Cross-Border Use of Digital Yuan &
International Race for Central Bank Digital Currencies†
The race to have a platform through which many countries can use their central bank digital currencies (“CBDCs”; e.g., digital yuan, dollar, or euro) to safely, efficiently, and inexpensively settle cross-border deals has drawn even more attention after China and three other jurisdictions recently announced their success in testing their blockchain-powered platform, mBridge. This success has understandably emboldened China to hold high expectations for mBridge. What are these expectations? Will the success of mBridge drive other countries, including the United States, to seriously consider their own CBDC plans?
Pilot Implementation of mBridge
With support from the Bank for International Settlements, twenty central banks and commercial lenders in mainland China, Hong Kong, Thailand, and the United Arab Emirates (“UAE”) tested mBridge from mid-August to late September 2022. During this period, they used mBridge to process 164 payments and foreign exchange transactions that were worth approximately USD 22 million in total. The processed payments reportedly included, for example, Chinese corporations’ payments in digital yuan to the UAE for oil and gas.
“[…] mBridge delivered promising results during the test by […] shortening the process of cross-border payments to only a few seconds.”
Designed to allow the central bank of each participating jurisdiction to host its own blockchain node (thereby control its digital currency), mBridge delivered promising results during the test by, for example, shortening the process of cross-border payments to only a few seconds.
China’s High Expectations for mBridge
The success of the pilot implementation of mBridge has brought representatives from participating jurisdictions to the limelight. What they have shared helps reveal China’s expectations for this platform.
Saving time and reducing costs are obvious expectations. By using mBridge as an alternative to correspondent banking, transactions can be processed within seconds, as discussed above, while costs that would otherwise need to be paid to intermediary banks can be saved. With respect to China’s payments made to the UAE, saving time and reducing costs are particularly beneficial because, due to these two countries’ intertwined relationships, there are many transactions between them. First, China is the UAE’s top customer for oil and gas. Second, according to Shu-Pui Li, who advises the UAE on the implementation of mBridge, 60% of China’s trade with the Middle East and North Africa (“MENA”) region goes through the UAE. It is worth noting that the MENA region, which accounts for approximately 6% of the world’s population, is of strategic importance to China as the region has more than 50% of the world’s oil reserves and 40% of the world’s natural gas reserves.
Moreover, mBridge is expected to offer a payment platform to jurisdictions that do not have access to the international network of correspondent banking services (e.g., many emerging and developing economies). As such, mBridge not only fosters greater financial inclusion, but also facilitates China’s trade with many emerging and developing economies. When this occurs, this will add momentum to the growing trend seen over the past two years: the share of China’s trade settled in yuan increased from less than 20% to nearly 30%.
Finally, UAE Advisor Shu-Pui Li candidly pointed out that having mBridge, which serves as an alternative to the SWIFT payment messaging system, allows China to avoid any potential disruption to the international payment system should any geopolitical tension work against the country.
With these high expectations for mBridge, representatives from mainland China and Hong Kong have warmly welcomed more jurisdictions to join the platform. Mr. MU Changchun, Director of the Digital Currency Research Institute at the People’s Bank of China, has specifically explained that having a CBDC is not a prerequisite for a central bank to join mBridge. This is because the platform can connect directly to a real time gross settlement system and convert central bank reserves to digital currency.
The mBridge platform seems to be a competitive platform. Shortly after mBridge’s preliminary success, India rolled out its CBDC. In fact, it is reported that 80% of central banks around the world are exploring CBDCs. The European Central Bank has announced that it expects to introduce a digital euro across its member states by 2025.
“The United States, however, has not committed to the issuance of its CBDC.”
The United States, however, has not committed to the issuance of its CBDC. A couple of weeks ago, Christopher J. Waller, a member of the Board of Governors of the Federal Reserve System, explained why he firmly believes that there is no need for the United States to have a CBDC. In a speech delivered at a symposium titled Digital Currencies and National Security Tradeoffs, he specifically asked, “[w]hat would be the effect of CBDCs and other digital money-like instruments on the role of the dollar?” and provided detailed explanations, some of which are as follows:
There are many ways to approach this question, but I want to do so by using a simple example: What is it about a CBDC that would make a non-U.S. company, engaging in international financial transactions, more or less likely to use the dollar?
[…] would a foreign CBDC affect this non-U.S. company’s decisions? […] the more users the foreign CBDC acquires, the greater will be the pressure on the non-U.S. company to also use the foreign CBDC. In this case, it is true that the appeal of the foreign CBDC as a transaction medium—not as a unit account or store of value—might gain at the expense of the dollar. These effects will likely only be on the margin because they rely on a large enough number of individuals and businesses being nearly indifferent between the dollar and the foreign currency in CBDC form.
[…] The factors supporting the primacy of the dollar are not technological, but include the ample supply and liquid market for U.S. Treasury securities and other debt and the long-standing stability of the U.S. economy and political system. No other country is fully comparable with the United States on those fronts, and a CBDC would not change that.
Indeed, to make mBridge appealing to more jurisdictions, the answer lies not in technological advances but China’s ability to provide a sound regulatory framework through which potential mBridge users can be confident that the platform’s increased transparency of money flows will not work against their interests.
† The citation of this article is: Dr. Mei Gechlik, Cross-Border Use of Digital Yuan & International Race for Central Bank Digital Currencies, SINOTALKS.COM, In Brief No. 25, Nov. 9, 2022, https://sinotalks.com/inbrief/2022w45-english-digital-yuan-cbdc.
The original, English version of this article was edited by Nathan Harpainter. The information and views set out in this article are the responsibility of the author and do not necessarily reflect the work or views of SINOTALKS.COM.
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