A man in a mask walks past the headquarters of the People’s Bank of China, the central bank, in Beijing, China, as the country is hit by an outbreak of the new coronavirus, Feb. 3, 2020.
Jason Lee | Reuters
GUANGZHOU, China – Central banks from China, Thailand, the United Arab Emirates and Hong Kong are jointly exploring a project for cross-border digital currency payments.
The Hong Kong Monetary Authority (HKMA) and the Bank of Thailand (BOT) worked together last year to study the application of central bank digital currency (CBDC).
They are now expanding their work with the Digital Currency Research Institute of the People’s Bank of China (PBOC) and the Central Bank of the United Arab Emirates.
Central bank digital currencies are gaining popularity with monetary authorities around the world. They broadly refer to central banks trying to digitize their fiat currency.
The exact technologies used differ from institution to institution.
But the group of central banks led by HKMA and BOT is exploring so-called distributed ledger technology (DLT). This refers to databases that are replicated and shared between the involved entities and record transactions. They are not owned by a single central bank per se, but are a shared ledger of activities. DLT is seen as a way to make potentially cross-border payments more efficient.
The project will explore ways to use DLT to “facilitate real-time cross-border payment-versus-payment transactions in foreign currency,” said Hong Kong’s central bank.
Payment versus payment is a settlement mechanism to ensure that “the final transfer of a payment in one currency occurs if and only if the final transfer of a payment is in another currency or currencies,” said the Bank for International Settlements , a group of central banks.
Cross-border payments have traditionally been slow and expensive. Central banks believe that central bank digital currencies can accelerate them.
Central banks will also examine “business use in a cross-border context, using both domestic and foreign currencies”.
China’s focus on digital currencies
While a number of central banks are exploring digital currencies, China’s central bank is furthest ahead, at least with a domestic version.
China has been testing what it calls the Digital Currency Electronic Payment system – a digital form of yuan currently targeting domestic payments.
In recent months, China has distributed large sums of its digital yuan through lotteries to citizens in some cities, such as Shenzhen and Chengdu.
But the PBOC has been very secretive about its digital currency efforts. Some commentators have suggested that a digital yuan could help China’s currency internationalize. And the cross-border project with the central banks of Hong Kong, Thailand and the UAE could be proof of that intention.
“The evidence is that the PBOC is still focused on domestic payments. But this kind of renminbi internationalization is the long-term strategic goal,” said Linghao Bao, an analyst at Trivium China.