How Digital Yuan Affects the US Financial Dominance

Since the Second World War ended, the US dollar has dominated the global economy and financial system. The US dollar is the global reserve currency that countries and individuals use in international trade and transactions. And this has made the US dollar the dominant player in the global financial system. For those interested in trading with Bitcoin Era, here is everything you need to know to have the best trading experience.

The introduction of the digital yuan could threaten US financial dominance. And this is China's central bank digital currency (CBDC) that is now widely used within China. As China continues to push the digital yuan domestically, it is also eyeing the international financial system.

And this means that the US financial dominance could be a challenge in the future. But this is hard to tell because the digital yuan is still developing. It does not command the same clout as the US dollar. So, it may take many years before the actual effects of the digital yuan on the US financial dominance are evident.

The Independence of the Digital Yuan

One of the main characteristics of the digital yuan is its independence from global financial systems that rely on the US dollar. The SWIFT payment system dominates international payments since all bank transaction processing happens through the system. The US dollar uses the SWIFT payment system.

China was keen to ensure that its digital yuan does not depend on the SWIFT payment system. No foreign processor is necessary for transactions involving the digital yuan. And this means that the digital yuan does not have to interact with the US financial system, including the US dollar. According to analysts, this provides a significant advantage to the digital yuan.

Since the digital yuan does not depend on any foreign processor like SWIFT, it makes it less susceptible to the influence of the US financial system. For example, when Russia invaded Ukraine, the US and other European countries restricted the country's access to the SWIFT system as part of the sanctions. Since the digital yuan doesn't link to any foreign processor, the US can't impose similar sanctions against it.

Global Reserve Currency

China is keen on ensuring that the digital yuan replaces the US dollar as the global reserve currency. And this could seem like a tall order that is impossible to negate completely. Since the digital yuan does not need to use or interact with the US financial system, it challenges the US dollar as the global reserve currency.

Already, China has invested in technology and systems to support the digital yuan. To expand its international adoption, the government is engaging other governments. For example, China entered into talks with Saudi Arabia and Russia to use the digital yuan to pay for oil. Such efforts, if successful, will have a big blow on the US financial dominance.

The US dollar has been the primary currency to pay for oil and facilitate international trade. As the digital yuan becomes more widely accepted, it will weaken the dominance of the US dollar in international business and transactions.

Take Away

The digital yuan could weaken US financial dominance in several ways. It could undermine the US dollar's position as the global reserve currency. It could also lower the supremacy of the US dollar in international trade. The effects will become more apparent with time.

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