What happens in a digital currency crisis? Harvard University took a look
In a digital currency crisis, the US would favour diplomacy over military action in protecting the dollar’s dominance
In the event of a digital currency crisis, the United States would likely opt to focus on shoring up the dominance of the dollar with diplomacy, rather than resort to using a military solution. These findings are based on a live simulation carried out last week by Harvard University of a national security crisis around the use of a digital yuan.
Harvard University’s Kennedy School of Politics’ simulation was set two years in the future, when China’s proposed digital yuan would have launched 20 months previously, and had potentially been used to enable a North Korean missile test.
The event, which mimicked a live White House National Security Council meeting that would have been called to deal with such an incident, was attended by former administration officials, such as Lawrence Summers, former US Treasury Secretary; Meghan O’Sullivan, former deputy national security adviser on Iraq and Afghanistan and Eric Rosenbach, previously chief of staff for the US secretary of defence.
The group watched a simulated newsflash of a North Korean missile launch that suggested the country’s arms programme was far more advanced than the US administration had previously believed.
Digital yuan, issued by the People’s Bank of China, was thought to have been used in order to circumvent US sanctions and bypass US financial oversight. The “council” then had to come up with a series of responses for the president to consider.
The group came up with a number of options, including putting pressure on China to cooperate, on using diplomacy on China’s neighbours to persuade them to switch from using the digital yuan to perceived safer alternatives, or even developing a digital dollar issued by the central bank itself.
“While we may try to shore up our financial dominance, we may also well be moving into a world where we are not financially dominant,” O’Sullivan said.
“That is what we are discussing right here. We may already be in a world where we are not financially dominant, certainly not in every sphere. And as such, we have to think about what do we do with the rest of our foreign policy tools?”
A number of US lawmakers have expressed concern about the lack of regulation and oversight for the digital currency market and have pointed out the scope for abuse in the system.
Treasury Secretary Steve Mnuchin said in July he had “very serious concerns” about cryptocurrencies, which he said posed a national security threat, because of the potential they offer to fund illegal activities.
According to Cointelegraph, the number of Chinese blockchain patents are now in the upper 7,000s, more than three times greater than US patents. The website also reported that a Chinese blockchain investor recently stated that a digital yuan is in the advanced stages of development, and is likely to launch within the next six to 12 months.
Ash Carter, a former secretary of defence, said: “We can’t let stand the Chinese using this currency issue as a way of making inroads into what has, traditionally, been a strength of ours.”
“We had a proposal to counter it … that counter needs to be a ‘sticking-up’ for the American role in the international financial system,” he said.
FURTHER READING: China gears up to launch its own cryptocurrency