The digital yuan could give those the U.S. seeks to penalize a way to exchange money without U.S. knowledge. Exchanges wouldn't need to use SWIFT, the messaging network that is used in money transfers between commercial banks and that can be monitored by the U.S. government.

The chance to weaken the power of American sanctions is central to Beijing's marketing of the digital yuan and to its efforts to internationalize the yuan more generally. Speaking at a forum last month, China's Mr. Mu, the central bank official, repeatedly said the digital yuan is aimed at protecting China's "monetary sovereignty," including by offsetting global use of the dollar.

In a 2019 war game at Harvard University, veteran U.S. policy makers scrambled to craft a response to a nuclear-missile development by North Korea secretly funded with digital yuan. Because of the currency's power to undercut sanctions, the participants, including several who are now in the Biden administration, deemed it more threatening than the warhead.

Nicholas Burns, a longtime American diplomat and favorite to be ambassador in Beijing, told the group, "The Chinese have created a problem for us by taking away our sanctions leverage."

As China's marketing for the digital yuan kicks into high gear, an English-language animation circulated online by state broadcaster CGTN -- seen below -- shows a man in an American-flag shirt knocked out by a golden coin depicting digital yuan.

"This is one of the building blocks of China's move toward world market status and greater involvement in setting the framework of the global economy," the narrator says.

Initially, the digital yuan won't change significantly how money circulates through China's financial system. Under the central bank's direction, the six biggest commercial banks -- all government-owned -- will distribute digital yuan to smaller banks and to app providers AliPay and WeChat, which are expected to manage sender-recipient interactions.

Unlike electronic transactions today, the digital yuan is designed to move from A to B instantaneously, at least in theory removing a way banks and financial apps profit off fees and brief built-in delays in such handoffs. The only necessary middleman is the central bank. Mr. Mu has said the digital yuan, because it is state-backed, will reduce risks to the financial system posed by China's dominant payment platforms that are private companies.

When a global TV audience turns its attention to skaters and bobsledders in Beijing's Winter Olympics next February, authorities are expected to give visiting athletes digital yuan to spend while they are in the spotlight, an indication of ambitions that stretch beyond China's shores.

Beijing has joined an initiative to develop protocols for the cross-border use of digital currencies, working with the Bank for International Settlements and the central banks of Hong Kong, Thailand and the United Arab Emirates.

China's digital strides draw attention to how the U.S. needs to modernize its own financial infrastructure, according to Kevin Warsh, a former Fed governor now at Stanford University's Hoover Institution. "If we wait 5 or 10 years, we may well end up with some very bad policy choices," he said.

More than 60 countries are at some stage of studying or developing a digital currency, according to research group CBDC Tracker. Digital currencies hold some of their biggest potential for the 1.7 billion people globally who the World Bank says lack a bank account. The Bahamas has already issued a digital currency to address financially underserved populations. Some central banks say such currencies would come in handy for families of migrant laborers who make tiny fund transfers that are cumbersome and expensive.

The senior European central banker noted that international person-to-person money transfers can take days and worried that speed and efficiency could eventually make the digital yuan a preferred currency for remittances as countries deepen financial ties with China.

China, with a working model, is offering a ready way for managing digital cash. President Xi last year called for China to seize opportunities to set international rules for digital currencies, much as Beijing has sought to influence and dominate an array of advanced-technology standards such as for 5G telecommunications, driverless cars and facial recognition.

Asked during a recent Senate appearance whether the dollar could be digitized to help the U.S. defend its supremacy, the Fed's Mr. Powell said researching that question is a "very high-priority project."

"We don't need to be the first," he said. "We need to get it right."

--Grace Zhu contributed to this article.

Write to James T. Areddy at james.areddy@wsj.com

(END) Dow Jones Newswires

04-05-21 1103ET