Digital Dollarization and the CBDC Currency Sovereignty War (Part 3)

Digital Currency Series · Part 1: What is a Stablecoin? · Part 2: Types and Lessons from Terra · Part 3: Currency Sovereignty War(Current) · Part 4: Asset Tokenization · Part 5: Regulatory Trends · Part 6: Financial Literacy

Discussions on stablecoins have moved beyond technical architecture into the geopolitical realm. As dollar-pegged stablecoins serve as the lifeblood of the global digital finance ecosystem, they have become more than just a market phenomenon—they are a powerful tool for extending U.S. monetary hegemony into the digital sphere.

The Shadow of Digital Dollarization: Neutralizing National Economies

Digital dollarization refers to the phenomenon where economic agents in a country extensively use digital dollars, such as USDC or USDT, for daily transactions, savings, and investments instead of their local currency. While this spreads more rapidly in countries with unstable local currencies, it is also quietly infiltrating the economies of developed nations. For example, if a developer in Seoul receives payment from a U.S. client in USDC and deposits it directly into a Decentralized Finance (DeFi) protocol to earn dollar-based interest without converting it to Korean Won, that capital completely bypasses the Korean financial system.

If this phenomenon intensifies, countries face severe threats to their sovereignty:

Neutralization of Monetary Policy: Even if a central bank adjusts its base interest rate, the impact on the market becomes minimal. If all economic activity is dollar-based, the central bank’s monetary policy effectively enters a state of paralysis.
Loss of Economic Data: When capital flows move out of a nation’s control and onto the blockchain, government and policy authorities lose the essential data needed to understand the economic situation and formulate appropriate policies.
Subordination to the U.S. Economy: It leads to a result where the national economy becomes completely dependent on the monetary policy and dollar value fluctuations of the U.S. Federal Reserve.

Paradoxically, this acts as a powerful strategic advantage for the U.S. As global demand for dollar-pegged stablecoins increases, issuers must purchase U.S. dollar cash or U.S. Treasuries as reserves. This creates stable demand for U.S. Treasuries, contributing to the financing of America’s massive debt and further solidifying the dollar’s reserve currency status in the global financial system.

National Response: Safeguarding Sovereignty with a ‘Two-Track Strategy’

To counter the massive threat of digital dollarization, countries around the world are employing a dual strategy to foster their own digital currency ecosystems: the ‘Two-Track Strategy.’ This involves running a top-down approach, led directly by the state, in parallel with a bottom-up approach that leverages private sector innovation.

Track 1: Building a CBDC Fortress

The first strategy is for governments and central banks to take the lead in developing the safest and most trusted state-sanctioned digital currency: Central Bank Digital Currency (CBDC). This is the ’last line of defense’ against the invasion of digital dollars and a strategy to build a ‘digital fortress’ controlled by the state.

![Central Bank Digital Currency (CBDC)](https://lh3.googleusercontent.com/d/1CeR9vI5j-UwZ6xwxbu4p-xBIPUu8gaZb “Central Bank Digital Currency (CBDC)

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China’s Digital Yuan (e-CNY): The most advanced case, aiming for strong state control. Through e-CNY, the Chinese government intends to keep a firm grip on all financial data of its citizens, check the influence of private big-tech companies like Alipay and WeChat Pay, and, in the long term, elevate the status of the yuan in international trade settlements to challenge dollar hegemony.
Europe’s Digital Euro: The European Central Bank (ECB) is pursuing the digital euro to counter both U.S. dollar hegemony and the dominance of massive U.S. tech firms like Google and Apple in the payment market. With a focus on ‘privacy protection’ as a core value, there is a strong intent to build an independent European digital economic zone free from U.S. surveillance.

Track 2: Fostering ‘National Champion’ Private Stablecoins

Developing a CBDC takes significant time as it involves complex technical, legal, and social consensus. Meanwhile, digital dollars are rapidly encroaching on the market. Consequently, countries are adopting a faster, more flexible response by fostering ‘private stablecoins’ based on their local currency under government regulation and oversight.

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Japan’s Progmat Coin: The most representative example of this strategy is Japan. The Japanese government is actively supporting Mitsubishi UFJ Trust and Banking Corporation (MUFG), a global financial giant, in issuing the yen-based stablecoin ‘Progmat Coin.’ This embodies several high-level strategic goals:
- Speed and Innovation: Private companies can respond far more agilely to market changes and demands than the government. By putting nimble private players at the forefront, they can respond to the ‘speed war’ of digital dollars.
- Maintaining Currency Sovereignty: While Progmat Coin is issued by the private sector, its value is pegged to the ‘Japanese Yen.’ In other words, all economic activity via this coin remains within the ‘Yen economic zone,’ and the Bank of Japan can absorb blockchain innovation without losing the influence of its monetary policy.
- Building a ‘Made in Japan’ Ecosystem: The Japanese government encourages domestic companies to preempt new DeFi and Security Token Offering (STO) markets based on yen stablecoins. This is part of an industrial policy to prevent the outflow of financial data and ensure that domestic companies hold the initiative in the future digital finance industry.

Ultimately, this two-track strategy is like a government-private alliance against the common enemy of the ‘digital dollar.’ The government lays the ‘mat’ of regulations and laws, while private companies ‘dance’ with innovation on top of it, expanding the nation’s digital currency territory.

Payment Layer: The Heart of Future Finance ⚔️

The future of this currency war ultimately boils down to the question: ‘What currency will be used for payment?’ We can examine the importance of this issue through the scenario of fractional investing in a popular cafe building in Seongsu-dong.

Scenario 1 (Infiltration of the Dollar Economic Zone): The building token issuer supports USDC payments to attract global investors. If a French investor buys these building tokens with USDC, the transaction bypasses the Korean financial network entirely. A portion of the building’s monthly rental income and capital gains leaks overseas as dollar-based assets, draining wealth from the Korean economy.
Scenario 2 (Defending Currency Sovereignty): The Korean government mandates the use of a regulated ‘Won stablecoin’ or a future ‘Digital Won (CBDC).’ Now, the French investor must first exchange their Euros or Dollars into Digital Won to buy the building tokens. All transactions take place on a Won basis, and the Bank of Korea can transparently monitor and control the entire flow of funds.

As such, the ‘payment currency’ of tokenized assets is more than just a matter of convenience; it is a strategic stronghold on which the fate of a national economy depends. The stablecoin regulations and CBDC development being pursued by various countries are part of an intense competition to secure dominance over this payment layer.