China is now working on connecting its nearly finished central bank digital currency (CBDC) to Hong Kong’s Fast Payment System.
Announced by the head of China’s digital yuan project in a Thursday (Dec. 9) seminar, the pilot program between the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA) is more than just an attempt to make cross-border payments easier: It is a shot across the bow of the dollar’s position as the world’s reserve currency.
Concern has been growing in U.S. financial circles for some time that China’s CBDC project — which is expected to launch by February — has the potential to offer an alternative to the dollar as the currency of cross-border trade, as well as limit its ability to enforce sanctions.
Learn more: China’s Central Bank: 10M Businesses, 140M People Using Digital Yuan
In April, Bloomberg reported that officials from the Pentagon and National Security Council had joined the Treasury and State Departments in looking at the long-term implications of China’s CBDC on the global financial system, although they were primarily concerned with sanctions evasion.
The issue also arose in the Dec. 8 hearing by the House Financial Services Committee on “Digital Assets and the Future of Finance.”
Among the six crypto industry executives testifying, there was Brian Brooks, CEO of BitFury and a former head of the U.S. main banking regulator, the Office of the Comptroller of the Currency.
Also see: Scenes From the Five-Hour Congressional Hearing on Crypto
Over the last decade, Brooks said, the amount of dollars held by major central banks like the Bank of Japan and European Central Bank is down a quarter.
“What that tells me is that in the future, with the rise of China and other major economies, the U.S. dollar can’t take its primacy for granted,” he testified. “And we need to start thinking about competing on utility, on features, not just based on the post-World War II monetary system. It’s really critically important.”
Another former regulator told the Senate Banking Committee much the same thing last year.
America’s “aging financial system infrastructure puts the United States at a competitive economic disadvantage to economies like China that are building new financial infrastructure based on 21st-century digital technology,” warned Digital Dollar Project Co-founder and former Commodity Futures Trading Commission Chairman Chris Giancarlo.
More details: Nonprofit Digital Dollar Project Plans Five Tests for Concept
“For example, it typically takes days in America to settle and clear retail bank transfers,” he said. “In many other countries, it takes minutes, if not seconds. Other economies, like China’s, are advancing rapidly in deploying instantaneous, digital currency payment systems.”
Tourism to International Trade
The Dec. 9 announcement by Mu Changchun, director of the People’s Bank of China’s Digital Currency Research Institute, marks the second phase of a project to link the digital yuan directly to Hong Kong’s interbank digital payments system, according to the Chinese-language Shanghai Securities News.
The three-year-old Hong Kong FPS now averages more than 750,000 daily transactions.
Also see: Hong Kong FPS Averages $667.9M in Daily Transaction Volume
The first stage of the project dealt with making the systems interoperable for topping up account balances, transferring funds and making payments. This current phase is aimed at combining FinTech and CBDCs to improve cross-border payments and facilitate international trade settlement.
“In the future, when mainland tourists use digital [yuan] renminbi to shop in Hong Kong, currency exchange will be completed between two wallets, and local merchants will receive money in Hong Kong dollars, so there will be no currency substitution,” Changchun said. “The digital RMB wallet will greatly enhance the facilitation level of cross-border payments between the two places.”
More broadly, the project’s goal is to “create an open, inclusive and co-constructed global financial ecosystem in the digital age,” he added.
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