The Digital Renminbi and the end of American sanctions hegemony
Money can be divided into two categories: token based money, and account based money. Token based money such as currency notes or gold is like a bearer bond: ownership of the thing is the store of value. In the film Die Hard, when Hans Gruber broke into the Nakatomi Plaza at Christmas, he was doing it because of the bearer bonds in the basement. Pounds and dollars are token based money because they promise to pay the bearer a fixed value. Account based money is not like a bearer bond: it sits on a ledger and that gives it the value. You can’t transfer account based money without the permission of the ledger owner. If you own shares in a start-up, you often can’t transfer those shares to another person without the permission of the company, because the company controls the shareholder register.
Crucially, the E-Renminbi is a combination of both account based money and token based money on a ledger controlled by the People’s Bank of China. It is token based between the consumers and private payment institutions, but ledger based between payment institutions and the Chinese central bank. Therefore, it has traits of a panopticon controlled by the Chinese government and thus forms a substantial projection of Chinese Government power.
We can contrast the libertarian roots of cryptocurrencies in the United States with with Chinese crypto-currency ultimately becoming a mechanism to enforce further state control within the domestic Chinese economy. However, there is a clear foreign policy dimension to the E-Renminbi with its ability to help the Chinese government overcome American sanctions hegemony.
The Dollar clearing system is necessarily both token and ledger based money, in that all dollars are cleared with the permission of the US Federal Reserve by government mandated banks. So, in many ways, the E-Renminbi is structured to be similar to the existing US Dollar based clearing system.
How then does the E-Reminnimbi help to undermine the American sanctions system? There are the domestic and international dimensions to the clearing system. The international system is currently underway as Inthanon-Lionrock, as a mechanism of value exchange between HKMA and the Bank of Thailand. Whilst the e-Renminbi is solely for domestic Yuan payments, the Inanthon-Lionrock system is for international settlement specifically between Thailand and China. Once finished, the two can be connected to complete an international and domestic payments system completely outside the jurisdiction of SWIFT and the US government.
One key consequence of the digital Renminbi is the end of the dominance of the US dollar clearing system. Right now, the US government can block financial institutions from trading in dollars if those entities facilitate transactions with sanctioned entities. Under a digital Renminbi, that would no longer be the case because there would be no tangible institution who could be sanctioned and thus denied access to the dollar clearing system. By enabling domestic Chinese and international entities to transact with China, this would erode the power of American sanctions in Iran and Hong Kong, which have recently been used to great effect.
This is because whilst payments are stored on a decentralized ledger, issuance is controlled by the central bank. For sanctioned entities like Carrie Lam, the head of the Hong Kong government who is currently entirely operating via cash, this is significant. She would now be able to use a local e-wallet provider with a direct link to the central bank and would no longer have to deal with a financial institution that would be fearful of the long-arm of American sanctions.