Trump's Digital Dollar Ban: China and Europe Emerge as Standard-Setters

The swift ban on a "digital dollar" imposed by President Trump has vacated a significant void in the central bank digital currency (CBDC) landscape. Experts now believe that China and Europe are well-positioned to establish their advanced CBDC prototypes as global benchmarks.

While the United States has long hesitated to digitize its reserve currency, it has now become the sole nation to enact a presidential prohibition against such an asset. This move has garnered global attention, considering that over 130 countries were actively exploring CBDCs before last week.

Proponents argue that digital currencies facilitate real-time cross-currency transactions 24/7 and serve as a viable alternative to declining physical cash. Opponents, however, contend that existing systems can achieve these purported advantages. Moreover, protests have emerged globally centered on Trump's concern, refuted by central bankers, that CBDCs could empower government surveillance.

Certain frontrunners in the CBDC race are becoming evident. China, the Bahamas, and Nigeria have witnessed increasing utilization of their digital currencies. The European Central Bank is poised to outline the fundamental characteristics of a future digital euro later this year, despite growing resistance in Brussels.

Josh Lipsky, director of the Atlantic Council's global CBDC tracker, maintains that while the ban will have minimal domestic impact due to the Federal Reserve's previous disinterest in a retail digital dollar, it nevertheless signals a significant setback.

"The ban conveys a distinct message to the international community," Lipsky explains. "It suggests that Europe has a free hand in establishing privacy and cybersecurity standards through the digital euro."

He adds that dollar-backed "stablecoins" will likely assume the mantle of de facto digital dollars for the foreseeable future. Meanwhile, China is positioned to capitalize on the absence of the United States by offering its CBDC to other nations.

Geopolitical Divide Emerges

Trump's anti-digital dollar stance, coupled with his support for cryptocurrencies and a national crypto reserve, has surfaced at a juncture where a geopolitical chasm over CBDCs seems to be emerging. The Bank for International Settlements (BIS), a central bank entity overseeing much of the global CBDC development, abruptly withdrew from the "mBridge" project in October, a collaboration with China, Hong Kong, and various developing economies.

Aside from privacy concerns, Trump's executive order cites potential risks to U.S. sovereignty and financial system stability. It explicitly prohibits U.S. agencies from engaging in any initiatives to establish, issue, or promote CBDCs.

Lewis McLellan from the Official Monetary and Financial Institutions Forum (OMFIF) asserts that the order "effectively seals the fate of a U.S. central bank digital currency." It also amplifies the narrative of "de-dollarization."

Marcos Viriato, whose company Parfin is involved in Brazil's DREX CBDC, believes that the U.S. decision will not deter other nations from advancing their own plans. However, it raises questions about future interoperability between CBDCs.

Many are now observing the trajectory of Agora, another BIS project. Unlike mBridge, Agora is predominantly driven by Western G7 central banks, including the New York Fed. Neither the NY Fed, the BIS, nor participating U.S. commercial banks (such as JPMorgan and Citi) have commented on their plans.

McLellan from OMFIF expresses concern that Trump's stance may significantly devalue these projects, given the dollar's pivotal role in financial markets. He proposes that Agora's continuation without Federal Reserve participation would necessitate a significant shift towards incorporating stablecoins pegged to the dollar.