Former Biden adviser says a digital dollar could “displace” private cryptos and improve national security

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(Kitco News) – Daleep Singh, former deputy national security adviser for international economics in the Biden administration, has suggested that the creation of a US central bank digital currency (CBDC) would “crowd out” the private cryptocurrency ecosystem and serve as a safeguard for the US national security

Singh made the comments on Tuesday during a Senate Banking Committee hearing, taking an oppositional stance on the nascent asset class by highlighting his view that cryptocurrencies facilitate ransom attacks and help evade US sanctions.

For that reason, Singh believes it would be in America’s best interest to release a digital dollar, saying it’s “the best step we can take [to protect the national interest] because it would displace the crypto ecosystem.”

The term “crowd out” relates to an economic theory that suggests that increasing public spending and investment will drive down or eliminate spending and investment in the private sector.

Federal Reserve Vice Chairman Lael Brainard used the same phrase during a speech on the digital dollar in September, saying “The Federal Reserve will not seek to crowd out private business activity in payments or otherwise.”

Brainard specifically cited concerns about a CBDC that could lead to Fed direct banking customers using the digital dollar — potentially reducing the role of private banks in the economy — and said the central bank needs to explore issues related to transfer limits and interest rates — keeping accounts as part of the debate over whether a digital dollar is required.

In Singh’s case, “cropping out” cryptos with a digital dollar is a desirable outcome as it will help protect the economic interests of the United States. The e-dollar is still in its early pilot testing phase and has a long way to go before the average American will have access to it.

China, on the other hand, is leading the way in developing a CBDC, with its digital yuan pilot now underway in more than 17 provinces, including 26 major cities and 5.6 million merchants. In early January, the People’s Bank of China (PBoC) included e-CNY in its official cash reports for the first time, with the digital fiat accounting for 13.61 billion yuan (about $2 billion) in circulation. This figure represents about 0.13% of the 10.5 trillion yuan in circulation at the end of December.

According to Yaya Fanusie, the head of policy for the Crypto Council for Innovation and a former CIA analyst, the United States’ late entry into the CBDC game could cause it to lose its grip on the global financial system.

During a Bloomberg interview on Tuesday, Fanusie explained that sanctioned states want to conduct cross-border transactions using financial infrastructure that is not controlled or heavily influenced by the United States, and state-issued CBDCs could be part of that solution. If the U.S. has little leverage over these new standards, “it affects U.S. economic statecraft,” he said.

“The strength of our sanctions power comes from America’s centrality to the financial global infrastructure,” Fanusie said. “So if that changes a little bit, it doesn’t mean China is going to take over or the yuan is going to displace the dollar, but if there is a viable new railway where sanctioned players can now trade, there are problems.”

While the Fed has made some progress on the digital dollar, including releasing the latest version of its white paper on January 18, it has yet to receive government approval to move forward with the CBDC project.

Fanusie noted that China now clearly benefits from a first-mover advantage, has already processed “millions of transactions” across “millions of wallets” and “has a number of pilots that are in the hands of people testing out smart contracts and programmability of money, so they actually have data that they iterate on. And they help other countries with standards, and they collaborate on CBDC to CBDC transactions.”

It remains to be seen whether China will push to make the digital yuan a global leader, or whether they will instead focus on establishing domestic dominance rather than trying to beat the US dollar, as some have suggested.

Data from the Atlantic Council shows that 114 countries, representing over 95% of global GDP, are currently exploring the creation of a CBDC. Of these, 11 countries have fully launched a digital currency, and by 2023, more than 20 countries will “take significant steps toward piloting a CBDC.” Australia, Thailand, Brazil, India, South Korea and Russia all intend to begin or continue testing in 2023, and the European Central Bank is likely to start a pilot next year.

As of December, all G7 economies have advanced to the development stage of a CBDC, while Project Cedar, which is the New York Federal Reserve’s wholesale CBDC experiment, has moved the US from research to development.

Almost every G20 country has also made significant progress and invested new resources in the creation of a CBDC in recent months, with 18 of the 20 members now in the advanced stage of development, and seven countries already in the pilot phase.