A visual representation of a cryptocurrency coin on display in front of the logos for Facebook and Libra. Chesnot | Getty Images

Facebook's cryptocurrency plans looked shaky this week after a handful of high-profile members bowed out of the project. But while libra slowly gets off the ground, China is looking to launch an alternative. The People's Bank of China announced earlier this year that it was working on a digital currency backed by the yuan, reportedly inspired by Facebook's announcement. Analysts and crypto industry leaders are highlighting geopolitical implications of China launching a digital currency first — especially if libra hits a brick wall with U.S. regulators. "China has been incredibly strategic about how they think about cryptocurrency," Brad Garlinghouse, CEO of Ripple, told CNBC in a phone interview. "They have been dependent on the U.S. dollar as the global reserve currency — to the extent that other currencies emerge, and they can help propagate those, they're intrigued by that." China's proposed digital currency would bear some similarities to Facebook's libra, a senior central bank officer said this summer, according to a transcript of a speech that was published online. He also said the digital coin could be used across major payment platforms, including China's ubiquitous WeChat and Alipay. RBC Capital Markets analysts told clients this week that based on recent conversations and meetings in Beijing, China's plans are moving quickly. The People's Bank of China "has expedited its development of a Central Bank Digital Currency" after Libra's announcement in June, the analysts said. "If U.S. regulators ultimately dismiss Libra and decide not to draft regulation to encourage Crypto innovation in the U.S., China's [Central Bank Digital Currency] may be strategically positioned to become the de facto global digital currency in emerging economies, largely through Alipay, WeChat, UnionPay and other messaging & payment apps," RBC analysts Mark Mahaney and Zachary Schwartzman said in a research note Tuesday. Cryptocurrency would add to a long list of existing tensions between the global superpowers. The U.S. and China are locked in a stalemate on trade, and a battle for dominance in 5G, the mobile network promising faster data speeds. The U.S. Treasury Department has also labeled China as a currency manipulator — a complaint that could be exacerbated if a yuan-backed cryptocurrency takes off. Fed chairman Jerome Powell said earlier this year that the U.S. is keeping an eye on sovereign-issued digital currencies but that it wasn't something he was "actively considering." In the meantime, other digital currencies could "dampen the domineering influence of the U.S. dollar on global trade," Bank of England governor Mark Carney said during a speech in Jackson Hole, Wyoming, earlier this year.

Controlling monetary systems

In June, Facebook announced that it would spearhead the launch of a cryptocurrency run by the nonprofit Switzerland-based Libra Association in 2020. Libra is a so-called "stable coin," meaning its value is tied to that of an underlying fiat currency such as the dollar. For now, the Libra Association has said its cryptocurrency would be pegged to the yen, U.S. dollar and euro. It has not said whether the yuan would be included. It started with roughly two dozen members. But last week Visa, PayPal, MasterCard and Stripe all dropped out, fueling concerns that the project may never see the light of day. The association met this week in Geneva, Switzerland, and the remaining group signed the association's charter on Monday. Katie Haun, general partner at Andreessen Horowitz and co-head of its $350 million cryptocurrency fund, was elected to the board of directors for the project. Despite the exodus of high-profile names this week, Haun said she and the firm "remain committed to Libra's mission." The project received pushback this summer from senior congressional finance committee members, global regulators, former lawmakers and industry insiders who flagged risks and questioned Facebook's ambitions. Lisa Ellis, senior equity analyst at MoffettNathanson, said regulators may be sidetracked by Facebook's involvement in libra and need to "keep their eye on the fact that we do need to innovate to create digital forms of currency." "If governments and regulators are concerned about their control over monetary systems and money flows, the best defense would be a good offense," Ellis said. "It would behoove regulators in the U.S. and Europe over the long term to maintain their leadership given that the dollar, the euro and the yen are used as proxies for global reserve currencies." Ripple's Garlinghouse, who has been critical of libra, pointed to U.S. dominance in the rise of the internet, too. That was in part because of a "constructive regulatory policy." If cryptocurrency projects aren't grown in the U.S., he said, there are potential "geopolitical implications." Garlinghouse is hardly alone in calls for clearer regulation. In a roundtable hosted on Capitol Hill last year, more than 50 cryptocurrency industry participants from Fidelity, Nasdaq, State Street and Andreessen Horowitz voiced concerns about lack of clear laws and potential for innovation to flee overseas as a result. "While bashing Facebook is good politics, neglecting the traditional role of the United States in welcoming the growth of innovative technology is not," the Blockchain Association, a Washington, D.C., lobbying group for cryptocurrency and blockchain, said in a blog post last month. "Congress should focus on nurturing open blockchain networks before the United States loses out in this global technology race." Andreessen's Haun told CNBC recently that it would be a "dangerous thing, and frankly a dangerous precedent to start shutting down technology before it's built." Haun also said there are "national security implications" if the United States falls behind in this area, and pointed to China's cryptocurrency as an example. Others are more worried about the national security implications if libra does get off the ground. Treasury Secretary Steven Mnuchin said in July that Facebook's planned digital currency "could be misused by money launderers and terrorist financiers" and that it was a "national security issue." He told CNBC's "Squawk Box" in an interview Monday that he met with libra representatives on multiple occasions and has been "very clear" that if they don't meet anti-money-laundering standards "that we would take enforcement actions against them." "I think they realized that they're not ready, they're not up to par," Mnuchin said. "I assume some of the partners got concerned and dropped out until they meet those standards."

WhatsApp's opportunity

For Facebook, moving meaningfully into payments would likely be done through WhatsApp. The mobile chat app, bought by Facebook for $19 billion in 2014, doesn't have fully built-in payment functions yet. WhatsApp has, however, done a pilot program with payments in India. RBC's Mahaney and Schwartzman said that messaging apps "represent the greatest opportunity to onboard consumers to digital wallets which could lead to a greater consumer adoption of digital currencies." This has already played out in China, where, according to RBC, WeChat has more than 1.1 billion monthly active users and Alipay counts 1.2 billion global annual active users. Brian Kelly, CEO of BKCM, also said the reason Facebook is launching libra in the first place is to compete with those "super apps" in Asia. WeChat and Alipay's built-in payments capability could be a leg up in emerging markets. Offering a payments capability is especially important in places such as sub-Saharan Africa, where mobile money is on the rise. According to the World Bank, the share of people with traditional financial accounts remained flat through 2018. But the percentage of those with mobile-only money accounts nearly doubled year over year to 21%. The Libra Association is moving ahead this week despite the loss of key members. Facebook CEO Mark Zuckerberg is heading to Capitol Hill next week to answer for the project in front of the House of Representatives. Kelly said if regulatory pushback persists, he "wouldn't be surprised if libra launches in another country." Even in the face of regulatory scrutiny, RBC analysts are predicting "Facebook will continue to pursue digital wallet initiatives." "We believe a host of other companies remain very interested in joining the association," Mahaney and Schwartzman said. "If a clear regulatory roadmap is developed and Libra launches successfully, we would not be surprised to see these firms reapply to the association." — CNBC's Michael Bloom contributed to this report.