Mastercard seeks role as bridge to facilitate cross-border use of China’s digital yuan

The payments giant is in talks with various central banks, including China’s, to explore wider cross-border usage of their digital currencies
In China, Mastercard is awaiting final approval for licences to start onshore card business, said Asia-Pacific co-president

Digital currencies

Georgina Lee

Published: 8:30am, 3 May, 2021

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Central bank digital currencies such as that being piloted by Beijing could be circulated outside their home countries and converted into foreign currencies via a card clearing network acting as the conversion agent, according to Mastercard.

The card payments giant is in talks with multiple central banks across the world, including the People’s Bank of China (PBOC), to enable cross-border use of their respective digital currencies, said Ling Hai, co-president for Asia-Pacific in an interview with the Post. The plan would make use of the group’s vast payment network that includes 2 million automatic teller machines (ATMs) and 70 million merchant partners worldwide.

It is already happening in the Bahamas. The Caribbean island chain’s central bank is one of the world’s first to issue a digital sovereign currency, called the Bahamas Sand dollar. Travellers to the country can readily convert their fiat currencies through a prepaid card on Mastercard’s network.

The prepaid card is linked to a digital wallet where the Sand dollars are issued, said Ling Hai, who prefers to go by both his names.

The PBOC and the Hong Kong Monetary Authority are currently exploring ways to broaden the use of the digital yuan across the Greater Bay Area, which comprises nine mainland cities, as well as Hong Kong and Macau.

“While central banks can address their domestic issues associated with digital sovereign currencies, the role we can always play is on interoperability when the payment goes beyond a country’s borders,” said Ling Hai. “For us, supporting a central bank digital currency is similar to adding another fiat currency onto our network.”

With transactions having already passed 2 billion yuan (US$310 million) in several pilot cities such as Suzhou, Xiongan, Shenzhen and Chengdu, the PBOC’s digital yuan is expected to provide another alternative for retail digital payments. Cashless payment is already well entrenched in China, with Alipay and Tencent’s WeChat Pay dominating some 90 per cent of the market.

But the potential use of digital yuan appears to have moved beyond just retail since it was first mooted by the PBOC back in 2014. In a digital currency “bridge” announced in February, the PBOC has joined its counterparts in Hong Kong, Thailand, and the United Arab Emirates to explore cross-border payments using central bank digital currencies.

Although accounting for just 2.4 per cent of the market, well shy of the US dollar’s 38 per cent, the yuan’s popularity as a currency for cross border payment is increasing. The rapid development of the digital yuan has raised speculation about how it could be a pathway for increasing the yuan’s global dominance.

US Federal Reserve chair Jerome Powell has already said China’s digital currency “is not one that would work here”.

Geopolitical obstacles aside, “conversion across a hybrid of both fiat and digital currencies could hold the key to broadening merchants’ acceptance of central bank digital currencies” said Ling Hai.

Extending the experience of the Bahamas Sand dollar, in the future a Hong Kong resident with a prepaid card could convert their Hong Kong dollars into digital yuan and reduce the need for currency conversion when travelling within the bay area.

At the wholesale level, Mastercard has been using blockchain technology to enable buyers to track the provenance of food supplies, so that the digital identity of produce such as avocado, beef and abalone can be validated across the entire supply chain, according to Sandeep Malhotra, executive vice-president for products and innovation, Asia-Pacific.

“In global trade finance, the use of blockchain is not just limited to payment. Our private blockchain technology is also supporting data exchange, contract validation, and authenticity validation of goods traded,” Malhotra said.

Last year, Mastercard’s joint venture in China won in-principle approval from the central bank to conduct bank card clearing in the vast onshore market. It was given one year to prepare for launch.

Ling Hai said the joint venture is working with regulators to obtain the licences required to start the business.

“Once we get the licence, our priority is to help people understand that our brand is also synonymous with the domestic Chinese market,” he said.

In China, state-backed UnionPay is the dominant player in the country’s card market with over 90 per cent share. Outside China, UnionPay cards are issued in 70 countries and regions.