Digital Renminbi as a part of the Belt and Road Initiative

The U.S. Dollar has been the dominant international trade currency for the past few decades. This is owing to the strength of U.S. institutions, robust capital markets with highliquidity and positive regulatory records.

With hindsight, it seems that the position of the USD as the global currency is unshakeable. However, a section of the Belt and Road Initiative (BRI) does present a considerable challenge to the monetary hegemony of the USD.

Before examining the possible challenges posed by the BRI, it is essential for us to understand the objectives of a currency. This is because a challenge with a remote chance of success to a dominant currency would only be possible if the challenger counterpart is able to serve these objectives better. A currency serves as a medium of exchange, a store of value, a means of deferred payment and a unit of account. The USD is doing well in terms of all of these functions.

The Chinese government launched the Digital Currency Electronic Payment (DCEP) project in 2014 to implement a digital version of the Renminbi (RMB) with a summarised aim to solidify its position as the forerunner of a cashless payment world. However, a blockchain- powered RMB has limitless possibilities. On a firm basis, some have suggested that as a crypto, the RMB may pose a strong challenge to the position of the USD as the world currency. From a geopolitical perspective, the wider adoption of the RMB is indispensable to enable a stronger Chinese influence among active nations within the BRI programme.

This is observable from the experience of countless economic sanctions imposed by the U.S. and its allies upon various nations in order to compel a reconfiguration of their policies.

There have actually been numerous attempts to produce “stablecoins”, which are basically cryptocurrencies pegged 1-1 in their value to a fiat currency. The USD Tether (USDT) is a great example of this, as it is a cryptocurrency issued by Tether Ltd that is pegged 1-1 to the U.S Dollar. This currency has been mired in controversy but is nevertheless the most widely adopted and stable crypto used to trade on most cryptocurrency derivative exchanges such as Binance, OKex, Huobi and MoonXBT. Efforts are underway in many different regions to produce the same for national currencies. Good examples include the Indonesian Rupiah Token (IDRT) and the Vietnamese Dong Coin (VNDC).

How would a “crypto RMB” be able to bring about a heightened dominance of China in the monetary sphere of world trade? According to the International Monetary Fund, the RMB’s share of international payments was only 1.9% in 2019. The share of RMB in global foreign exchange reserves was only 2.0% during the same year. This figure has not changed much in both the years 2020 and 2021. Coupled with dynamic trading activities within the BRI participants, the digital RMB serves as a game-changer for this lack of popularity through additional features that the blockchain technology can offer.

Firstly, a blockchain is almost dispute-free and intermediary-free. By having each transaction cryptographically encrypted and displayed on a public ledger, transactions with the digital RMB are able to skip the unnecessary human or technical errors that have plagued the global financial system for centuries. The Chinese government has been extremely fervent in catalysing the growth of blockchain technology. The strategy was to synergise six public blockchains in China, including NEO, TEZOS, NERVOS, EOS, IRISNET and Ethereum to create a national blockchain network to enable not only crypto transfers but also the development of decentralised applications.

Secondly, having a blockchain base offers the RMB a key characteristic to ensure that it is convenient to be transferred and exchanged throughout the world: fungibility. Fungibility means that the digital RMB is indistinguishable from the RMB in cash form. This can be contrasted with famous e-wallets such as Alipay and WeChat Pay, which offer a storage facility for currencies where trusts are derived from these companies’ long-standing integrity.

The digital RMB is issued and backed directly by the People’s Bank of China (PBOC). Therefore, it is able to overstep the risk of unreliable custodian corporations. At the same time, cold hard cash in digital form can be transferred and exchanged throughout the globe within a fraction of a second without having to engage in complex cross-border settlement processes between two banks.

Last but not least, in fuelling the growth of the RMB as the main trading currency within economic blocs throughout the BRI participating countries, a crypto RMB is much safer and much more affordable compared to conventional payment methods such as a letter of credit or documentary collection. Smart contracts can be integrated within the main RMB crypto blockchain network, which permits the release of a buyer’s fund automatically when certain conditions are satisfied. The highly customisable nature of the smart contracting platform makes the execution of these transactions possibly free of charge.

Lee Zhao Yan is a Lecturer at Tunku Abdul Rahman University College. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (SEARCH) and the Centre of Business and Policy Research, Tunku Abdul Rahman University College (TAR UC) and co-organised by the Association of Belt and Road Malaysia.