Cryptocurrency, digital currency, Doge coin, bitcoin—all buzzwords used in the cyber, business, and government sectors, along with popular culture. The concept of paperless money, financial flexibility, and institutional independence are all key draws of digital currency, specifically the type that fall under the category of cryptocurrency. Crypto is a currency that can be exchanged through a digital medium without the constraints of a bank or central institution. It has become so popular that country's national banks were taking an interest in it, leading to the investigation of Central Bank Digital Currencies (CBDC). A CBDC is digital currency created and maintained by a country’s national bank, allowing for government regulation. Eighty-seven countries are exploring CBDC’s, all in different stages of developing, testing, and fully launching. One of the countries most relevant to the U.S. in this regard is China. They have had success in their new form of currency and thus poses a threat to the United States in their ability to set the standard in an emerging economic field. While crypto will never get government approval, CBDC’s have the potential to integrate into existing banking systems and it is of imminent importance that the U.S. is able to compete with China in the race to claim digital currency by establishing a functional CBDC. 

Briefly, it is important to understand why a CBDC is better for mass consumption than cryptocurrency. Although crypto has the primary benefit of complete freedom from institutions and CBDCs are based on directly opposing that freedom, CBDCs offer something that is more tangible and reliable. Crypto is subject to volatile markets routinely, not as an exception. For example, in the summer of 2021, Dogecoin’s value increased massively then dropped by 60%. When the success of a currency is contingent upon public perception, it ensures a risky industry with the commodity that should be most protected. Additionally, the lack of traceability opens the possibility for ransomware attacks and other cyber security threats on large scale and small. In May of 2021, Colonial Pipeline was the victim of an attack and remedied it by paying the demanded 63.7 Bitcoin which converted to $2.3 million. The vulnerability and instability that comes with crypto is accounted for in digital currencies that protect the consumer for preventable losses.  

For reasons similar to this, a CBDC is the safer alternative to a flexible currency. For the reasons previously stated, a currency backed by the government encourages safe transfers and mitigates the opportunity for crime as it is monitored by a powerful institution. Further, this is an opportunity to improve the banking sector in a controlled manner. While crypto is a fully independent form of currency, CBDCs offer a partnership between the private and public sectors. Mastercard and Visa have been working together with the government to advance the stages of CBDC, which signals legitimacy and, in turn, consumer investment. 

Despite these benefits, the U.S. is more skeptical of the full embrace of digital currencies even with the promise of ease and efficiency. Critics will say that there is nothing broken in the banking system, so there is no need to reinvent money. But ease and efficiency are potential improvements to the system without uprooting it entirely. Not long ago, Americans were skeptical of the reliance on credit; now it is the dominant use of payment, and people even use modes like Apple Pay, which seemed too nuanced before. However, if general upkeep is not a good enough reason for the government to invest in it, then the US should be reminded that the entire world is competing to be the first in this field. The US has consistently set the benchmark, and CBDC could prove to be a huge missed opportunity. Namely, we would be playing by somebody else’s rules on the global stage, something that has not happened since the U.S. rose to power. Financial supremacy has allowed the U.S. to buy and sell at the prices it wishes. Upsetting who has the financial supremacy disrupts the strategic capacity the U.S. has as a global hegemon. This is because monetary leeway is the connector to domestic prosperity, flexibility in international endeavors, and leadership opportunities. All too often people have confused this issue as merely a new technology or a phase, but if beat out, this is another indicator of American economic decline in the face of a rising China. 

The Chinese have taken their CBDC through the stages of development and tested it publicly at the 2022 Olympics in Beijing. Their digital yuan or e-CNY experiment has proven that the technological infrastructure can handle high levels of interaction and that China now has an alternative payment system if something were to happen to their current mode of payment. This flexibility of currency is powerful. As China’s economy grows they will be able to offer alternatives to partnering countries and they will be able to resist the power of the US dollar, especially our sanctions. Sanctions are powerful because the dollar is the universal trade currency, but if countries can maneuver around the dependence on the dollar, instead trading with crypto or CBDC, then the sanctions used against them are weakened. The Director of the Digital Currency Institute at the People’s Bank of China, Mu Changchun, confirms that they intend to set the standard globally and will use it to their advantage. In fact, he states, “The front runner will take the whole market—who is more efficient, who can provide a better service to the public—they can survive in the future.” For example, the Belt Road Initiative, a modern-day Silk Road, offers a significant platform for the Chinese to expand political and economic influence while spreading this new currency, allowing others to participate in it. To US adversaries, this new platform could be more appealing than the USD. Though it may not replace the dollar, it will limit their dependence on it, thereby limiting American involvement and sanctioning power. Aptly, Project Hamilton, MIT’s initiative to research digital currencies, has dubbed this the “new space race,” reflecting the urgency and importance of this technological milestone. 

China is on the rise while the US is struggling not to plateau economically. We are in a position to maintain success by staying ahead at all costs. Digital currency may not seem like an issue related to international relations, but the environment of the international system keeps the US and China in a contest for influence and reputation. Even if the US did not wish to compete with anybody in this field, it is a given that we will have to in order to protect our interests. With the potential for a shift in global power, neither side has the luxury to pick and choose when to compete. Competition is necessary for the US to remain the long-term liberal hegemon.