Alliance Analysis-Policies and Regulations | Central Bank Digital Currency and RMB Internationalization

As the pilot work of the central bank's digital currency is gradually advancing, the public has high expectations for it. Especially in promoting the internationalization of the RMB, it is believed that the central bank's digital currency is a mathematical mapping of power. Whoever can take the lead in launching the central bank's digital currency can shake the hegemony of the US dollar. In addition, affected by the tense international situation, the public also has great doubts about the potential threat of sanctions from SWIFT. For this reason, they hope to get rid of their dependence on SWIFT with the help of DCEP. This involves an important issue, that is, how to rationally and accurately understand the central bank's digital currency and the internationalization of the RMB.

DCEP and cross-border payments

At present, the biggest expectation of the central bank's digital currency in the market is the application of DCEP in the field of cross-border payments, and to promote the internationalization of the RMB. Digital currency has certain advantages in cross-border payments: First, the current cross-border payments have problems such as long cycles, high costs, and low efficiency. For example, a current wire transfer usually takes 2-5 working days to arrive, and the handling fee is usually one thousandth of the remittance amount, plus a telecommunications fee of 150 yuan; cross-border payments based on digital currency can not only increase the speed of cross-border transfers, but also reduce the handling fee of remittances (without considering supervision). Secondly, the current central bank's digital currency adopts a loosely coupled account design, so users do not need to bind a bank account to make transfers and payments when using the central bank's digital currency, which is very attractive to people in poor and remote areas overseas, as well as local people who lack traditional financial infrastructure (banks). Based on the above advantages, if overseas people all use DCEP for cross-border remittances or transaction payments, it will increase the use of RMB in the field of trade settlement.

However, it should also be recognized that DCEP is positioned at M0, which is mainly for small retail scenarios, and has restrictions on the amount and time of payment according to the account category. In the current increasingly developed international trade, the transaction model of using M0 to achieve "money and goods" (i.e. one hand for money and the other for goods) is gradually decreasing. Foreign businessmen are more likely to adopt various trade financing models (such as factoring, forfay extension, packaged loans, export bills, etc.). In this process, the currency generated based on credit belongs to the category of M1, M2 or even M3. Relying solely on DCEP cannot realize transactions, and it also requires support from the country's developed financial market. Moreover, an international currency must occupy a large market share in the settlement and pricing of trade and financial transactions. However, DCEP is only for small payment scenarios, so it is difficult for people to use DCEP for large payment transactions in the trade field, which also limits the role of DCEP in the settlement of international trade and financial transactions.

At present, my country has not yet fully opened its capital account, so it is inevitable that the RMB will be restricted in cross-border payments. Therefore, we cannot simply assume that only DCEP is needed to achieve the free cross-border flow of RMB. This also requires further reforms in my country's domestic financial markets (including market-oriented reforms of interest rates and exchange rates), currency convertibility, and the opening of capital controls.

Can central bank digital currency get rid of its reliance on SWIFT?

At present, many opinions believe that the launch of DCEP will help my country get rid of its dependence on SWIFT. This statement is debatable, which requires us to accurately view SWIFT and the current international clearing system.

At present, the international clearing system consists of two parts: one is the cross-border clearing system of national currencies led by each country, such as CHIPS (Cross-border Clearing System for US Dollars) in the United States and CIPS (Cross-border Payment System for RMB) in my country; the other is the international payment and collection telecommunication operation system shared by all countries, such as SWIFT. SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a membership-based professional cooperative organization for the formulation of international interbank payment and collection information message standards and their transmission and conversion, providing fast, accurate and excellent message transmission and conversion services for member units engaged in cross-border payment and collection clearing business. Therefore, SWIFT is a multi-currency message processing system and a telecommunication channel in the international clearing system, rather than a payment system. In actual operation, SWIFT is connected to the cross-border clearing systems of various countries to achieve cross-border payment. Taking the United States as an example, the cross-border payment settlement of US dollars requires SWIFT to be connected with CHIPS and another US payment system Fedwire (US dollar large-value payment system). SWIFT provides message exchange, CHIPS conducts netting and clearing, and finally completes the settlement through Fedwire. The central bank's digital currency is essentially a payment system rather than a message processing system, so DCEP cannot replace SWIFT.

Correctly understand the central bank’s digital currency and the internationalization of the RMB

The internationalization of a country's currency involves value storage, transaction medium and accounting unit, and it cannot be achieved by relying solely on the widespread application of central bank digital currency in the field of cross-border payments. It should be clearly recognized that the fundamental basis for a country's currency to become an international currency is the comprehensive national strength formed by its political, military, economic, financial and scientific and technological strength, which will not change because of changes in the currency carrier. To truly realize the internationalization of the RMB, we also need to promote market-oriented reforms such as interest rates and exchange rates in the domestic financial market, develop the RMB offshore market, and promote the opening of capital projects. DCEP does have advantages in cross-border payments, and even in the future, as DCEP gradually relaxes restrictions on payment time and amount, it will promote the internationalization of RMB in trade and financial transaction settlement and pricing. But more importantly, it is to further promote market-oriented reforms and opening up in my country's economic and financial fields, and enhance my country's economic status and comprehensive national strength in the world. It is unrealistic to rely solely on the advantages of DCEP in the field of cross-border payments to internationalize the RMB.

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