Are we moving to digital currency? Those asking this question should reflect on the use of transaction methods like credit cards, online payments, and QR codes; all are quasi-digital – in other words, the transaction is converted and paid using technology and digital means.
Regional Impact
Fragmented Banking Systems and Multipolar Blocs:
The proliferation of central bank digital currencies enhances alternative cross-border networks, such as mBridge, linking central banks in China, UAE, Saudi Arabia, and others to share liquidity and settlement in local digital currencies.
This model presents a stark contrast to the interconnected US dollar system, instead promoting fragmentation into regionally specific blocs with their own digital rails. This fragmented architecture challenges dollar dominance, shifting economic gravity toward emerging power centers, particularly China and other BRICS nations.
Central Bank Digital Currencies Reshape Regional Power Dynamics:
By enabling countries to assert digital monetary sovereignty, central banks gain direct control over their local money stocks and financial flows, reducing their dependence on private payment networks and traditional US dollar dominance systems, such as SWIFT.
This sovereignty extends to cross-border transaction systems like China’s digital yuan integrated with platforms like BIS mBridge, promoting faster and cheaper local currency settlements and weakening intermediaries tied to Western financial infrastructure.
This shift also presents new geopolitical levers:
Central bank digital currencies facilitate sanctions evasion and grant issuing countries enhanced strategic influence. China’s electronic yuan (e-CNY), for example, is promoted in Belt and Road countries as an alternative to dollar-based transactions, giving these countries a reliable exit route from the US financial sphere.
Central Bank Digital Currencies Are Used as Digital Diplomatic Tools:
Issuing countries gain economic independence and normative influence through interoperability standards and regional digital currency agreements, shaping trade corridors and future alliances.
Impact on Cross-Border Settlements
The clear impact on cross-border settlements is most evident in the financial realm – fees ranging from 0.1 to 0.3% versus 0.3 to 0.5% for SWIFT, plus the benefit of real-time and same-day settlement.
Local currencies have already dominated bilateral trade (such as 90% of China-Russia settlements in non-US dollar currencies). Will BRICS fuel this trend? We haven’t seen it yet.
Geopolitical Implications and Strategic Measures
By enabling local currency-based trade and central bank digital currencies, BRICS can erode the central role of the US dollar in global payment systems and reduce dependence on Western dollars, making them resistant/protected from sanctions.
Central bank digital currencies enable countries like China and Russia to bypass sanctions and financial scrutiny by redirecting transactions outside US-controlled infrastructure. China’s digital yuan is strategically integrated into trade with developing countries through the Belt and Road Initiative, expanding its financial influence while carving away from dollar dependency.
This emerging “digital currency cold war” increases geopolitical tensions. Western powers have responded by strengthening dollar-backed stablecoins and digital dollar initiatives, aiming to maintain their existing financial dominance.
Conclusion
Central banks worldwide are increasingly focusing on regional cooperation and interoperability as key future directions for digital currencies. While the decision to issue a central bank digital currency remains a sovereign decision, there is growing recognition that cross-border functions and coordinated standards are crucial for the success and efficiency of digital payments.
Initiatives like the mBridge project and Agor project highlight this trend, bringing together several central banks and commercial entities to explore wholesale central bank digital currencies to improve cross-border settlements.
The goal is to overcome complexities like time zone differences, diverse legal frameworks, and varied technical systems, ultimately promoting a more interconnected and efficient global financial landscape.