Digital Currencies

1 Digital CurrenciesCopyright 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights CurrenciesTHE US, CHINA, AND THE WORLD AT A CROSSROA DSEdited byDARRELL DUFFIE and ELIZABETH ECONOMYH O O V E R I N S T I T U T I O N P R E S S , Copyright 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights AggarwalDan BonehJared CohenLarry DiamondDarrell DuffieElizabeth EconomyYaya J.

2 FanusieNiall FergusonJ. Christopher GiancarloLauren GloudemanZhiguo HeSamantha HoffmanMatthew D. JohnsonStuart LeveySigal MandelkerDavid Mazi resH. R. McMasterEvan S. MedeirosNeha NarulaMonika PiazzesiMatthew PottingerEswar PrasadRaghuram RajanNadia SchadlowRichard SokolowJohn B. TaylorGlenn TiffertRobert M. TownsendMatt TurpinKev i n Wa rshChenggang XuContributorsCopyright 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights its eminent scholars and world-renowned library and archives, the Hoover Institution seeks to improve the human condition by advancing ideas that promote economic opportunity and prosperity, while securing and safeguarding peace for America and all mankind.

3 The views expressed in its publications are entirely those of the authors and do not necessarily ref lect the views of the staff, officers, or Board of Overseers of the Hoover Institution Press PublicationHoover Institution at Leland Stanford Junior University,Stanford, California 94305-6003 Copyright 2022 by the Board of Trustees of the Leland Stanford Junior UniversityAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission of the publisher and copyright printing 202228272625242322 7654321 Copyright 2022 by the Board of Trustees of the Leland Stanford Junior University.

4 All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights of Figures and TablesixForeword by Condoleezza RicexiAcknowledgmentsxvAbbreviationsxixE xecutive Summaryxxi1 Introduction: At a Global Crossroads in Digital Currencies12 China s New Digital Currency: Function and Motives233 Prospects for e-CNY Internationalization554 International Security Implications of the e-CNY795 Forging International Cooperation on Digital Currencies1076A Road Map for US Leadership133 Related Work by Working Group Members147 ContentsCopyright 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights Suggested Readings167 About the Contributors183 Index189 Copyright 2022 by the Board of Trustees of the Leland Stanford Junior University.

5 All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights ure Development of Fast-Payment Systems7 Figure CBDC Work around the World10 Figure The e-CN Y s Tw o -Tier Operating System25 Figure e-CNY Database Management System26 Figure Schematic of the m-CBDC Bridge58 Figure Fintech Payments88 Figure Telecommunications Projects Worldwide91 Figure Foreign Debt Owed to China92 Figure City Projects Worldwide98 Table System of Digital RMB Wallets30 Figures and TablesCopyright 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights 2022 by the Board of Trustees of the Leland Stanford Junior University.

6 All rights the past four decades, no country s economy has grown more rap-idly than China s. Today, China has the world s second-largest economy, a large and increasingly sophisticated military, and the most pervasive system of domestic surveillance. It is the world s largest exporter, its second-largest importer, and globally the biggest provider of infrastruc -ture development. While the uneven playing field that China has cre-ated for itself has aided its economic rise and military modernization, China is increasingly innovating on its own. Beijing aspires to take the lead in many areas of science and technology, with large-scale govern-ment investments in research and development. In Digital commerce, China has become a leader perhaps the leader.

7 And building on that success, China has resolutely developed a central bank currency the Digital yuan (e-CN Y ).As this report makes clear, China s deployment of the e-CN Y already underway could give its economy significant advantages by promoting efficiency and financial inclusion and, potentially, tackling the problem of pervasive corruption. Without proper oversight and re-straint, it also poses stark challenges for the Chinese people, the United States, and the world. In the hands of a state that has already deployed a massive network of cameras and biometric detectors to monitor its people and store data on their politi cal, social, and Digital behavior, the addition of comprehensive information on payments could represent a stagger-ing enhancement of authoritarian 2022 by the Board of Trustees of the Leland Stanford Junior University.

8 All rights 2022 by the Board of Trustees of the Leland Stanford Junior University. All rights China s billion citizens are not the only ones who will be affected by this financial transformation. China aims to roll out its Digital cur-rency on a global basis through cooperation with many potential part-ners. As this report indicates, China s first mover advantage here threatens to consolidate its lead in e-payment technology and to shape the global rules and standards for Digital finance in ways that will elevate authoritarian norms and undermine principles of transparency, account-ability, and human rights. Some argue that even the dominance of the dollar as the world s reserve currency is threatened.

9 For instance, the ability of the United States to use financial sanctions to punish states that pursue nuclear weapons or support terrorists would be result of a yearlong effort by a distinguished group of experts on China, finance, technology, and national security, this report provides a pathway for the United States to revitalize its international financial leadership by helping to shape the emerging global Digital economy. It does not advocate that the US Federal Reserve create a Digital dollar but stresses that US authorities should move energetically to develop US central bank Digital currency (CBDC) technology and standards to counter this growing Chinese influence. It will take time to develop a design that strikes the best possible balance among goals that any demo-cratic society should care about: privacy, security, accessibility, efficiency, and transparency.

10 And should the United States decide that its transition to the Digital economy would be better served by new private sector monetary technologies, such as stablecoins, it will take time to write the necessary regulations and implement the infrastructure to ensure the success of that transition. US officials will also need time to coordinate with their G7 and other democratic partners on the principles and stan-dards for a system of global Digital finance that enhances, rather than diminishes, privacy, accountability, security, and the rule of law. This will require hard thought and careful planning to ensure that international criminals and pariah states cannot flagrantly utilize Digital Currencies to make payments and transfer funds across short, for the executive branch, the Federal Reserve, Congress, and indeed the American people, this is an urgent task.