Zou Chuanwei: Discussing the strategic choice of digital RMB going international

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Cross-border payment is not the main goal of digital renminbi at this stage.

Original Title: “Zou Chuanwei: Strategy for Digital RMB to Go Global”
Author: Zou Chuanwei, Chief Economist of Wanxiang Blockchain

Why is the digital RMB going internationally an important issue?

Since 2020, the digital renminbi has been in good condition in many cities in my country. Digital RMB mainly serves the goals of domestic payment modernization: one is to provide safe and low-cost payment tools while the use of cash is reduced; the second is to adapt to the needs of the development of the digital economy, especially the demand for contactless payment; the third is to promote financial inclusion; the fourth is Protect user privacy; fifth, promote fair competition in the retail payment market; sixth, effectively implement anti-money laundering, anti-terrorist financing, and anti-tax evasion regulations. In the upcoming 2022 Beijing Winter Olympics scene, the digital renminbi will also be open to overseas users who travel to China.

Unlike what some researchers understand, cross-border payment is not the main goal of digital renminbi at this stage. This reflects the deep understanding and pragmatic choice of the People’s Bank of China for the application of digital currency to cross-border payments. Nevertheless, it is still a very meaningful issue to discuss the role that the digital renminbi can play in the context of the internationalization of the renminbi. It should be forward-looking and active. The strategy of digital renminbi going international is to rely on the flexibility provided by the digital renminbi design on the one hand, and on the other hand to grasp the profound changes that will occur in the cross-border payment field in the era of central bank digital currency.

Explore the feasibility of issuing digital renminbi in the offshore market

Although the People’s Bank of China has not systematically disclosed the digital renminbi design plan, judging from the publicly available information, the digital renminbi should not be a typical retail central bank digital currency, and it is more appropriate to call it legal digital currency. From the research and experimentation of foreign countries, the central bank’s digital currency, whether it is wholesale or retail, is a liability of the central bank. However, according to Zhou Xiaochuan’s speech at Peking University on November 27, 2020, the former Governor of the People’s Bank of China, digital renminbi does not necessarily constitute a user’s right to claim the People’s Bank of China; several commercial banks licensed by the People’s Bank of China (ie, “designated Operating institutions”) have the ownership of digital renminbi and related technologies and systems; the People’s Bank of China supports the value of digital renminbi through the supervision of designated operating institutions, as well as requirements for issuance preparation and capital adequacy.

If I understand correctly, the digital renminbi is issued based on the excess deposit reserves of designated operating institutions in the People’s Bank of China. The designated operating institution can obtain the “Certificate of Payment” or “Comfort Letter” (Expression by Governor Zhou Xiaochuan) issued by the People’s Bank of China as preparation for the issuance of digital renminbi and is responsible for the retail payment of digital renminbi. This arrangement draws on the linked exchange rate system implemented in Hong Kong to a certain extent, and will provide strong support for the issuance of digital renminbi in the offshore market.

Since 2013, my country has established an offshore clearing system under the clearing bank model. Under this system, the Hong Kong and Macau clearing banks are directly connected to the large-value payment system of the People’s Bank of China, other clearing banks are connected to the large-value payment system through their head office or parent bank, and overseas banks open RMB clearing accounts at the clearing bank for joint completion. Cross-border and offshore clearing of RMB. Combined with the digital renminbi design plan, offshore clearing banks should be able to issue digital renminbi overseas and provide exchange services between offshore renminbi and digital renminbi, subject to the same rules and regulatory standards as designated domestic operating institutions. For example, Bank of China Hong Kong is one of the three Hong Kong dollar note-issuing banks, and it should also become a digital renminbi issuing institution in the Hong Kong market in the future.

The digital renminbi issued in the offshore market and the digital renminbi issued in my country should be completely equivalent in terms of legal status and value characteristics. Not only that, my country should also improve the payment and settlement infrastructure of digital renminbi, so that the digital renminbi issued in the country and the digital renminbi issued in the offshore market are interconnected in the circulation link. It is conceivable that a Hong Kong user can use the digital renminbi wallet provided by BOC Hong Kong and exchange the digital renminbi in the mainland of my country; conversely, the mainland user can also use the digital renminbi wallet installed in the mainland while traveling in Hong Kong. If this idea comes true, the digital renminbi will become an important tool for opening up the onshore and offshore renminbi markets.

The strategic choice of central bank digital currency applied to cross-border payment

How to improve the efficiency of cross-border payment has become an issue of great concern in the current international financial field. In July 2020, the Committee on Payments and Market Infrastructure (CPMI) of the Bank for International Settlements (BIS) in its report to the G20 on improving cross-border payments, sorted out a total of 19 work in 5 areas, of which the 19th item proposed to include the international dimension Central bank digital currency design. In October 2020, the Financial Stability Board (FSB) proposed a roadmap to improve cross-border payments based on the report of the Payments and Market Infrastructure Committee.

Central bank digital currencies are divided into wholesale and retail types. In theory, both wholesale and retail central bank digital currencies can be used for cross-border payments. When the wholesale central bank digital currency is used for cross-border payments, it retains the intermediary function of commercial banks, mainly to improve the current agency banking model. When the retail central bank digital currency is used for cross-border payment, it can be directly traded point-to-point, and the transaction is settlement, and the transaction is naturally cross-border, which is theoretically superior to the agency bank model. Initially, it seems that cross-border payments should be based on retail central bank digital currencies, but this is not the case.

First of all, the central bank digital currency used in cross-border payments should embody the spirit of “do not do to others what you do not want to do to others”: First, the monetary sovereignty of all countries should be respected, and the central bank digital currency should not become a tool for strong currencies to erode weak currencies; It is a country’s central bank digital currency that can be opened to overseas users, but it mainly serves the financial needs of overseas users when they are living in the country, rather than replacing overseas users’ use of domestic currency. To this end, a country should implement a “know your user” (KYC) review of its central bank digital currency, clarify the procedures and requirements for foreign users to open a central bank digital currency wallet, and determine the amount of central bank digital currency held and used by foreign users Implement more stringent quota management than domestic users. Obviously, these regulatory principles impose greater restrictions on retail central bank digital currencies.

Second, the cross-border application scenarios of retail central bank digital currencies mainly include cross-border e-commerce, overseas users coming to their home country, and domestic users going abroad. These are transactions under the current account, which mainly occur between person-to-person and person-to-institution. Retail-type central bank digital currencies are generally positioned as M0, which should be compared with large-amount cash management, and it is unlikely to be used for large-value transactions between institutions. In other words, the functions of retail central bank digital currencies as commodity settlement currencies, international investment and financing currencies, and transaction currencies will not be very prominent, and will not have a direct and significant role in promoting the status of international reserve currencies. In addition, overseas users may face stricter quota restrictions due to KYC review. How foreign users can obtain retail central bank digital currency will also be subject to convertibility requirements.

The above discussion is also applicable to digital renminbi. At this stage, we should adhere to the modernization goal of digital RMB services for domestic payments, and do our own things right and do well. It is necessary to pass the 2022 Winter Olympics scene test to clarify the procedures and requirements for foreign users to open a digital RMB wallet, as well as the relevant limit standards. For overseas users, the openness of digital renminbi wallets should be higher than that of domestic bank deposit accounts, but they should face stricter limits on the digital renminbi that they can hold and use than domestic users. This will help expand the use of RMB and facilitate the economic life of overseas users in my country. To a certain extent, this is also a manifestation of financial inclusion, because many overseas users do not have domestic bank deposit accounts and cannot enjoy financial services in my country.

Give full play to the role of digital RMB wholesale in cross-border payments

Although the digital renminbi has obvious retail characteristics, it also has a wholesale link under the two-tier operation framework. The participants are mainly the People’s Bank of China and designated operating institutions. As the digital renminbi moves internationally, we can learn from the experimental results of wholesale central bank digital currencies.

The application of wholesale central bank digital currency to cross-border payments can shorten the correspondent bank chain and ease the liquidity requirements of interbank accounts between correspondent banks. It may become the mainstream mode of central bank digital currency used in cross-border payments. However, it is difficult for the digital currencies of central banks of various countries to converge to the same standard in terms of underlying technology, clearing and settlement mechanisms, message formats, cryptographic technology, data requirements, and user interfaces. Simultaneous delivery (PvP) posed a challenge. Synchronous cross-border settlement is the basic requirement of cross-border payment, mainly to improve settlement efficiency and prevent settlement risks. The Multi-CBDC Bridge advocated by the Bank for International Settlements since 2021 is a solution that deserves attention.

The concept of a multilateral central bank digital currency bridge mainly comes from the Inthanon-LionRock project, which is a cooperation between the Hong Kong Monetary Authority and the Bank of Thailand. It essentially “maps” two central bank digital currencies to the same distributed ledger, that is, based on the central bank digital currency in the “corridor network” The issuance of depositary receipts on the Internet enables the same distributed ledger to support multiple central bank digital currencies. The advantages of the multilateral central bank digital currency bridge are: first, the transactions between the two central bank digital currencies occur on the same ledger, and it is easy to implement cross-border synchronous settlement through smart contracts; second, it can be compatible with different central bank digital currency systems and designs. Good scalability; third, it alleviates the impact of central bank digital currency circulation overseas on foreign currency sovereignty, and can better meet the spirit of “do not do to others what you do not want to do to others” mentioned in the previous article; fourth, promote exchanges between central banks of different countries Cooperation and the interconnection of central bank digital currencies will help to form a global standard for central bank digital currencies. However, the “corridor network” is jointly owned, constructed, operated and managed by central banks, which will cause governance issues involving multiple central banks.

On February 23, 2021, with the support of the Bank for International Settlements, the Hong Kong Monetary Authority, the Bank of Thailand, the UAE Central Bank, and the People’s Bank of China Digital Currency Research Institute announced the joint launch of a 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 used in cross-border payments, my country should actively participate in multilateral central bank digital currency bridge research projects. In this process, in accordance with the instructions of General Secretary Xi Jinping at the first phase of the 15th G20 Leaders Summit, discuss the formulation of legal digital currency standards and principles in an open and inclusive manner, and jointly promote the development of the international monetary system During the process, various risks and challenges were properly dealt with. In addition, the multilateral central bank digital currency bridge is likely to evolve into a new international financial governance mechanism in the era of central bank digital currency. Active participation will help my country seize the opportunity and greater voice in the formulation of relevant rules.

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

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