King dollar risks losing its crown to an Asian mutiny

The highest US tariffs in almost a century have so far had a slight impact on global growth, but Asian policymakers are unimpressed by the calm. They take their cues from the nervous markets and hatch a plan for what appears to be a rebellion against King Dollar. In the 1960s the French could do nothing but oppose America’s exorbitant privilege. In the 2020s, China may challenge this with the help of other countries.

Those looking for evidence of this rise in payment flows are looking in the wrong place. The elimination of the dollar in the coming years will remain hidden in additions and changes in the financial installation. Cumulative effects will take time to emerge.

With little fanfare, e-CNY, China’s official digital currency, transitioned from interest-free cash to a yield-generating product of commercial banks. This is a very profound change. The problem with the adoption of e-CNY so far was that even Chinese government employees who received their salaries in tokens in their e-wallets immediately transferred them to their bank accounts. There is no need for this anymore. For them and their banks, e-CNY is no longer different from a regular deposit account. Popular payment apps like Alipay and WeChat Pay work with both.

This maneuver will not undermine the dollar’s current dominance: The dollar is the preferred global payment currency, with a share of more than 50 percent, more than twice the share of the euro and well ahead of the yuan’s 3 percent. But an e-CNY more widely used in China reduces the danger of further dollarization in a scenario where local savers switch to dollar stablecoins, which are 1:1 copies of the US currency traded on the blockchain. Paying interest on e-CNY is a defensive move because last year’s US Genius Act expressly prohibits stablecoin issuers from offering yield.

But a moat against stablecoins will not be enough. To seize the dollar’s hegemony more directly, China will need to attack it abroad. But there is no deep enough pool of offshore liquidity in Chinese currency, except in Hong Kong, where banks provide yuan-denominated trade finance to clients in Indonesia and Cambodia.

Enter mBridge. When I wrote about 2022, it was just a pilot project of the Bank for International Settlements and the monetary authorities of China, Hong Kong, Thailand and the United Arab Emirates. Some of the financial institutions have come together on a common blockchain, where they exchange prototype digital currencies issued by central banks to meet the cross-border demands of their corporate clients.
In 2024, Saudi Arabia joined the experimental payment platform. But it attracted little attention before Russian President Vladimir Putin identified the underlying technology as a tool to circumvent sanctions and potentially weaken the dollar. BIS withdrew from the project in late 2024, but partner countries continued the project. According to a recently published Atlantic Council report, the activity has reached more than 4,000 cross-border transactions since its inception, with its cumulative value reaching approximately $55.49 billion by 2022, a 2,500-fold increase. E-CNY accounts for more than 95% of payment value.
There are reports that mBridge could evolve into something bigger. India, which is developing its own central bank digital currency, is considering proposing to link CBDCs of the emerging markets group called BRICS+, according to Reuters. This idea will be anathema to Washington. And since New Delhi has agreed to halt purchases of Russian oil to get out of the Trump administration’s tariff prison, it’s hard to say whether enthusiasm for a payments corridor that would include Russia and Iran will continue.
Even if it takes time for a viable anti-dollar coalition to emerge, Beijing will continue to press. A few years ago, President Xi Jinping’s emphasis on China’s need to create a “strong currency” that was “widely used in international trade, investment and foreign exchange markets and achieved reserve currency status” would have been dismissed by investors as an empty boast.

This is no longer the case. Markets are already questioning the exceptionality of the dollar. New York University professors Viral Acharya and Toomas Laarits examined in detail what caused the unusual rise in US bond yields after President Donald Trump launched his tariff war, concluding that “investors have lost confidence in the long-term safety properties of Treasuries in particular, while still valuing their near-term benefits.” They found evidence of an escape to gold.

However, gold cannot be a payment currency. In the foreign exchange market worth 9.6 trillion dollars a day, dollars are seen in 89 percent of all transactions. About two-fifths of this huge share is tied to its vehicle money status: The funds are first converted into dollars, then reconverted into money that the creditor’s bank account will accept. A tokenized, interest-paying e-CNY that processes transactions within China and around the world would bypass the dollar and SWIFT messages entirely. Now that superior installations have been invented, rust will not be allowed to accumulate.