Paul Ryan | Stablecoins as defender of the dollar’s global status

Imagine a world where China has supplanted the United States atop the world economy, and the renminbi, not the greenback, is the global reserve currency. This scenario would be disastrous for American citizens, businesses, and allies. Given America’s record high debt and unsustainable spending, reduced demand for dollar assets would cripple the United States economy. The government would be forced to cut public services and military expenditures, altering almost every facet of American life – and not for the better.

Worse, the Communist Party of China would control global payments systems and other financial infrastructure. This would allow the CPC to exert its influence and export its surveillance state around the world, and isolate the US and its allies with a wall of sanctions. If an American individual or business were to criticise China’s leaders, they could be cut off immediately from global commerce.

The CPC is trying to make this a reality. In conjunction with its Belt and Road Initiative, which has massively expanded Chinese influence by providing funding for large infrastructure and technology projects in emerging and developing economies, China is devoting significant resources to creating an alternative to the dollar payments system. In 2021, the Chinese government took an important step in this direction with the launch of a CBDC or central bank digital currency.

To extend the reach of the digital renminbi, the People’s Bank of China (PBOC) is spearheading efforts to create a platform for instantaneous cross-border settlement. The mBridge project, short for ‘multiple CBDC bridge’ and developed in partnership with a handful of other central banks, seeks to connect commercial banks, businesses, and monetary authorities to a distributed network for trade and financial flows.

Many Western central banks, including the European Central Bank and the Federal Reserve Bank of New York, as well as the World Bank and commercial banks, have joined the project as observers, but wield little influence over its design and technical details.

If successful, mBridge would buttress China’s currency power play. Worryingly, there are early signs that this strategy is bearing fruit. In April, data from SWIFT, the Brussels-based interbank-payments network, showed the renminbi’s share of international payments at an all-time high, overtaking the yen to become the fourth most used currency in cross-border transactions. Although the renminbi has a long way to go before it can credibly threaten the dollar, mBridge will only accelerate this trend.

The dollar has reigned supreme for nearly a century because it is backed by a well-established rule of law, a large and powerful military, and a dynamic economy. But US policymakers cannot afford to sit idly while the world changes. Pound sterling was once the dominant currency for international trade and foreign reserves – until it wasn’t. If the greenback is to avoid the same fate, American leaders must recognise that the US financial system is in dire need of updating. As our lives and economies become increasingly digitalised, so, too, must the dollar.

The main challenge for US officials is to update the global financial architecture in a way that ensures the dollar’s continued use as an instrument for promoting economic freedom globally. The solution lies in a central pillar of American soft power: technological innovation. In other words, a payments system built by private industry in the US is better than one built by the PBOC using Chinese technology. In addition to getting America’s fiscal house in order, policymakers should support entrepreneurs issuing stablecoins on blockchain rails.

Stablecoins – nearly all of which are backed by dollars – can ensure demand for US government debt while boosting the global standing of the greenback and extending its reach to new digital platforms that empower users and protect individual privacy and sovereignty. But to encourage their uptake, policymakers must create a tailored regulatory framework that provides both issuers and holders with some degree of legal certainty and promotes further innovation.

The dollar payments system is under attack. Given what is at stake, protecting its future must become a national-security imperative.

Paul Ryan, a former speaker of the US House of Representatives (2015-19), is a visiting fellow at the American Enterprise Institute and a member of the Paradigm Policy Council. © Project Syndicate 2024 www.project-syndicate.org