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China’s Central Bank’s Digital Currency Enables Cross-Border Payments without Settlement Risk

A Chinese scholar recently told Russia’s Sputnik News that China’s central bank’s digital currency (CBDC) can achieve cross-border payments without settlement risk.

Due to the Chinese government’s promotion and rapid development of related technologies, China may become the first country in the world to issue legal digital currency. The Ministry of Commerce recently announced that it will carry out digital RMB pilot programs in the Beijing-Tianjin-Hebei region, the Yangtze River Delta, the Guangdong-Hong Kong-Macao Greater Bay Area, and the central and western regions where conditions permit. The People’s Bank of China (PBOC) will formulate a set of policy support measures.

Regarding the cross-border circulation of digital currency, Liu Yihua, a researcher with the Taihe Institute, a government affiliated think tank, said that traditional currency cross-border circulation is mainly reflected in international trade settlement under the current account, in international investment and financing under the capital account, and in international reserves. This is usually done by domestic and overseas banks through the international CLS FX clearing system. Although this model meets the needs of cross-border payments, it lengthens the cross-border payment chain. At the same time, cross-border transactions under this model are highly dependent on bank accounts. Taking RMB cross-border payment as an example, overseas banks need to connect to domestic correspondent banks, clearing banks, domestic fund custodian banks and other institutions to conduct RMB business. Overseas residents and overseas institutions need to open RMB deposit accounts to complete RMB cross-border payments.

Liu said that the central bank digital currency (CBDC) issued by the PBOC belongs to the monetary base (M0), which is the central bank’s direct liability to the public (including overseas residents and institutions). The public owns and uses CBDC by opening a CBDC electronic wallet. In this process, the public directly establishes a creditor-debt relationship with the central bank. For the central bank, domestic and overseas (including offshore) CBDC wallets make no difference; for the public, any two CBDC wallets can initiate peer-to-peer transactions, and there is no difference between domestic and overseas (including offshore). For operators of CBDC electronic wallets such as commercial banks, they only perform management functions, and the CBDC in the electronic wallet does not enter their balance sheet. In CBDC transactions, the flow of funds only involves both parties to the transaction. Because CBDC uses a loosely coupled account model (transfers can be realized without a bank account, and the transaction is settlement) to complete the transaction, compared with traditional cross-border payments, CBDC can realize cross-border payment with almost no settlement risk.

Liu pointed out that, for foreign residents and institutions to participate in CBDC cross-border payments, they only need to open a CBDC wallet. As the requirements for opening a CBDC wallet are much lower than opening bank accounts (especially offshore bank accounts), it is beneficial for overseas residents and institutions to own and use CBDC.

Source: Sputnik News, August 27, 2020