Digital Financial Statecraft: The EU’s and China’s Divergent Approaches to Central Bank Digital Currencies

CSDS POLICY BRIEF • 20/2025

By Lukas Spielberger and Paige Reynolds

16.7.2025

Key issues

• Central Bank Digital Currencies (CBDCs) will play an important role in the development of a more multipolar international monetary system;
• The People’s Bank of China is undertaking concerted efforts to use its CBDC to promote the international role of the renminbi (RMB) and create an alternative to the dollar-based international financial system;
• Recent proposals for a digital euro, by comparison, follow a more defensive logic. To meet its objective of strengthening the international role of the euro, the EU should align the design of the digital euro with its wider strategy.

Introduction

The international currency system is in upheaval. Although the United States (US) dollar has long been the most important international currency, recent policy actions by the Trump administration have cast doubt over whether the greenback can continue to play that role. This erosion of trust in the dollar-based system has opened the door to rival currency issuers seeking to promote their currencies at the dollar’s expense. China has officially sought to promote the RMB since 2009 and has since pursued an aggressive strategy of promoting RMB-based trade invoicing and investments. The European Union (EU) in 2019 resolved to strengthen the international role of the euro and to defend its “monetary sovereignty”. While these developments do not herald the imminent end of the dollar’s international dominance, they illustrate that there are clear attempts by major economic actors to create alternatives and insulate against the political risks of using the US dollar.

One domain in which such efforts have become clearest has been the creation of digital currencies. Both the EU and China have undertaken pioneering efforts to create blockchain-based CBDCs. As we discuss in this CSDS Policy Brief, however, CBDCs play very different roles in the EU’s and China’s efforts to internationalise their respective currencies. China has developed the “e-yuan” according to an unabashedly offensive logic, seeking to create a blockchain-based alternative to the global dollar system. By contrast, the EU’s efforts to create a digital euro are primarily framed in defensive terms. The European Central Bank (ECB) has presented the project as an effort to ensure monetary sovereignty in the euro area, but it places less emphasis on using the digital euro to increase the euro’s international reach. To ensure that the development of the digital euro dovetails with the EU’s stated objective of promoting the euro as an international currency, a much more ambitious approach will be needed.

CBDCs and currency internationalisation 

Central bank digital currencies offer new technical possibilities for payment systems. To understand how they work, it is important to recall that central banks issue legal tender – their balance sheets are therefore the safest store of value that exists. If a central bank issues a digital currency, that entry on the blockchain is equivalent to cash from the holder’s perspective. As such, a CBDC represents an inherently risk-free asset for its users, but, unlike cash, it can be transacted digitally. Two different use cases for CBDCs are currently under development. On the one hand, so-called “retail CBDCs” would be available for businesses and consumers to conduct electronic transactions. “Wholesale CBDCs”, on the other hand, would be available to financial institutions to settle trades in financial markets, in much larger volumes than retail CBDCs.

As overly technical and arcane as these differences may seem – for end users, the experience would be virtually indistinguishable from current payment technologies – it is not just central bankers who have taken great interest in digital currencies. As tensions have mounted in the international monetary system, not least due to frequent use of financial sanctions by the US, CBDCs have increasingly been considered as a tool of what some call “financial statecraft” – the use of financial policies to accomplish foreign policy objectives. Put simply, being able to transact in one’s currency means being less exposed to the risk that financial infrastructure might one day be weaponised by rival powers, and CBDCs provide a new option to achieve that.

The two types of CBDCs can contribute to currency internationalisation to different degrees. On the one hand, retail CBDCs can generally be used for smaller transactions abroad, say, paying for a coffee in euros while on holiday in London. While handy for end-users, the impact of this technology on international currency usage is likely limited. On the other hand, wholesale CBDCs can be used to expedite cross-border transactions among banks and other financial institutions, which are far larger in volume. Currently, these transactions are settled through intermediary banks, which slows down the process and raises their costs. A well-designed wholesale CBDC thus has the potential to significantly restructure and improve the efficiency of international payments.

Given this potential, the question of how quickly jurisdictions develop CBDCs and for what ends has attained strategic importance. For the dollar’s main challengers, the euro and the RMB, there are currently initiatives to develop CBDCs – yet their design parameters suggest very different degrees of geopolitical ambition. The ECB’s approach to the digital euro has mostly been defensive, seeking to shield the Euro Area’s payment systems from foreign interference. China’s efforts to develop the e-yuan, conversely, can be seen as a case of offensive financial statecraft, aimed directly at promoting the international use of its currency. Succinctly, CBDCs as a technology are open to various strategic uses.

China’s efforts to promote the e-yuan 

China has positioned itself to lead the construction of a new digital financial order. Launched in 2022, the digital yuan has been a central pillar of Beijing’s broader effort to enhance the renminbi’s global standing and reshape international finance. China sees CBDCs not simply as a new payment method: it seeks to restructure the current global system to be centred around the digital yuan. With no dominant international digital currency in existence, China considers the field of CBDCs as a prime opportunity to rival the US dollar.

A core driver of this strategy is China’s national security concern over dependence on the dollar. As of 2023, roughly 47% of China’s cross-border payments continued to be transacted in US dollars, most of which are routed through US-based payment systems like SWIFT (the Society for Worldwide Interbank Financial Telecommunication). For Beijing, dependence on the dollar is a large national security risk. This vulnerability, heightened by the recent weaponisation of the dollar in response to Russia’s invasion of Ukraine, has driven China’s move to establish a multipolar currency system. The digital yuan serves as the cornerstone of this vision, offering a path to reduce China’s exposure to dollar-dominated infrastructures and promote renminbi usage in cross-border trade.

China has re-engineered its blockchain to prioritise cross-border wholesale settlements and its sovereign priorities. The People’s Bank of China has been at the cutting edge of the technological development of CBDCs, notably when it achieved a breakthrough known as the Dashing Protocol, which has laid the foundation for a competitive wholesale CBDC. A key innovation for this blockchain has been the use of a dual certification mechanism, which reduces transaction costs and improves performance, operating up to 10 times faster than traditional blockchain models. Such technological advancements have enabled China to design a competitive infrastructure for transactions between national banking systems, centred around the PBoC.

Two recent initiatives to implement its wholesale CBDC at the international level illustrate China’s ambition to provide a digital rival to the current dollar and euro-based international financial system. First, together with Hong Kong, Thailand and the United Arab Emirates, China has launched “Project mBridge”, which aims to facilitate real-time cross-border payments between central banks using CBDCs. By facilitating payment-versus-payment settlements directly between national central banks, Project mBridge has sought to enable quick, secure and direct transactions between its participants. The initiative thereby removes the need for intermediaries and overall reliance on SWIFT. By avoiding SWIFT, China decreases its risk exposure to a Western-dominated system, which helps China evade Western economic pressures and create a more independent payment network. The result is a digital financial infrastructure that is faster and cheaper, reducing costs by up to 50%, and less dependent on the West.

Project mBridge has gained international political significance. In October 2024, the Bank for International Settlements (BIS) decided to withdraw from Project mBridge after it had co-founded the project, citing concerns about China’s influence and control. This move reveals that China’s ambition is not just technological, but deeply political. By global players stepping away, the BIS made it clear that Beijing’s dominant role challenges existing international systems. In this case, political ambition plays a larger role than innovation.

Second, China has sought to harness its wholesale CBDC infrastructure to transform how global oil is priced and settled. As the world’s largest oil importer, with over 80% of its oil needs met through foreign sources, China’s dollar dependence is a major challenge when faced with the rise of a global superpower. Since 1974, oil payments have almost exclusively been settled in US dollars, and oil-exporting states have largely reinvested the proceeds in the Eurodollar market. China aims to break this cycle using its CBDC technology.

To do so, China has sought to invoice and settle its oil imports in yuan using the blockchain. To this end, China has intensified cooperation with the Gulf Cooperation Council (GCC), combining digital payment infrastructures and access to renminbi liquidity through central bank swap lines. The first crude oil trade settled in digital yuan took place in 2023, and the Saudi central bank joined Project mBridge in 2024. Settling oil trades in renminbi not only reduces China’s reliance on the dollar but also offers the Gulf states an infrastructure that aligns with their goal of diversifying away from the dollar. Even more than just settling oil in yuan, China seeks to replicate the full financial cycle of the petrodollar system by developing a mechanism for oil exporters to reinvest yuan revenues into the Chinese economy, again using digital yuan infrastructures. Recent work has identified this as the foundation of a rising Petroyuan regime aimed at challenging the dollar’s dominance in global energy markets.

In sum, China has pioneered its wholesale CBDC as a strategic tool to advance its role in the global financial system. By positioning itself at the forefront of this currency innovation and seeking to cooperate with other central banks, it has turned its wholesale CBDC into a direct challenge to the dollar-dominated system. Beijing is offering a more efficient alternative financial system by prioritising a wholesale CBDC for cross-border settlements. This new design is not just an example of technological innovation, but more importantly, represents a form of financial statecraft.

The planned “digital euro” 

Contrasting with China’s aggressive approach, the ECB has approached the development of a CBDC more cautiously. The ECB has discussed the potential introduction of a digital euro since 2020. In 2023, the idea made it on the EU’s policy agenda when the European Commission proposed a legal framework for a digital euro for retail payments. While these efforts could, in principle, align with the ECB’s stated objective of strengthening the international role of the euro, in practice, there are strong reasons to doubt that the digital euro project will support currency internationalisation in the near future.

The ECB’s initial enthusiasm for the idea of a digital euro followed undeniable geopolitical considerations. The ECB justified the introduction of a CBDC as a way of safeguarding the Euro Area’s “monetary sovereignty” against the backdrop of two types of threats from outside the Euro Area. First, the attempt by Meta, Facebook’s parent company, to introduce a stablecoin called Libra in 2019 was seen as a potential threat to the ECB’s monetary monopoly. Efforts by other central banks, most notably the People’s Bank of China, to create CBDCs were seen in similar terms if they were to become accepted within the Euro Area. In other words, by creating its own CBDC, the ECB sought to ward off competition from other providers of blockchain-based payment systems.

A second geopolitical motivation has been to create an alternative payment system to reduce the EU’s reliance on the dominant US payment providers, VISA and Mastercard. As a recent article argues, the ECB has come to see payment infrastructures increasingly in terms of their potential security risks. Excessive reliance on US service providers raised not just the risk of sanctions, but also concerns about privacy, thus linking up with the EU’s worries about achieving digital sovereignty. Having a digital euro was presented as safeguarding the strategic autonomy of European payments by ensuring compliance with EU privacy standards and securing against geopolitical risks.

On balance, all of these geopolitical considerations were primarily defensive – another recent article argues that the promotion of the euro as an international currency took a back seat in the discussion on the digital euro. Indeed, the ECB has been sceptical towards the idea of linking its CBDC plans to the internationalisation of the euro. From its perspective, the motivations behind the digital euro are primarily domestic.

This inward-looking motivation is borne out in the efforts at creating a digital euro to date. Rather than develop a digital euro for retail payments on its own, the ECB has sought political backing from the Commission, which culminated in the legislative proposal currently under discussion. This decision has not just slowed down the process immensely – the file has been under negotiation for two years – but also opened the design features of the digital euro up for interest politics. European banks have loudly voiced their reservations against the project. They feared that the digital euro could rival customer deposits, which are the primary source of bank funding, and that the banks might lose out on their retail banking business. Anticipating this pushback, the proposal for the digital euro limits individual wallets to just €3,000. Access to the digital euro is, under the current proposal, to be limited to Euro Area residents, a design choice that the ECB has welcomed, but which reduces its potential to serve for international payments.

Plans for a wholesale digital euro are far less advanced, even if they enjoy more support from the financial industry. To date, there have been several trials in which euro-denominated securities were settled via the blockchain. The ECB’s Governing Council, earlier this year, endorsed a two-track strategy towards a wholesale international euro: initially, it will seek to create a platform for linking the blockchain to the ECB’s current payments system T2/T2S. In the longer run, it wants to work towards settling blockchain transactions in central bank money, including international operations, such as foreign exchange.

In other words, the primary justification for the wholesale digital euro has been European capital market integration. The digital wholesale euro is presented as a way of facilitating trade in digital financial assets within the EU and contributing to the digital capital markets union. By contrast, the possibility of designing the wholesale digital euro as an international payment infrastructure remains off the agenda for now. This comes despite efforts by the Commission since 2018 to increase the euro’s share in domains such as energy invoicing.

Geopolitical considerations clearly played an important role in justifying the ECB’s efforts to create a digital euro, particularly for the more advanced work towards a retail CBDC. And yet, it appears that these efforts have not been systematically integrated with the EU’s broader agenda of supporting euro internationalisation. The objective for the digital euro has been for the ECB to retain control over blockchain-based payment systems in the Euro Area. Several design features of the digital euro are set to hold back its potential international usage, and it does not appear that the ECB is keen to see large amounts of digital euros circulating outside the Euro Area.

Conclusion

Central bank digital currencies have the potential to transform the international financial system, but much depends on how they are designed. As China’s promotion of the digital yuan in international wholesale payments illustrates, CBDCs can be used as an alternative to existing financial infrastructures and help countries reduce their reliance on the dollar. And yet, the ECB’s efforts regarding the digital euro have primarily followed defensive motivations, not the promotion of the euro. As a result of this lack of ambition, the digital euro has progressed slowly and seems unlikely to keep pace with the efforts spearheaded by China. Being more integrated in the current international financial architecture, not least the governance of SWIFT, the ECB may see less of an incentive to develop the digital euro as an alternative international payment system. But this approach risks missing a larger strategic opportunity to bolster the role of the euro and EU-based payment technologies, in line with the EU’s wider strategic priorities.

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