CBDCs and Geopolitics: Are Central Bank Digital Currencies the New Tools for Sanctions and Alliances?
The Rising Influence of CBDCs
The emergence of Central Bank Digital Currencies (CBDCs) marks a turning point in the evolution of global finance. These state-controlled digital currencies promise to undermine the foundations of the international monetary system whilst promising enhanced efficiency and financial inclusivity. Whereas cryptocurrencies are operated in decentralized networks with no central authority, CBDCs allow central banks to have extreme control over transactions and governments to dictate the terms of their economies precisely.
For China and Russia, CBDCs represent an opportunity to bypass the US-led financial system, particularly mechanisms such as SWIFT, the cross-border messaging system necessary for banks to make transactions, and the dollar's dominance. Conversely, for Western economies, this raises the issue of maintaining geopolitical influence in an increasingly digitizing world. CBDCs are a potential tool for sanctions evasion, alliance-building, and disruptive economic technology, creating their dual potential. The stakes are high, as the rise of CBDCs could fundamentally alter global power dynamics.
Sanctions Evasion: A Financial Loophole?
CBDCs could have one of the most powerful geopolitical implications, given their potential to undermine traditional sanctions. In recent years, sanctions have become an increasingly powerful tool in Western powers' arsenals, allowing them to exert influence without military intervention. However, CBDCs may deem those sanctions less effective since sanctioned nations may conduct transactions outside a traditional financial system approach.
For instance, take Russia’s Digital Ruble. Russia, increasingly under a barrage of Western sanctions since its invasion of Ukraine, has accelerated its push to build a digital currency under state control. Russia attempts to bypass reliance on the US dollar and the SWIFT payment system, as it facilitates trade agreements with states like China and Iran directly without going through American banks. Although it is still in its nascent stages, the Digital Ruble could be a saviour for Russia’s economy, raising questions about the long-term viability of sanctions as a geopolitical tool.
However, such developments are not without risks. While critics argue that CBDCs' reliance on secure digital infrastructures makes them susceptible to cyberattacks, the expertise required to manipulate CBDC transactions, as well as the speed and scale of a significant hack into the system is far beyond the reach of cybercriminals. In addition, the lack of international standards for CBDCs could result in fragmented financial ecosystems, further intensifying global economic instability.
Forging Alliances in a Digital Economy
CBDCs are also an instrument for forming and strengthening geopolitical alliances beyond sanctions evasion. China has leveraged its Digital Yuan to strengthen ties with countries part of the Belt and Road Initiative (BRI). The Digital Yuan is integrated into cross-border trade agreements as a route to reduce Chinese dependency on the U.S. dollar and foster economic interdependence with partner countries.
The potential of CBDCs to create exclusive trading blocs is not limited to China. Brazil, Russia, India, China and South Africa have also discussed the possibility of creating a shared digital currency to facilitate trade within a bloc, challenging the Western-dominated financial order. Such initiatives are speculative but highlight the centrality CBDCs play in reshaping global economic alliances.
However, this strategy is limited. CBDCs are adopted on a widespread basis but hinge on trust in the nation’s ability to run a stable economy and its political stability. The risks of becoming too dependent on a foreign CBDC could outweigh the benefits for smaller countries, especially if the issuing country uses its currency unilaterally to exert influence, undermining its security.
Challenges for Developing Nations
While CBDC presents opportunities for economic independence to nations, they pose a challenge to developing nations. The technological infrastructure needed to implement a digital currency into circulation and regulate it is costly, leaving poorer nations disadvantaged. Without substantial international support, these countries risk being left behind in the digital economy.
India provides an illustrative example. Despite being a member of BRICS and an advocate for financial innovation, India has taken on the idea of a national CBDC cautiously. Its progress has been gradual due to concerns about data privacy, cybersecurity and how it could affect monetary policy. Moreover, India’s hesitation highlights a broader issue: The adoption could deepen global inequality if wealthier nations with well-developed infrastructure take control of the space.
The Dual-Edged Sword of CBDCs
Central Bank Digital Currencies, which seem to be on an ascending trajectory of inevitability, pose both opportunities and challenges in the geopolitical space. CBDCs could democratize access to global financial systems, offering alternatives to nations marginalized by the current order. But if they do so, they risk fragmenting the global economy, helping erode the effectiveness of traditional tools such as sanctions, and exacerbating the inequality between nations.
As countries like China and Russia continue to innovate in this space, the West faces a pressing question: how can we adapt to a world where digital currencies redefine the rules of engagement? While the full implications of CBDCs remain uncertain, one thing is clear: they are not merely financial innovations but geopolitical instruments with the power to reshape global alliances and rivalries.