China’s central bank digital currency (CBDC) has undermined the dollar’s dominance of the global financial system. North Korea has used the digital yuan to build and test nuclear missiles, safely evading financial sanctions imposed by Washington. And malicious actors are stealing funds from the SWIFT communications network to prove a point.
But don't worry. It's only a game, for now.
These scenarios were dreamed up by an all-star cast of former high-ranking U.S. officials during a wargaming exercise conducted Tuesday night. The simulated principals committee meeting (PC meeting) was held by the Harvard Kennedy School and Belfer Center for Science and International Affairs in Cambridge, Massachusetts.
The Beltway veterans played the roles of National Security Council (NSC) members who convene in 2021 to discuss the potential threat to the U.S. after China rolls out its proposed CBDC.
The imaginary meeting takes place a few days after North Korea has conducted a major missile test using materials purchased with the digital yuan.
“The competitiveness of the U.S. dollar is a matter of national security,” said Neha Narula, portraying a digital currency czar and advisor to the U.S. president in the discussion. Even in the simulation’s timeline, “we are still in a place where the U.S. dollar is the world’s reserve currency.”
The dollar “has incredible importance” because the U.S. can “weaponize” it through the use of sanctions, she said.
“That could change if suddenly another currency becomes more interesting and more viable,” Narula said. “We have to keep pace for this innovation.”
A veritable who’s who of government and academia participated in the exercise, including former U.S. Defense Secretary Ash Carter; former Commodity Futures Trading Commission Chairman Gary Gensler; former Under Secretary of State for Political Affairs Nicholas Burns; former Deputy Assistant Secretary of the Treasury Jennifer Fowler; former special assistant and Deputy National Security Advisor Meghan O’Sullivan; former Secretary of Defense Chief of Staff Eric Rosenbach; former Treasury Secretary Lawrence Summers; former Ambassador to India Richard Verma; MIT’s Digital Currency Initiative director Narula; and Belfer Center executive director Aditi Kumar.
Before the exercise began, Narula told CoinDesk that her hope was lawmakers and other regulators might be paying attention.
“I hope [the simulation] gets people really thinking [about] what the impact of digital currencies are, and it gets people thinking now and not later,” she said. “I think it could almost serve as a template or a guide to sort of kick-start the conversation around these issues.”
The U.S.’s dominant role in the global financial system enables it to cut off adversaries, but it is also largely dependent on cooperation with other nations, Summers said, reprising his role as the Treasury Secretary for the exercise.
In this regard, China’s central bank digital currency is perhaps less impactful on dollar hegemony than is the U.S.’s diplomatic relations with the world’s most populous country.
“Fundamentally, our ability to sanction North Korea in a devastating way depends on Chinese cooperation … that was true before the digital yuan and that is true now in the presence of the digital yuan,” he said.
However, the U.S. may not be able to exert its mighty influence for much longer, said
Gensler, who played the assistant to the president on economic policy in the simulation. It could take China decades to build up the infrastructure needed to fully compete with the dollar, but in real life, countries are already taking steps to move away from the greenback.
Russia, as one example, has already begun adopting China’s Cross-Border Interbank Payment System (CIPS), he said.
In the game, Chinese authorities have claimed the digital yuan “is fully portable,” said Kumar, meaning different countries can create their own instances of the system by choosing banks and payment providers as node participants based around the Chinese central bank digital currency infrastructure.
Aside from sanctions, “I also worry about ‘are we going down the road of bifurcating the global economy’ and ‘how far down are we on that road’ and ‘do our options actually take us further down that road?’” said O’Sullivan, playing the vice president of the United States in the simulation.
Though Washington could take measures to shore up its financial dominance, it is entirely possible that the emergence of China’s digital currency and other moves away from the dollar mean the world is transitioning to one where the U.S. is not the king of the hill, O’Sullivan said.
“We may already be in a world where we're not financially dominant, certainly not in every sphere, and so we have to think about what do we do with the rest of our foreign policy tools?” she said.
Summers acknowledged this possibility, but dismissed the suggestion that the U.S. issuing its own digital currency could have an impact on this state of affairs.
“If we have our own digital yuan, digital dollar, national Venmo, whatever the hell it is, it will do nothing to interfere one whit with the ability of others,” he said.
Threats to SWIFT
Throughout the discussion, American reliance on the SWIFT system as part of its sanctions regime was repeatedly noted.
In a twist near the end of the simulation, imaginary North Korean actors stole $3 billion from the SWIFT interbank messaging system to push other countries toward the digital yuan. This sort of theft is not without precedent: malicious actors have already stolen millions from SWIFT in the past.
“Right now we have one network that doesn’t work very well,” Summers said.
The U.S.’s path forward should be reinforcing SWIFT, rather than contemplating a U.S. central bank digital currency, he said. No other nation’s currency, digital or otherwise, is a legitimate threat to the U.S. in his view.
“Let's be honest here in the Situation Room. Europe's a museum, Japan's a nursing home and China's a jail and we don't need to worry about those currencies being some kind of major threat to us,” Summers said. “A hardened SWIFT that will be secure has to be our first priority.”
Developing a separate digital dollar project might be “the worst idea in the world,” as it could dilute resources and attention, he said.
Verma, playing the U.S. ambassador to China in the simulation, said his recommendation would be to see how the U.S. can partner with the Chinese government on its ongoing payments efforts.
“We’re upset in this room because they got there ahead of us,” he said.
There’s also the question of why any nation or group would move to China’s central bank digital currency.
Carter, back in his old Defense Secretary’s chair for the simulation, said he does not see any logical reason for a digital currency replacing SWIFT, “but there is something psychological and we have to take that seriously.”
The U.S. should continue backing the system it has worked on for decades, he said.
"I think much of the world's economy supports that for a very good reason, there's no particular reason for them to go for the Chinese alternative now,” Carter said.
Image via Harvard Kennedy School
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