Blue Chip Web LogoBlue Chip Web LogoBlue Chip Web LogoBlue Chip Web Logo
  • Services
    • Overview
    • Investment Management
    • Executive Compensation
    • Retirement Planning
    • Tax Planning
    • Estate Planning
  • About
    • About Us
    • Our Team
    • In the News
    • Career Opportunities
  • Resources
    • Blog
    • Webinars & Videos
  • Client Toolbox
  • Contact
  • Disclosures
Schedule A Call
✕
Timothy Reaume
Timothy Reaume Joins Blue Chip Partners as a Senior Financial Advisor
09/27/21
Erin Goss, Chief Operating Officer
Erin Goss Joins Blue Chip Partners as Chief Operating Officer
10/11/21

Could CBDC Impact Global Currency Reserves?

Posted on 09/30/21
The Digital Yuan
Original Content By Jacob Seabolt, Hayden Kibbey
Jacob Seabolt
Jacob Seabolt
Student Intern
Hayden Kibbey
Hayden Kibbey
Student Intern
  • Part 1
  • Part 2

Part Three In a Three Part Series On Digital Currency

In Part Two of our series on digital currency, we wrote about the emergence of Central Bank Digital Currencies (CBDC), virtual legal tender, issued by a central bank. Some have speculated that China’s issuance of a digital yuan could cause shocks within foreign currency markets, challenging the U.S. dollar’s role as the global reserve currency. Deeper analysis suggests these fears are overblown and that the dollar’s role in the global economy should remain intact.

What is a reserve currency?

A reserve currency is a large quantity of a specific currency held in abundance by central banks for the purpose of conducting international transactions and investments, as well as influencing exchange rates. Due in part to our large economy, the U.S. dollar has taken hold as the primary global reserve currency. Foreign central banks hold large quantities of U.S. dollar reserves in the forms of cash and Treasury bonds.

 global reserve currencies USD share

Sources: Blue Chip Partners with data from the International Monetary Fund. Data as of 16 August 2021.

As the global reserve currency, the U.S. dollar has a special advantage, known as exorbitant privilege. Exorbitant privilege refers to a handful of strategic benefits that the U.S. enjoys as a result of the dollar's prevalence. Because most foreign trades are priced in U.S. dollars, America is protected against currency crises that could arise from depleting reserves. Because many countries hold dollar reserves in the form of Treasury bonds, the U.S. can issue debt at a low price. The dollar’s reserve currency status also extends the impact of U.S. sanctions to any transaction involving dollars, empowering the country both politically and economically.

How could CBDC impact global currency reserves?

As more and more countries begin to pursue central bank digital currency, it can be expected that they will transition their currency reserves accordingly. Because of China’s first-mover advantage in CBDC development, some have speculated that the yuan will begin to take over as a global reserve currency; however, because of the economic differences between China and the U.S., it is unlikely that the digital yuan will be able to encroach upon the dollar’s share of global reserves.

The primary advantage the dollar has over the yuan is its stability, backed by the reliable and independent Federal Reserve. China’s central bank, on the other hand, is an executive department of its State Council, and as such, it maintains stricter control over the value of its currency. Through what is called a managed float, China’s central bank keeps its currency relatively fixed to the U.S. dollar’s value, in order to maintain competitive price levels. This makes the yuan a relatively unfavorable store of value for other countries, who would have to put their faith in a foreign government, rather than markets.

CNY USD Rate

Even if China were to allow the market to set the price of the yuan, there are still strict capital flow controls that stymie the potential of a global capital market in its homeland. Primarily, the country takes measures to maintain financial control over enterprises. Among these measures are restricted lending and taxed capital inflows, both of which can impact the stability of the yuan. As long as China maintains a restricted capital account, their currency will be an unfavorable reserve option, even if they are the first to pursue CBDC. For the time being, the U.S. dollar appears to be well positioned as the world’s choice of currency.

(Click here to read Part One)

(Click here to read Part Two)

Read more about Digital Currency here.

Expressions of opinion are as of this date and are subject to change without notice. The information provided does not constitute tax, legal, accounting, or other professional advice and is without warranty as to the accuracy or completeness of the information. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, hold or sell any security. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There are limitations associated with the use of any method of securities analysis. Indices are included for informational purposes only; investors cannot invest directly in any index. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.

Share
0

Related posts

Blue Chip Partners Quarterly Edge
01/03/23

Blue Chip Partners Quarterly Edge: Q1 2023


Learn More
Blue Chip Partners Quarterly Edge
10/02/22

Blue Chip Partners Quarterly Edge: Q4 2022


Learn More
Blue Chip Partners Quarterly Edge
07/11/22

Blue Chip Partners Quarterly Edge: Q3 2022


Learn More
248-848-1111
  • Home
  • Contact Us
  • Services
  • About Us


  • Facebook
  • LinkedIn
  • YouTube

Our wealth management team is ready to help you get the most life out of your wealth. Click here to get started.

  • Privacy Policy
  • Terms & Conditions
  • Disclosures

Copyright © 2023
All rights reserved.

Blue Chip Partners LLC
38505 Country Club Drive
Suite 150
Farmington Hills, MI 48331 U.S.A.

Schedule A Call