China Could Curb Reliance on U.S. Dollar, Avoid Sanctions Through Digital Currency Apps

The People's Bank of China unrolled 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 through a far greater level of government oversight.

In introducing the pilot version of this digital currency system, China steps ahead of the United States when it comes to unrolling a government-backed digital form of payment. At the moment, the U.S. still finds itself in the research phase as the popularity of unregulated cryptocurrencies continues to rise.

As crypto becomes more widespread and some 39 countries enter the development, pilot, and launch phases of their digital currencies, the U.S. could see its dollar become less influential.

Because the U.S. dollar currently stands as the primary global currency, China often must use dollars when conducting international trade. However, Scott Kennedy, senior adviser and trustee chair in Chinese business and economics at the Center for Strategic and International Studies (CSIS), told Newsweek that the rise of digital currencies could eventually allow China to largely do away with the dollar as an intermediary currency when conducting deals with its allies.

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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 by Mary Altaffer - Pool/Getty Images

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

If digital currencies do in fact make it easier to conduct trade without the use of the dollar as an intermediary currency, China could find itself with a greater level of financial autonomy when making deals with its allies which could also allow it to avoid American punishment when conducting business that runs in contrast to American interests.

Kennedy said China could use its digital currency to avoid conducting 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 overseas when conducting trade. Though the bank is independent of the United States, it is primarily overseen by the Group of 10 that includes Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the U.S. Because the interests of these nations are often aligned, SWIFT has in the past followed American demands, such as when it expelled Iran's central bank in 2012.

Kennedy said that China's digital currency could allow it to conduct trade outside of SWIFT, allowing it to escape any potential future U.S. sanctions.

"(China) wouldn't need that SWIFT interbank communication system. It is the only way for the U.S. to actually stop any of these transactions," Kennedy said. "There are a lot of different types of economic and political power that can flow from having the world use your currency."