China has taken a step further in its quest to boost yuan through its sovereign digital currency. SCMP reported that Beijing has joined Hong Kong, Thailand and the United Arab Emirates (UAE), along with the Bank of International Settlements (BIS), to explore cross-border payments for digital currencies.
According the report, the People’s Bank of China (PBOC)’s Digital Currency Institute, the arm of the central bank in charge of minting the country’s sovereign digital currency, made the announcement on Tuesday. The announcement said it’s joining the Multiple Central Bank Digital Currency Bridge, a cross-border payments project initiated by the Hong Kong Monetary Authority and Bank of Thailand in 2019.
The move is believed to have the potential of helping China to create a new path to promote the use of yuan in global payments and weaken the US dollar’s position as the world’s dominant reserve currency.
The project is part of China’s long-nurtured aim to internationalize yuan through its sovereign digital currency use. The report said the project has received support from the Bank for International settlement Innovation Hub center in Hong Kong, a unit created by the Basel, Switzerland-based organization to study key financial technologies for central banks. The project was originally named Inthanon-LionRock, but was renamed bank for “international” settlement, suggesting more inclusivity and that it’s open for others to join.
Earlier in the month, the PBOC had set up joint venture with SWIFT, the dominant network facilitating international payments between banks.
In January, China embarked on the third trial of e-yuan in the city of Shenzhen, as part of larger scheme to introduce the digital currency in mainland China. The first test was held in Luohu District, in October 2020, while a second round was conducted in Futian District at the beginning of this year.
But the Digital Currency Electronic Payment (DCEP) project was about the use of the e-yuan within China, and it was executed through a few individuals selected through a lottery to spend the digital currency.
The press release from BIS said the new project is intended to use capabilities of “distributed ledger technologies” to support real-time cross-border foreign exchange transactions in multiple jurisdictions around the clock.
“The project aims to foster a conducive environment for more central banks in Asia as well as other regions to study the distributed ledger technology, solve pain points and aid in cross-border fund transfers, international trade settlement and capital market transactions,” the statement said.
The PBOC is in the forefront of digital currencies as other central banks are yet to make a move, although many are likely going to launch retail digital currencies in the next three years, according to a BIS survey published in January.
SCMP quoted former China’s central bank governor, Zhou Xiaochuan, who played a key role in the digital currency project, saying at the end of 2020 that one of the major benefits of using a digital system is that both payments and currency conversion happen in real time.
He explained that the DCEP could help the yuan go international, but it is not a goal that Beijing will deliberately push.
“Some countries are worried about the internationalization of yuan. We can’t push them on sensitive issues and we can’t impose our will. We must avoid the perception of great power chauvinism,” he said.
China is expected to launch the digital currency before the 2022 Winter Olympics in Beijing, although no official time-table has been set yet.
The proof-of-concept project is currently an alliance between just Beijing, Hong Kong, Bangkok and Abu Dhabi, with backing from the BIS, which indicates support by an organization, owned by 63 central banks; but doesn’t determine where the project might lead.
It is also not clear if China is going to use blockchain technology as a ledger in distributing its digital currency, even though the South Asian giant has invested so much blockchain.