Zou Chuanwei: Exploring the Strategic Options of Digital RMB Towards Internationalization

Cross-border payments are not among the main objectives of the digital RMB at this stage.

Zou Chuanwei: Exploring the Strategic Options of Digital RMB Towards Internationalization

Written by Zou Chuanwei, Chief Economist, Wanxiang Blockchain

Why is the digital RMB going international an important issue?
The digital RMB has been piloted well in several cities in China since 2020. The digital RMB mainly serves the goals of payment modernization within the country: first, to provide a secure, low-cost payment instrument in the face of declining cash use; second, to accommodate the needs of the digital economy, especially contactless payments; third, to promote financial inclusion; fourth, to protect user privacy; fifth, to promote fair competition in the retail payment market; and sixth, to effectively enforce anti-money laundering, anti-terrorist financing and anti-tax evasion regulation. In the upcoming 2022 Beijing Winter Olympics scenario, digital RMB will also be available to overseas users traveling to China.

Contrary to the understanding of some researchers, cross-border payments are not part of the main objectives of digital RMB at this stage. This reflects the PBOC’s deep understanding and pragmatic choice of applying digital currency to cross-border payments. Nevertheless, discussing the role that digital RMB can play in the context of RMB internationalization is still a very meaningful issue that should be laid out in a forward-looking and proactive manner. The strategy of digital RMB going international should rely on the flexibility provided by the digital RMB design solution on the one hand, and capture the profound changes that will occur in the cross-border payment space in the era of central bank digital currencies on the other.

Exploring the feasibility of issuing digital RMB in the offshore market
Although the People’s Bank of China has not yet systematically disclosed the digital renminbi design scheme, from the available public information, the digital renminbi should not be a retail-type central bank digital currency in the typical sense, but more appropriately called a legal digital currency. From the studies and experiments in overseas countries, the central bank digital currency is a liability of the central bank regardless of whether it is wholesale or retail type. However, according to a speech by Zhou Xiaochuan, former governor of the People’s Bank of China, at Peking University on November 27, 2020, the digital RMB does not necessarily constitute a user’s claim on the PBOC; a number of commercial banks licensed by the PBOC (i.e., “designated operators”) have ownership of the digital RMB and related technology and systems; the PBOC, through its The PBOC supports the value of the digital renminbi through its supervision of the designated operators and through issuance reserve and capital adequacy requirements.

If I understand correctly, the digital RMB is issued based on the DOI’s excess deposit reserves with the PBOC. The designated operator can obtain a “certificate of provision” or “comfort letter” (Governor Zhou Xiaochuan’s expression) from the PBOC as a reserve for the issuance of digital RMB and is responsible for retail payments of digital RMB. This arrangement, which draws to some extent on the linked exchange rate system implemented in Hong Kong, China, will provide strong support for the issuance of digital RMB in the offshore market.

Since 2013, China has established an offshore clearing system under the clearing bank model. Under this system, clearing banks in Hong Kong and Macao directly access the large-value payment system of the People’s Bank of China, other clearing banks access the large-value payment system through their head offices or parent banks, and overseas banks open RMB clearing accounts at the clearing banks in order to jointly complete RMB cross-border and offshore clearing. Combined with the digital RMB design proposal, offshore clearing banks should be able to issue digital RMB outside of China and provide exchange services between offshore RMB and digital RMB, while following the same rules and regulatory standards as the domestic designated operators. For example, BOC Hong Kong, one of the three issuing banks for Hong Kong currency, should also be able to become a digital RMB issuer in the Hong Kong market in the future.

The digital RMB issued in the offshore market should be fully equivalent to the digital RMB issued in China, both in terms of legal status and in terms of value characteristics. Not only that, China should also make the digital RMB issued domestically and the digital RMB issued in the offshore market interoperable in circulation by improving the payment and clearing infrastructure of the digital RMB. It is conceivable that a Hong Kong user, after installing the digital RMB wallet provided by BOC Hong Kong and exchanging the digital RMB, can use it in our mainland; in turn, a mainland user can use the digital RMB wallet installed in the mainland during his travel in Hong Kong. If this scenario comes true, digital RMB will become an important tool to bridge the onshore and offshore RMB markets.

Strategic Options for Central Bank Digital Currency Applications for Cross-Border Payments
In July 2020, the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS), in its report to the G20 on improving cross-border payments, identified a total of 19 tasks in five areas, of which item 19 proposed to incorporate the international dimension into the central bank’s digital currency design. Design. in October 2020, the Financial Stability Board (FSB) proposed a roadmap for improving cross-border payments based on the report of the Committee on Payments and Market Infrastructures.

There are wholesale and retail versions of central bank digital currencies. In theory, both wholesale and retail central bank digital currencies can be used for cross-border payments. When used for cross-border payments, the wholesale type central bank digital currency retains the intermediary function of commercial banks, mainly to improve the current correspondent banking model. In contrast, when retail-type central bank digital currencies are used for cross-border payments, they can be used for direct peer-to-peer transactions, where transactions are settled, and transactions are naturally cross-border, which is theoretically superior to the correspondent banking model. At first glance, it seems that the retail-type central bank digital currency should take precedence in cross-border payments, but in fact, it does not.

First of all, the central bank digital currency should be applied to cross-border payments in the spirit of “do unto others as you would have them do unto you”: first, it should respect the monetary sovereignty of each country, and the central bank digital currency should not become a tool for strong currencies to encroach on weak currencies; second, a country’s central bank digital currency can be opened to foreign users, but it should mainly serve the financial needs of foreign users when they are living in the country, rather than replacing the use of foreign users’ domestic currency. To this end, a country should implement a “know your user” (KYC) review of its own central bank digital currency, clarify the procedures and requirements for foreign users to open a central bank digital currency wallet, and impose stricter quota management on the amount of central bank digital currency held and used by foreign users than by domestic users. Clearly, these regulatory principles are more restrictive for retail-type central bank digital currencies.

Second, the cross-border application scenarios of retail-type central bank digital currencies mainly include cross-border e-commerce, overseas users coming to their home countries, and domestic users going abroad. These are all current account transactions and occur mainly between individuals to individuals and individuals to institutions. Retail-type central bank digital currencies are generally M0-positioned and should be compared to large-value cash management, and are unlikely to be used for large-value institution-to-institution transactions. In other words, the function of retail-type central bank digital currency as a commodity settlement currency, international investment and financing currency and transaction currency will not be prominent and will not contribute directly and significantly to the international reserve currency status. In addition, offshore users may face stricter limit restrictions due to KYC review. Offshore users will also be subject to convertibility requirements in terms of how they can access retail-type central bank digital currencies.

The above discussion is also applicable to digital RMB. At this stage, one should stick to the goal of modernizing the digital RMB to serve domestic payments, and get things right and done first. The procedures and requirements for opening digital RMB wallets for overseas users, as well as the relevant limit standards, should be clarified through the 2022 Winter Olympics scenario testing. Digital RMB wallets should be more open to overseas users than domestic bank deposit accounts, but they should face stricter limits on the amount of digital RMB they can hold and use than domestic users. This will help expand the use of RMB and facilitate the economic life of offshore users in China. It is also, to some extent, a reflection of financial inclusion, as many offshore users do not have domestic bank deposit accounts and do not enjoy financial services within China.

Leveraging the role of the digital RMB wholesale segment in cross-border payments
Despite its retail character, the digital RMB also has a wholesale segment under a two-tier operational framework, with the People’s Bank of China and designated operators as the main participants. As the digital RMB goes international, it can draw on the experimental results of the wholesale central bank digital currency.

Wholesale central bank digital currency applied to cross-border payments can shorten the correspondent bank chain and alleviate the liquidity requirements of interbank accounts between correspondent banks, which may become the mainstream mode of central bank digital currency applied to cross-border payments. However, it is difficult for central bank digital currencies of different countries to converge to the same standard in terms of underlying technology, clearing mechanism, message format, cryptographic technology, data requirements and user interface, which poses a challenge to interoperability among central bank digital currencies of different countries and thus support cross-border simultaneous settlement (PvP). Cross-border simultaneous settlement is a fundamental requirement for cross-border payments, mainly to improve settlement efficiency and prevent settlement risks. The Multilateral Central Bank Digital Currency Bridge (Multi-CBDC Bridge) advocated by the Bank for International Settlements since 2021 is a noteworthy solution idea.

The concept of Multi-CBDC Bridge is mainly derived from the Inthanon-LionRock project between HKMA and Bank of Thailand, which essentially “maps” two central bank digital currencies into the same distributed ledger, i.e. issuing depositary receipts on a “corridor network” based on central bank digital currencies, enabling the same distributed ledger to support multiple central bank digital currencies. The benefits of multilateral central bank digital currency bridges are: first, transactions between two central bank digital currencies occur on the same ledger, and it is easy to implement cross-border simultaneous settlement through smart contracts; second, it is compatible with different central bank digital currency systems and designs, and has good scalability; third, it alleviates the impact of central bank digital currencies circulating abroad on the sovereignty of foreign currencies, and can better meet the “do unto others as you would have them do unto you” spirit mentioned above; fourth, it promotes the central bank digital currencies of different countries to circulate abroad. Fourth, it promotes the cooperation among central banks of different countries and the interconnection of central bank digital currencies, and helps to form a global standard for central bank digital currencies. However, the “corridor network” is jointly owned, built, operated and managed by central banks, which raises governance issues involving multiple central banks.

On 23 February 2021, with the support of the Bank for International Settlements, the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates and the Institute of Digital Currency of the People’s Bank of China announced the joint launch of the Multilateral Central Bank Digital Currency Bridge Research Project. Given that “wholesale central bank digital currency + multilateral central bank digital currency bridge” may become the mainstream model of central bank digital currency applied to cross-border payments, China should actively participate in the multilateral central bank digital currency bridge research project. In this process, as instructed by General Secretary Xi Jinping at the first phase of the 15th G20 Leaders Summit, we should explore the development of legal digital currency standards and principles in an open and inclusive manner, and properly address various risk challenges in the process of jointly driving the international monetary system forward. In addition, the multilateral central bank digital currency bridge has the potential to evolve into a new international financial governance mechanism in the era of central bank digital currencies, and active participation will help China to have a head start and a greater voice in the formulation of relevant rules.

What needs to be seen is that the role of playing the wholesale aspect of digital RMB will not be limited to cross-border payments, but will also help explore the application of digital RMB in the post-processing of financial transactions. The significance of this in enhancing the RMB’s status as an international investment and financing currency, transaction currency and reserve currency cannot be ignored.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/zou-chuanwei-exploring-the-strategic-options-of-digital-rmb-towards-internationalization/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-06-11 12:40
Next 2021-06-11 12:43

Related articles