Ukraine, Sanctions and Central Bank Digital Currencies: The Weaponization of Digital Finance and the End of Global Monetary Hegemony?

Abstract

Technology is profoundly reshaping international and domestic monetary and payment systems. Catalysts include the launch of Bitcoin in 2009, the announcement of Facebook’s Libra cryptocurrency proposal and China’s announcement of its Digital Yuan, both in 2019, and COVID-19 in 2020. The Ukraine invasion in 2022 has combined these pre-existing trends with geopolitics and the weaponization of digital finance.

This paper analyses the geopolitical and strategic dimensions of how technology is reshaping the international monetary and payments systems. Recent developments pose major challenges for governments, policymakers and regulators. While Bitcoin and its thousands of progenies could be ignored safely by central banks as a challenge to monetary sovereignty, Facebook’s proposal for Libra, the first global stablecoin, brought an immediate and potent regulatory response globally. This proposal by a private technology firm to move into the traditional preserve of sovereigns – the creation of money – was always likely to trigger both a strong regulatory response and the launch of other rival sovereign digital currencies. China moved first with its Digital Yuan (eCNY) – an initiative that has provoked a chain of central bank digital currency (CBDC) projects around the globe. In turn, COVID-19 has driven digitalization to new heights, particularly in electronic payments.

Into this environment, the invasion of Ukraine in 2022 and the response led by Europe and the United States focusing on the weaponization of the existing international monetary and payment system, has highlighted the power of the existing Western-led monetary and payments architecture and the potential risks of dependence on that system. While China’s Digital Yuan was originally developed with a mostly domestic focus, when as we expect, it is unleashed for use beyond China, we foresee it will be the catalyst for most major economies – and many others – to issue their own sovereign digital currencies, if they have not already done so, as these nations strive to retain and strengthen their own monetary and financial sovereignty through technology.

Looking forward, new technologies present the possibility of building a new international monetary system, not dominated by any single monetary hegemon. While it is now possible (echoing Libra) to build a global technological framework for money and payments, under the existing framework of the IMF Articles of Agreement, we suggest – while potentially optional from the standpoint of efficiency – the geopolitics of a multipolar world coupled to the evolution of enabling technologies will result in a small number of major power / major economy CBDCs and currency areas, eliminating the historical pattern of monetary hegemony. There is a clear need to redesign systems to reduce this likelihood and support international monetary and payment arrangements as a public good.

Keywords: Sovereign digital currencies, central bank digital currencies, Libra, Diem, Digital Yuan, e-CNY, COVID-19, payments, blockchain, distributed ledger technology, SWIFT, CHIPS, IMF, SDR

JEL Classification: E51, G23, O31