China’s Central Bank has proposed the application of global standards for the coming influx of sovereign digital currencies at the 2021 Bank for International Settlements (BIS) Innovation Summit held at the end of March.
The outlined plan, “Global Sovereign Digital Currency Governance” encompasses cross-border digital transactions, risk supervision, use and ownership of data, and other related financial and risk issues.
Mu Changchun, a Director of the Digital Currency Research Institute of the People’s Bank of China (PBOC), has stated that the bank aims to become the first major global central bank to issue a sovereign digital currency. It aims to propel the internationalization of the Chinese renminbi (RMB) and reduce dependence on the global dollar system.
The development of sovereign digital currencies will upgrade national financial systems, act as a counterweight to the use of cryptocurrencies such as Bitcoin, and improve global financial transaction efficiency.
The proposed rules would regulate global use, supervision, and information sharing. According to the PBOC, an upcoming challenge is to provide a reasonable supply of digital currency and to use it as part of a sustainable and stable development of the international monetary system.
The PBOC proposals include the following:
- The flow of financial data and digital currencies should be concurrent to help regulators monitor the compliance of transactions.
- The digital currency should be operated through a scalable and supervised sovereign digital currency exchange platform supported by DLT (a blockchain-like distributed ledger technology) or comparable technologies.
- Interoperability among Central Banks’ sovereign digital currency systems is crucial.
- The independence of central banks’ monetary decisions is also crucial. One central bank’s decision on monetary supplies within its border should not interfere with another central bank’s monetary decisions.
- At the same time, global central banks that adopt digital currencies should shoulder the collective responsibility to maintain global financial stability.
China’s Views on Central Bank Sovereign Digital Currency Development
If international standards for sovereign digital currencies are accepted on a worldwide basis, this system may gradually replace the global monetary order underpinned by the U.S. dollar. Therefore, countries that adhere to the digital currency infrastructure will be able to decrease their reliance on the dollar. This is because several countries have lost trust in the United States use of the U.S. dollar as a trade weapon and have used it to punish countries that do not follow U.S. international policy.
China, Russia, Iran, Japan, and the U.K. among others have begun active work on launching their central bank digital currencies. China has already carried out pilot testing in the Beijing-Tianjin-Hebei metropolitan area, the Yangtze River Delta area, and the Greater Bay Area. The selection of these areas is motivated by their financial innovative capacity and the impact of high consumption on local economies.
Additionally, the People’s Bank of China Digital Currency Research Institute has also explored the internationalization of the digital RMB. A multilateral central bank digital currency bridge research project (m-CBDC Bridge) is being developed together with the Hong Kong Monetary Authority, the Bank of Thailand, and the Central Bank of the United Arab Emirates.
It is significant that China has taken the lead on acknowledging the developing digital currency trend, its growing impact on global banking and finance, and is currently ahead of the development in this field, taking the lead from the United States—who do not want to change the current, U.S. dollar-based global trading system.
This article was first published by China Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to [email protected] for more support.