Since 2014, China has been a forerunner in carrying out tests for a centralized digital currency. This includes a plan to build cross-border payment systems with multiple countries—a vision that now may be regarded with greater significance amid the stringent economic sanctions being imposed on Russia by the United States, Canada, European countries, and more.
As Russia’s biggest export partner, China has good reason to promote a higher degree of international usage of the digital yuan in global trade and finance. At the moment, some of Russia’s banks have been severed from the SWIFT messaging system, which is used by financial institutions to transmit instructions that make wire transfers between countries possible, due to its invasion of Ukraine. This has affected Russia’s financial infrastructure, causing bank runs in several cities.
China’s central bank has currency swap agreements with 41 countries. Several partners, like Russia, have good reason to increase their utilization of the renminbi to settle payments for bilateral trade involving Chinese businesses. They can utilize China’s Cross-border Interbank Payment System, or CIPS, which clears payments in yuan instead of US dollars.
When the e-CNY becomes available for international transactions, it will facilitate efficient cross-border and inter-currency transactions, according to Amnon Samid, CEO of an Israel-based cybersecurity firm.
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“The CBDC cross-border payment system is aiming to achieve real-time transactions in multiple jurisdictions, and be operational 24/7. As such, it can revolutionize financial markets, reduce dependence on intermediaries, be more efficient, and help create healthy competition. In the future, it may substitute or co-exist with the SWIFT system,” said Samid.
So far, the e-CNY is primarily used domestically, but it may be implemented for cross-border payments in the future. At the moment, many countries and international financial organizations, such as the monetary authorities of Hong Kong, Thailand, and United Arab Emirates, are evaluating the use of CBDCs to make cross-border payments more efficient and improve processes that at present are costly and slow.
China’s central bank, the People’s Bank of China (PBOC), has teamed up with the mentioned central banking institutions and more around the world to explore how digital money can be used for cross-border payments. The project aligns with Beijing’s long-term ambition to use its sovereign digital currency to boost the yuan’s usage in international remittance.
In the near future, monetary regulators will have to address several issues, including the inconsistencies of regulatory requirements in different countries, capital flow management measures, monetary sovereignty, and matters related to money laundering and tax evasion, Samid said.
“For now, China can propose its CIPS to connect with Russia, so it can decouple from the US dollar. No western bank will be involved in moving funds using CIPS. SWIFT will not see the transaction,” Samid said.
The PBOC has explicitly stated that one major goal for the e-CNY is to improve cross-border payment channels, according to a white paper published by the central bank last year. Already, “the PBOC has initiated pilot programs [for e-CNY] in some representative regions to make sure the pilots run in a steady and safe manner,” according to the white paper’s authors.
In October 2020, the Bank of Russia said it was developing its own digital currency, the digital ruble. At the time, Russia’s central bank said this would allow Russian entities to trade directly with counterparties in other countries without converting their currencies into US dollars. Specifically, this would mitigate the pain of sanctions.
Now, Russian enterprises have been approaching Chinese banks to open new accounts as the country’s businesses anticipate hardship due to international sanctions. Several Russian companies that already trade with Chinese firms are now willing to accept yuan, Reuters reported.
At the Bank for International Settlements Innovation Summit in March 2021, the PBOC submitted a Global Sovereign Digital Currency Governance proposal that indicated its views for standards on cross-border digital transactions, risk supervision, and data privacy.
At the event, the director of PBOC’s Digital Currency Research Institute said the bank aims to become the first major central bank to issue a sovereign digital currency, and that this would cultivate RMB internationalization and reduce dependence on the US dollar.
While these systems are still in development, national digital currencies are shaping up to be a way for some countries to pull away from integrated, global remittance networks. While the technological development of these currencies offers convenience for international trade, their implementation remains entangled with geopolitical conditions.