On October 14, former Deputy National Security Adviser Daleep Singh—who left the Biden administration in June—debated Federal Reserve Board Governor Christopher J. Waller during Harvard Law School National Security Journal’s symposium on Digital Currency and National Security Symposium. Here are Singh’s full remarks on the merits of central bank digital currencies (CBDCs), which cites Atlantic Council GeoEconomics Center research.
Good morning, everyone. First, thank you, Professor Jackson, for inviting me to this event, to Harvard Law School for hosting this symposium, to everyone here for their interest, and most of all Governor Waller for agreeing to a friendly verbal joust!
I’m now a few months removed from my time at the White House, where my job—in plain English—was focus on strategic challenges at the intersection of international economics and national security.
And looking back, I’d be hard pressed to think of any topic that better captures the essence of that job than to help shape the future of money—how it’s created, what it’s used for, where it flows, whether it’s seen, and—ultimately—who’s in control. The question before us today is whether and how to pursue a CBDC, and the geopolitical context really matters. We’re having this discussion against the backdrop of most intense period of great power competition we’ve faced in decades—perhaps since World War II—in which the use of economic tools are being deployed with greater frequency and potency than ever before. This isn’t a conversation that belongs solely within the realm of economic policy or national security. It’s not a technocratic choice that can be made inside the walls of the Federal Reserve and Treasury Department, nor is it a judgment that we should leave to the political, or geopolitically minded parts of the US government. The stakes involved in our digital assets strategy deserve and require an interdisciplinary conversation like today’s symposium, cutting across economics, finance, foreign policy, technology, and the law – so once again I want to thank the organizers for bringing us together.
To be clear, the same blurry line of responsibility exists for a long and growing list of policy efforts at an historical moment in which a nation’s ability to project power—and exert influence—is increasingly measured and exercised in economic terms. Take, for example, US efforts to shape a national innovation strategy—to set a course that sustains and enhances our global leadership in foundational technologies like AI, quantum, biotech, semiconductors, robotics, and hypersonics—each with outsized promise to boost our economic growth potential and military prowess. Or consider the efforts to strike a better balance between the efficiency and resilience of supply chains—such as semiconductors, clean energy, and pharmaceutical products—with critical importance to our economic output and national security. Or to chart a course on climate policy, trade, corporate taxation, export controls, investment restrictions, global infrastructure finance, and a growing list of strategic priorities that will shape America’s enduring capacity to lead on the world stage.
The point I’m making is that the challenges of crafting a US strategy around digital money are profound but not unique, and the path forward will require us to balance domestic economic considerations around market efficiency, credit creation, financial inclusion, consumer protection, and financial stability, with our interest in sustaining global technological leadership, the efficacy of economic statecraft, the primacy of the dollar, and the prevalence of democratic values in the global financial system.
Let me say a bit more about the geopolitical backdrop with a few blunt observations. First, both Russia and China—at the highest levels—have expressed and revealed their desire to disrupt the US-led international order. Second, both Russia and China have the capacity to challenge the US led order. China is nearly a peer competitor to the US across economic, military and technological dimensions. Russia punches at a much lower strategic weight than china but it’s willing to take more risk, its leadership feels more deeply aggrieved by the West, and it has globally systemic relevance in nuclear weapons and energy production. Third, both Russia and China have pressed for a sphere of influence in their respective backyards, perhaps drawing from their shared and stated belief that the US is in structural decline and preoccupied by our own challenges of political dysfunction, social cleavages, and fiscal profligacy. And fourth, as this competition plays out , there’s a sizable group of large G20 economies—India, Indonesia, Brazil, Turkey, South Africa, Saudi Arabia, Argentina, Mexico—that are largely hedging their bets and trying to carve out a non-aligned path.
It’s in this more fragile and uncertain geopolitical context that we should consider whether China being the first mover among large economies to introduce a CBDC really matters. Let’s rewind. The PBOC began research on the e-CNY in 2014, including on a potential issuance framework and the underlying technologies. By 2016, it had developed a working prototype. By the end of 2017, upon the approval of the State Council, the PBOC began work with commercial entities to develop and test e-CNY’s usage in pilots. The pilot operated in ten regions across China before it was introduced to Olympic Games venues in February 2022. And today, hundreds of millions of active e-CNY wallets are reportedly in operation.
Now it’s often said that Beijing’s motivations for moving first, and moving fast, are primarily internal—to undercut the power of Chinese tech giants that might challenge the authority of the state; to snuff out foreign payment networks such as dollar-based stablecoins and other cryptocurrencies; and most of all, to reassert control over the commanding heights of the digital economy, and in doing so mover ever closer to perfecting a form of digital authoritarianism.
But this narrow conception is less convincing when you consider what China has repeatedly said and done on the international stage. In 2020, President Xi gave a speech in which he ordered his technocrats to take advantage of China’s momentum on developing a digital currency to “actively participate” in the formulation of international rules to shape new competitive advantages. And dutifully, China’s economic diplomats have taken the lead in organizing cross-border digital payments experiments such as the Multiple Central Bank Digital Currency (m-bridge) project with Hong Kong, Thailand, and the UAE—under the auspices of the BIS—giving it a platform and reputational cover to shape global norms and standards for privacy, security, and interoperability. In 2021, the PBOC formed a joint venture with SWIFT, the messaging system that banks use to make cross-border payments, which could allow China to augment its capabilities in cross-border payments systems beyond the homegrown Cross-Border Interbank Payment System (CIPS) it unveiled in 2015.
Now to be fair, it’s not just China that’s moving far and fast. According to the Atlantic Council, 105 countries are actively exploring CBDCs, and 50 of them are in the advanced stages—including 16 of the G20 economies in the development or pilot stage. Along with the UK, Argentina, and Mexico, the US is behind.
So coming back to the question on the table—do these developments matter for US national security, and why? My judgment is yes, for three reasons.
First, CBDCs have great potential to either enhance or erode the potency of US economic statecraft. As mentioned earlier, we are facing perhaps the most intense competition from major, nuclear-armed powers since World War II. The implications include higher uncertainty, less scope for cross border cooperation to manage cross- border risks, and greater likelihood of conflict—either directly or via proxies—and this will involve more frequent and more potent use of financial sanctions and other forms of economic statecraft—especially when the alternatives—military conflict between nuclear powers, or doing nothing to defend core principles that underpin global peace and security – are generally seen as far, far worse. To be very clear: the potency of financial sanctions hinges on our ability to constrain the access of or fully exclude a rogue actor from the dollar-based financial system, a network that has grown geometrically in value with its size and reach.
Taking this as a premise, what’s the risk of our remaining a CBDC bystander? Consider the scenario in which all countries currently exploring a CBDC eventually issue one. That would mean countries representing upwards of 90 percent of global GDP, not counting the US, will have CBDCs in circulation. It’s no stretch to assume that each of these countries will establish CBDC-to-CBDC platforms to improve upon the slow, costly, opaque, and complex status quo for cross-border transactions. Indeed, according to the Atlantic Council, over a dozen countries are actively testing cross-border CBDC exchanges. More to the point, it’s likely that China – the leading trading country in the world and first mover in this space—is well positioned to influence the setting of norms and standards in a competing or parallel digital payment architecture, blunting or even eliminating our ability to apply financial sanctions as we currently do through correspondent banks and SWIFT.
Beijing’s motivation for doing so is clear—in June of this year, President Xi criticized the “abuse” and “selfishness” of international sanctions on Russia, and last year China’s Ministry of Commerce issued measures that allow Chinese citizens to sue parties that comply with “inappropriate extraterritorial application” of foreign measures—including US sanctions.
Now admittedly, the Chinese and Russian central banks can already arrange to make payments with each other that bypass the dollar and could mitigate the impact of sanctions. Payments could also get routed through unsanctioned commercial banks between China and Russia, but their respective payment systems are still quite limited in scale and scope outside their borders. CIPS, the Chinese payment system, counted only about 1,300 members earlier this year, two-fifths of them domestic residents, making China still reliant upon SWIFT for cross-border transactions, and at risk of being discovered in an attempt to evade or backfill sanctions.
So why is a world of CBDCs a potential game changer? It’s the technological scalability of CBDCs that could allow countries to transact far more quickly, in higher amounts, with less detection, and less currency volatility—than they do now.
With this as a premise, it’s not overstatement to say that the standard setting for CBDC interoperability—including the rules that govern exclusion from a CBDC network – will become a key geopolitical front in a digitized global economy. Appropriately, the BIS, as the central bank to central banks, is leading and organizing this effort, and unsurprisingly, China is actively proposing rules for how sanctions would get enforced—or not—in CBDC-intermediated transactions. Put simply, the United States needs a seat at the head of this table, and without a proposal of our own—reflecting our standards, values, and geopolitical interests—we are playing a weak hand. To be clear, when I say proposal—I don’t mean to imply we need a finished product, or even a final decision on whether to issue a US CBDC—but we do need a technological model, or a menu of options, to be taken seriously. In my conversations with central bankers and finance ministry officials, the rest of the world is asking what we’re for as it relates to CBDC interoperability, and it’s an unforced error for the United States not to heed this call.
Second, and to broaden out my first point, we have a strong national security interest to develop a US CBDC to reinforce leadership in digital payments technology, separate and apart from the importance of sustaining the potency of sanctions. That means promoting standards that uphold democratic values as they relate to privacy and human rights; protections against illicit finance; the security and operational integrity of digital architecture; rule of law and dispute resolution; consumer, investor, and market protections; and accessibility for digital platforms, legacy architecture, and international payment systems.
Without our US voice at the table, backed by a viable CBDC prototype in hand, we would likely see a continuing fragmentation of CBDC standards. As mentioned earlier, nineteen of the Group of Twenty (G20) countries are exploring a CBDC, with sixteen already in the development or pilot stage. There are already nine cross-border wholesale (bank-to-bank) CBDC tests and three cross-border retail projects, numbers that are likely to increase in the current geopolitical climate. Even worse than fragmentation would be the coalescing around a global standard that’s at odds with democratic values—for example, by allowing for mass financial surveillance of citizens or the unauthorized sharing of personal information. This isn’t just a theoretical risk. China’s global dominance of 5G network infrastructure is largely the result of a state-led effort to generate large economies of scale and lock in standards at odds with our interests for security and transparency.
Respectfully, the stakes are simply too high to cede leadership on standards-setting to the private sector—and in backing this claim I would submit the history of financial innovation. Sometimes it works out well. The ATM is the classic example. Electronic payments and microcredit might be others. But we all know more recent horror stories with globally systemic consequences. Subprime mortgage securitization. CDO squared. Unregulated OTC swaps. The lesson we’ve learned the hard way is that governance matters, especially during the period of creative destruction when the applications of a new technology are still taking shape. More practically, based on my conversations with foreign official counterparts, private stablecoins issued from big tech are unlikely to generate the trust that would be conferred to a digital currency backed by the U.S. government. In fact, I would argue it was the potential for private stablecoin issuance to scale at rapid speed that motivated the three-fold increase in CBDC exploration over the past two years.
The third reason why a CBDC matters for national security, and by far most important, is we have an overwhelming interest to reinforce dollar primacy and to minimize even the most remote risks of losing its status. Now I want to take this step by step, because perhaps like some of you, I’ve been frustrated with lazy narratives that foresee the loss of dollar primacy without bothering to connect the dots.
So let me start with the easy part by saying what I hope is beyond dispute—dollar primacy is a national asset that provides incalculable benefits to the United States. It gives us tremendous leverage to absorb a shock (recall the S&P downgrade in 2011, after which the dollar strengthen and our borrowing costs fell), unrivaled capacity to deliver a shock (see sanctions), and to fund our government, households, and businesses at much lower costs than would otherwise be the case (the academic estimates I’ve seen on the borrowing cost advantage for the federal government is on the order of 20-50 basis points on average across the yield curve, which amounts to quite a number on a 20 trillion plus debt stock). So that’s point one.
Point two is that right now, on paper, there’s nothing to see here, nothing to worry about as it relates to dollar primacy. In fact, if I reflect on this week’s discussions at the IMF meetings in DC, the preoccupying question was whether the global economy could bear the unrelenting strength of the dollar. It’s risen more on a nominal trade weighted basis YTD than any other year over the past half a century, excluding 2008 and 1997—both of which ended in tears!
If you look at the traditional measures of primacy—the use of a currency to buy or sell stuff, to borrow money, or to save money. You do see a reduction in the dollar’s share of global foreign reserves (a proxy for saving money) of about 10 percentage points this century, but the dollar is still in a dominant position, 3 times more than the currency in second place—the euro—and almost 20 times more than the renminbi. As a payment currency, the dollar’s share has remained stable at a high level, and the dollar’s share has grown considerably as a source of funds in debt and loan markets. So again – on paper, there’s nothing to see.
Point three is the steady dominance of the dollar is unsurprising. Why? Two reasons. First, the dollar has become tantamount to the operating system of global finance, with incredibly powerful network effects that generate inertia in its status.
Second, this outcome is by default. Many still worry about existential challenges in the Euro area as it struggles to forge a closer union. Japan has been economically stagnant for decades, with decreasing depth and liquidity in its financial markets. And China hasn’t embraced the kind of reforms that would make the renminbi a credible currency in which to save or borrow money—it still has K controls, it doesn’t have an independent central bank, nor does it have transparent rule of law or an independent judiciary.
Point four. We should take none of this for granted. Like any other asset, dollar primacy will depreciate in value if we manage it poorly. Let’s recall the conditions that gave us dollar primacy in the first place: strong and independent institutions like the Fed, rule of law, an open system for the flow of trade, capital, people, the ability to innovate, the deepest, most liquid, safest, financial markets in the world, a story that attracts ideas, talent, goodwill, and trust that the US will be a faithful steward with the exorbitant privileges of dollar primacy.
The fact that many across the world are raising the question of whether they can still trust the dollar-based financial system in the wake of our sanctions response to Russia is itself a risk that we should take very seriously. Dollar primacy is nothing more than a network, and all networks have tipping points, often psychological ones that are impossible to identify in advance. And we know from the history of networks – whether they’re in biology, technology, finance, or my son’s eighth grade lunch table—they lose value slowly and then very suddenly. By the time the erosion of dollar primacy shows up in the data, it will likely be too late to stop the process.
Now let me bring this back to why it matters that we’re a distant CBDC laggard playing an uncertain trumpet. Let’s go through a thought exercise. Imagine that China consolidates and grows its leadership position in cross border payment technology. Why? Well, as I mentioned before, it has a strong geopolitical and economic motivation to challenge the dollar’s unrivaled status.
And, importantly, it’s positioned to offer a better product to address a genuine market need for faster and cheaper cross border payments. Currently, the many steps required to process an international wire transfer are lengthy, costly, and frustrating for the 1 in 8 people across the world that send or receive remittances with regularity. According to World Bank data, average global remittance costs are 7% of the transaction, whereas a DLT-based infrastructure can reduce those costs to less than 1%. With regard to speed, the Director-General of China’s digital currency initiative said earlier this year that the e-CNY could process 300,000 transactions per second, many orders of magnitude higher than Visa at 1,700 TPS.
Without a competing CBDC issued by a major economy, let’s further assume that the share of cross-border transactions denominated in renminbi continues to converge towards China’s share of global trade, already the highest in the world. With more internationally traded goods invoiced in renminbi, academic research and historical experience suggests we might expect a higher equilibrium level of renminbi deposits and other financial claims held outside of China to undertake these transactions.
If the size of these renminbi claims rises to a material level for China’s trading partners, then government authorities in these countries would have greater incentive to accumulate renminbi reserves as insurance against foreign exchange fluctuations or a sudden stop to renminbi capital flows. As Jeremy Stein and Gita Gopinath have laid out in their research, it’s not hard to imagine a reinforcing feedback loop between these dynamics, whereby the increased use of a currency for cross border trade eventually, or concurrently, leads to greater usage of the currency as a unit of account, and ultimately as a store of value.
In fact, this isn’t just an imaginary scenario. It would follow the historical sequence of events that led to the displacement of the British pound by the U.S. dollar after World War I. As described by Barry Eichengreen, the Federal Reserve Act of 1913 allowed U.S. banks to facilitate dollar-denominated transactions with dollar trade credit, leading to rapid growth in the use of the dollar for the invoicing and settlement of cross-border trade. In his words: “experience suggests that the logical sequencing of steps in internationalizing a currency is: first, encouraging its use in invoicing and settling trade; second, encouraging its use in private financial transactions; third, encouraging its use by central banks and governments as a form in which to hold foreign reserves.”
Now while I would readily acknowledge that China lacks almost all of the competitive advantages I listed as attributes that gave the dollar its primacy – most of all trust – we should also be clear-eyed that the incentives to hedge against the dollar-based financial system are on the rise in the current geopolitical environment, and CBDCs could very well be a building block in Beijing’s capacity to build a competing or parallel network. Even for those of you who think there’s only a remote chance of my story being true, my response would be this—why take a chance of losing a national treasure? Why gamble our position of strength? Why not fully explore all options to improve our product?
As a concluding point, nothing I’ve said is meant to get ahead of the long list of important design and deployment questions that need to get addressed before the US decides whether to issue a CBDC. Would this be a retail or wholesale CBDC? If the former – where would the accounts reside, what would be the services offered with these accounts, and by whom? What would be the design modalities that limit the disintermediation of the commercial banking system—particularly during times of stress? How would the government, or its agents, protect data and safeguard the operational integrity of the CBDC? What would be the implications for credit creation, both in peacetime and during episodes of stress? Which features would the CBDC include to improve the execution of stimulus provision, whether it’s an automatic stabilizer or a discretionary program put in place during a crisis. And how might a CBDC interact with and co-exist with other digital currencies, both privately issued and those backed by other fiat currencies.
My message isn’t that we have those answers today. It’s more modest—let’s get on with the work of grappling with these questions, in the best tradition of American innovation, by collaborating across government, academia, and the private sector and committing to develop, experiment with, and refine a CBDC prototype. And let’s do so in the spirit of democratic legitimacy, seeking input from public and private stakeholders and then putting the decision before our elected officials. It may be that our leaders ultimately decide, years down the road, that we don’t need a CBDC, that the process of creative destruction is advancing our national interests just fine without the hand of government. But even for the sake of risk management, let’s not make hope and inertia our digital assets strategy—let’s create a public option, let’s compete, and may the best product win.
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