple cryptocurrency it called the “petro,” which it marketed as a way to conduct international trade outside the global banking system. But the launch of a crypto token did not change the fundamentals of Venezuela’s disastrous economy or offset its political corruption and instability. Nor did the regime build the necessary digital infrastructure to support its proposed alternative payment rails. There was no well-developed system for dispersing the token to citizens, nor were domestic busi- nesses set up to accept it.