SWIFT Sets Up Joint Venture With China Central Bank

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SWIFT Sets Up Joint Venture With China Central Bank Ahead Of Imminent Digital Yuan Launch

It's been a long time coming, and now it's almost here.

Back in August we reported that China's Commerce Ministry had released fresh details of a pilot program for the country's central bank digital currency (CBDC) to be expanded to several metropolitan areas, including Guangdong-Hong Kong-Macao Greater Bay Area, Beijing-Tianjin-Hebei region, and Yangtze River Delta region. This was the inevitable culmination of a process which started back in 2014 when as we reported at the time, "China Readies Digital Currency, IMF Says "Extremely Beneficial""

Fast forward a few months when China's preparations to rollout a digital yuan gathered pace, and we reported in October that China was poised to give legal backing to the launch of its own sovereign digital currency, "cementing its trailblazer status in virtual currencies far ahead of other countries, after already recently experimenting with large-scale trials of actual payments by consumers, which was met with mixed results." Specifically, the South China Morning Post reported that "The People’s Bank of China published a draft law on Friday that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time the digital yuan has been included and defined as part of the country’s sovereign fiat currency."

The design framework for the digital yuan had been released one year ago on the heels of Facebook's ambitious but disastrous Libra token rollout after founding corporate partners split for lack of confidence in the project and on fears US federal regulators would seek to block it just as they did encrypted-messaging company Telegram's Gram cryptocurrency.

"The draft law would also forbid any party from making or issuing yuan-backed digital tokens to replace the renminbi in the market," the SCMP said.

This in turn brought us to the so-called "Shenzhen case study"  when in October of 2020, China was the first nation to hold a trial run of its digital currency, when the government in Shenzhen carried out a lottery to give away a total of 10 million yuan (about $1.5 million) worth of the digital currency (nearly 2 million people applied and 50,000 people actually "won").

The winners were required to download a digital Renminbi app in order to receive a "red packet" worth 200 digital yuan ($30), which they can then spend at over 3,000 designated retailers in Shenzhen’s Luohu district, according to China Daily. After that, they’ll be able to buy goods from local pharmacies, supermarkets and even Walmart.

The idea was to not only test the technology involved, but boost consumer spending in the wake of the COVID-19 pandemic. In short, China is not only subsidizing the centrally-planned economy by manipulating the supply-side of the question- it now can prop up demand by handing out digital currency to anyone (or everyone).

Of course, unlike traditional central bank account-based currencies such as reserves, or decentralized cryptocurrencies like bitcoin, China’s digital currency would be controlled by the country’s central bank and will be instantly made available at a moment's notice to anyone who can receive it.

And since "China's adoption of digital central bank tokens is expected to be seamless as most of the nation's digital payments already pass through companies like TenCent and AliPay and are already very popular in the country", we concluded that "the successful Shenzhen test means that a broad rollout is just a matter of time."

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Still, one thing was missing: a stamp of approval by the gatekeeper of not only the global payments system, but the protector of the dollar reserve system, SWIFT. But as of this morning, China has that too.

As Reuters reports this morning, "SWIFT, the global system for financial messaging and cross-border payments, has set up a joint venture with the Chinese central bank’s digital currency research institute and clearing centre, in a sign that China is exploring global use of its planned digital yuan."

Actually, not just "exploring" but thanks to year of testing and partial rollouts, Beijing is about to become the first country in the world set to launch the digital yuan, and with both the IMF's and SWIFT's blessing, it's now just a matter of months if not weeks.

As the report details, every key Chines currency regulator is part of the project:

Other shareholders of the Beijing-based venture include China’s Cross-border Interbank Payment System (CIPS) and the Payment & Clearing Association of China, both supervised by the People’s Bank of China (PBOC), according to public information.

The new entity, called Finance Gateway Information Services Co, was established in Beijing on Jan. 16, and its business scope includes information system integration, data processing and technological consultancy, according to the website of the National Enterprise Credit Information Public System. This also means that China is well ahead of the curve when it comes to adoption of ISO 20022, the global "standard" that will ensure a uniform rollout of digital currencies across the world as paper currencies are banned and as the entire world goes under the de facto control of a handful of central banks, making politicians obsolete.

As a reminder, according to tentative estimates for the rollout of ISO 20022, which is the required universal transaction standard which will make payment in digital currencies possible, we are looking at a 2022 launch date, although China may be looking to go live as soon as this year.

In a recent report, HSBC said that China's digital currency "will help increase oversight of money flows, while also raising the efficiency of cross-border payments and facilitate yuan internationalization" but what it will really do is make money laundering virtually impossible as every single currency transaction will be trackable in real time.

China’s cross-border payment system CIPS both partners and competes with SWIFT amid growing Sino-U.S. tensions. Greater use of the CIPS instead of the Belgium-based SWIFT system would reduce exposure of China’s global payments data to the United States, BOC International (BOCI) said in a report last July.

Finally, for those who have missed our reporting on this fascinating issue, here again is Rabobank's Wim Boonstra explaining not only why China will be the first country to launch a digital currency - clearly a done deal now that it has SWIFT's seal of approval - but also looking at what happens next:

China Will Be The First Country To Launch A Digital Currency: What Happens Then

• China may be the first major country to launch a central bank digital currency or CBDC
• The Chinese CBDC, named DCEP, will strengthen the position of the central bank and help to further modernize the Chinese economy
• The DCEP will probably also be available for China’s trade partners, to begin with Africa
• The DCEP may strengthen the international position of the renminbi to the detriment of the euro
• The arrival of the DCEP should be a strong wake-up call for Western, especially European, policymakers
  

Introduction

Most central banks are busy preparing for the potential introduction of central bank digital currency (CBDC). CBDC is a digital currency issued by the central bank. It is sometimes referred to as a digital version of a bank note, but in many cases this is not correct. There are indeed many different potential variants.

So far, virtually all the central banks are keeping their options open as to whether a CBDC will ultimately appear.

China, where a far-reaching trial is under way, is the major exception. If this trial is successful, one can expect the Chinese CBDC to be introduced widely in the near future. China is therefore comfortably leading the way because the country has big ambitions for its digital currency. First, it should provide a sizable boost to the Chinese economy; second, it will concurrently further increase the Chinese government’s control of Chinese society; finally, the new currency is part of an ambitious plan to strengthen the international position of the renminbi, the Chinese currency, and potentially at the expense of the euro in particular. This Chinese decisiveness should spur European policymakers into action by further strengthening the euro.

China: from cash-based to almost completely cashless money in 10 years’ time

Not so long ago, retail payments in China were still almost entirely made in cash. There has been a revolution in payments traffic since that time, and China is now one of the leading countries in cashless payments. Unlike in other countries, such as the Netherlands and Sweden, in China this development did not originate from the banking system, but it was induced by a few key apps from relatively young Fintech companies such as WeChat (Tencent) and Alipay (Ant Financial). These parties, that form a kind of extra layer between the banks and their customers, now have a collective market share of more than 90% in Chinese payments cashless retail payments. The Chinese cashless payments system is already able to settle approximately 100,000 transactions per second.

The Chinese CBDC: DCEP

Against this background, the People’s Bank of China (PBoC), the Chinese central bank, has taken the initiative of developing its own digital currency known as the Digital Currency Electronic Payment (DCEP). Above all, the DCEP is a digital alternative to bank notes, although it has features that differ from cash in certain respects (see below). The DCEP does however have the same value as a renminbi.