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Digital currency experts ponder cross-border payments, settlements

By CHEN JIA | CHINA DAILY | Updated: 2020-11-09 09:06
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Chinese scholars recently focus more on designing a cross-border payment and settlement system for the digital renminbi. [Photo/Sipa]

Cross-border payments of the digital renminbi have never been ignored by central bank officials and financial regulators since the innovation started, although they still need a long-term view to allow transactions on various electronic systems across jurisdictions, monetary experts said.

Theoretically, the usage of digital currency has the potential to change the current global cross-border payment system, which is based on a complicated network of agent banks and clearing banks located in different regions and time zones, said He Dong, deputy director of the monetary and capital markets department of the International Monetary Fund.

Chinese scholars recently focused more on designing a cross-border payment and settlement system for the digital renminbi, as the monetary authorities have accelerated trials and expanded usage of the new money called DC/EP (which stands for digital currency/electronic payment).

A research paper from the Center for International Finance and Economics Research of Tsinghua University, said the cross-border use of digital yuan could help reduce reliance on the existing US-dollar denominated payment system, which may threaten China's financial security if Sino-US frictions escalate.

Right from the initial stage of the digital currency experiment, market observers have predicted that the launch of the digital renminbi will accelerate Chinese yuan's internationalization, challenging the status of the US dollar as the world's reserve currency.

"We hope that foreign companies that have business with Chinese firms will use digital renminbi for cross-border payments. But a key issue is how to set the exchange rate of digital yuan against other currencies. The exchange rate should be attractive for users, while it can prevent arbitrage activities of speculative capital," said Ju Jiandong, a professor of finance at Tsinghua's CIFER.

Big companies, especially the high-tech ones, should be the "super nodes" of the cross-border digital currency payment network, and the central bank should play the role of a supervisor and the guardian of digital currency's floating, to ensure transactions are smooth if some countries impose financial sanctions under extreme circumstances, Ju said.

China's telecommunications giant Huawei, and internet and e-commerce behemoth Alibaba Group, have joined the designing work for the cross-border payment network of China's digital currency, according to people familiar with the matter.

But the process will be long and complicated, which also requires effective communications among major central banks and better-balanced foreign exchange regimes in different countries, experts said.

Zhou Xiaochuan, former governor of the PBOC, said: "Successful cross-border payments need full respect for currency sovereignties of emerging markets and developing countries, their various exchange rate regimes and convertibility regulations, as well as considerations behind their macro-prudential management policies."

However, the structure of the international currency system could not be easily changed by simply issuing central bank-backed digital currencies, as the issue also involves complicated aspects like the economic scale of the issuing country, trade volume, security and liquidity of the currency and geopolitics, said He of the IMF.

But the usage of digital currency will save time during cross-border transactions, simplify payment chains and improve transparency, He said.

"The major policy challenge that all countries are facing is to sustain monetary and financial stability when they are improving the efficiency of the cross-border payment and settlement services. It also requires close cooperation between central banks and support from the international society."

He suggested building a "currency bridge" to promote the interoperability of digital currencies designed by different countries, and facilitate the foreign exchange market denominated by automated trading.

Chinese central bank officials have confirmed that foreigners and companies from overseas can hold the digital renminbi even without opening an account in Chinese banks, which means a more convenient way for cross-border payments.

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