Digital Currency Headache: Goodbye to the dollar's ability to further national interests.

• Author: Rogoff, Kenneth

Facebook CEO Mark Zuckerberg was at least half right when he recently told the United States Congress that there is no U.S. monopoly on regulation of next-generation payments technology. You may not like Facebook's proposed Libra (pseudo) cryptocurrency, Zuckerberg implied, but a state-run Chinese digital currency with global ambitions is perhaps just a few months away, and you will probably like that even less. Perhaps Zuckerberg went too far when he suggested that the imminent rise of a Chinese digital currency could undermine overall dollar dominance of global trade and finance--at least the large part that is legal, taxed, and regulated. In fact, U.S. regulators have vast power not only over domestic entities but also over any financial firms that need access to dollar markets, as Europe recently learned to its dismay when the United States forced European banks to comply with severe restrictions on doing business with Iran.

America's deep and liquid markets, its strong institutions, and the rule of law will trump Chinese efforts to achieve currency dominance for a long time to come. China's burdensome capital controls, its limits on foreign holdings of bonds and equities, and the general opaqueness of its financial system leave the renminbi many decades away from supplanting the dollar in the legal global economy.

Control over the underground economy, however, is another matter entirely. The global underground economy, consisting mainly of tax evasion and criminal activities, but also terrorism, is much smaller than the legal economy (perhaps one-fifth the size), but it is still highly consequential. The issue here is not so much whose currency is dominant, but how to minimize adverse effects. And a widely used, state-backed Chinese digital currency could certainly have an impact, especially in areas where China's interests do not coincide with those of the West.

A U.S.-regulated digital currency could in principle be required to be traceable by U.S. authorities, so that if North Korea were to use it to hire Russian nuclear scientists, or Iran were to use it to finance terrorist activity, they would run a high risk of being caught, and potentially even blocked. If, however, the digital currency were run out of China, the United States would have far fewer levers to pull. Western regulators could ultimately ban the use of China's digital currency, but that wouldn't stop it from being used in large parts of Africa, Latin America, and...