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U.S. Banking System under threat as China may put Donald Trump and The Fed under pressure

In his re-election bid, Donald Trump has reignited his long-running battle with China, something that is likely to feature heavily.

Meanwhile, China may be about to create serious problems for the U.S. banking system by launching a digital version of its currency Yuan — and this could force the U.S. dollar to compete even more.

The Federal Reserve has now cautioned that the digital currencies of central banks could one day overtake commercial banks, create "a deposit monopolist" and play "havoc" with the bank system.

"The implementation of digital currencies will explain a fundamental change in the framework of a financial system, a central bank that is open to all'" wrote the Philadelphia researchers in a 32-page paper entitled “Central Bank Digital Currency: Central Banking for All?"

The paper looked at the potential effects of "giving consumers the opportunity to hold a bank account directly with the central bank"—something that could potentially replace commercial bank checking accounts.

The paper stated "If competition from commercial banks is hampered (e.g. by any tax subsidization of central bank deposits), the central bank must be vigilant in choosing not to cause havoc with the maturity transformation," the paper read.

If people were to start keeping cash exclusively with the central bank of the country, the Fed and other central banks could gradually become a "deposit monopolist," drawing deposits away from the commercial banking sector.

Theoretical discussions around digital currencies in central banks, sometimes called CBDCs and often inspired by Bitcoin's blockchain technology, have swirled over the past few years, but China's efforts to digitize its Yuan and Facebook's plans to launch its own currency have pushed central bankers into action.

The Fed's paper echoes an alert given in December last year by the International Monetary Fund that digital currencies may see deposits "removed from commercial banks."

Digital currencies are supposed to operate much like standard coins and notes issued by central banks but function entirely online — with some floating the idea of using Fed Accounts run by the government to distribute digital dollars.

China has already started trialing payments in four major cities in its new digital currency, local media reported in late April.

Other countries around the world are also working on digitizing their own currencies, including Norway, Sweden, and Japan.

Digital currencies intended to make it "faster, easier, and more efficient to buy, sell, or move money from place to place" could put pressure on the Dollar's supremacy according to one analyst.

"We may be heading towards a post-dollar world," reported the Financial Times last month, pointing to China's digital currency regime as one of a number of ways to erode the dollar's stance.

"It's very possible for other countries to adopt the China framework and then a first-mover advantage turns into a strong network effect," said Matthew Graham, Chief Executive Officer of the Beijing-based blockchain and crypto-monetary consultancy Sino Global Capital, also stating "For China, this is the best-case scenario."

It is unlikely that Donald Trump will take that sitting down.

"We only have one true currency in the U.S.A., and it's stronger than ever, both safe and secure," Trump said last year in a Twitter tirade against the Libra, bitcoin, and cryptocurrencies of Facebook.

"[The dollar] is by far the most dominant currency in any part of the world, and it will still remain so."

To keep the dollar at its pole position, China could force Trump and the Fed into difficult decisions about the financial system's future. 

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