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During a trial of the Digital Currency Electronic Payment in Suzhou in December, users downloaded a specialised app for paying with digital yuan. Photo: Kyodo

Beijing is exploring digital yuan cross-border payments by joining with Hong Kong, Thailand, UAE and the Bank of International Settlements

  • The People’s Bank of China is joining the Multiple Central Bank Digital Currency Bridge, a project exploring cross-border payments using distributed ledgers
  • After a joint venture with SWIFT, the project is the latest step towards Beijing’s long-term goal of internationalising the yuan at the expense of the US dollar

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, a move that could potentially create a new path for China to promote the use of yuan in global payments and weaken the US dollar’s position as the world’s dominant reserve currency.

The People’s Bank of China’s (PBOC) Digital Currency Institute, the arm of the Chinese central bank in charge of minting the country’s sovereign digital currency, announced on Tuesday that it was 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, according to a press release. The UAE’s central bank joined the project at the same time.

The expansion of the project has received support from the Bank for International Settlements (BIS) Innovation Hub centre in Hong Kong, a unit created by the Basel, Switzerland-based organisation to study key financial technologies for central banks. The project was originally named Inthanon-LionRock, referencing the highest peak in Thailand and the iconic hill in Hong Kong. The new name hints at a more inclusive project that is open for others to join.

China eyes global digital currency use, internationalising yuan with SWIFT tie-up

It is too early to know where the project might lead, but it aligns with Beijing’s long-term ambition to use its sovereign digital currency to boost the use of the yuan in international payments. While the proof-of-concept project is currently an alliance between just Beijing, Hong Kong, Bangkok and Abu Dhabi, backing from the BIS means it is supported by an organisation owned by 63 central banks.

The deal also comes weeks after the PBOC’s Digital Currency Institute set up a joint venture with SWIFT, the dominant network facilitating international payments between banks.

According to the press release from BIS, the 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.

China promoted the use of the digital yuan, or e-CNY, ahead of the Lunar New Year holiday while trialing the Digital Currency Electronic Payment on February 10. Photo: Reuters

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 most widely known distributed ledger technology today is blockchain, the tech that makes bitcoin possible, but the PBOC has not specified what role blockchain might play in its Digital Currency Electronic Payment (DCEP) project, if any.

The PBOC has recently been accelerating programmes for its digital currency, with trials being conducted in Shenzhen, Suzhou and Beijing.

Why China is investing heavily in blockchain

Many other central banks are still in the early stages of studying central bank digital currencies (CBDC) and their potential impact on financial systems. A BIS survey published in January showed that “central banks that represent one-fifth of the world’s population” are likely to launch retail digital currencies in the next three years.

Zhou Xiaochuan, former governor of China’s central bank and a key figure behind China’s digital currency plan, said at the end of 2020 that one of the major benefits of using a digital system is that both payments and currency conversions happen in real time.

Zhou said 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 internationalisation of yuan,” Zhou said. “We can’t push them on sensitive issues and we can’t impose our will. We must avoid the perception of great power chauvinism.”

China has not set an official timetable for the launch of its digital currency, but a wider roll-out is expected ahead of the 2022 Winter Olympics in Beijing.

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