| BizInsight @Geoswift Today’s edition shines a light on the arrival of the digital Renminbi into cross-border payments. Geoswift’s CEO Raymond Qu draws on his extensive experience in China cross-border payments to present insights into this topic. September 25, 2020 |
Viewed from a global perspective, China is among the first countries to propose and implement its digital currency. The digital renminbi (RMB) had already started a sort of trial phase in certain low-value, high-frequency retail business markets, but has recently taken the next step toward international acceptance in cross-border payments. Government officials in Hebei and Hainan provinces have begun encouraging the use of digital RMB for valuation and settlement in cross-border transactions, prompting an exploration of digital currency’s entrance into the domain of cross-border payments.
How can digital currency help settle cross-border payments?
To answer this question, let’s consider the following example. Say that 1 yuan RMB can be exchanged for 15 yen, and that Company A in China sells 10,000 yuan RMB of their product to Company B, a Japanese importer. A payment settlement platform would handle this type of cross-border transaction in the following way:
Step 1: RMB legal tender cannot be directly converted to yen on the platform – it must be digitized before the exchange can be processed. The settlement platform uses the 10,000 yuan RMB to purchase 10,000 digital RMB from the central bank, and this digital RMB acts as the platform’s internal currency. It then fixes the exchange rate of digital RMB to yen at a ratio of 1:15.
Step 2: Company B exchanges 150,000 yen for 10,000 digital RMB, which it uses to make its payment to Company A.
Step 3: Company A uses the settlement platform to exchange this payment of 10,000 digital RMB to an equal value of RMB legal tender.
Step 4: Finally, the central bank uses RMB legal tender to purchase 150,000 yen from the settlement platform, paying the platform 10,000 yuan RMB.
Throughout the entire transaction, the value of the digital RMB stays exactly the same, and it merely acts as an intermediary currency. The only function of this type of intermediary currency is valuation.
The future prospects for digital RMB’s use in cross-border payments
Our founder and CEO, Raymond Qu, is a member of the Forbes Finance Council, and an expert in the field of cross-border payments. He draws on his experience in China cross-border payments to present insights into this topic.
Q: What benefits will each party see when adopting digital RMB for use in their cross-border transaction? What sort of changes might arise following its adoption, in terms of customer demands?
Raymond: The biggest draws of digital RMB are its “efficiency, convenience, and low-cost,” and when compared to traditional cross-border payment methods, it holds a distinct advantage in both transaction speed and cost due to its ability to bundle the transmission of information and funds in one package. This advantage is especially true for “small-value, high-frequency” transactions, where digital RMB will be vastly superior to the traditional bank transaction systems that are currently in use. In addition, digital RMB does not require bank account binding in order to process a payment, which will greatly accelerate and simplify the payment process, and be very appealing to users.
It holds a distinct advantage in both transaction speed and cost due to its ability to bundle the transmission of information and funds in one package.
Q: Could it be said that DC/EP will promote the free movement of RMB across borders?
Raymond: DC/EP on its own will not be enough to accomplish completely free movement of RMB across borders. For this to happen, further development would be needed within financial markets, including increased marketization of exchange rates and interest rates, easier convertibility of currency, the relaxation of capital control restrictions, and more. However, the utilization of digital currency for settling cross-border payments will continue to develop over the long term, and the globalization and free movement of RMB across borders will inevitably follow alongside.
Q: What short-term and long-term impacts will this transition have on payment and clearing systems?
Raymond：The digitization of payment transactions is moving along at a rapid pace, and many characteristics such as its fragmentation, diversification, and usability are starting to appear within transaction systems. Compared to traditional banks, new settlement platforms can lean on the flexibility of their products and systems to better penetrate the market, providing both sellers and consumers with a comprehensive digital currency service. Adding the power of this new technology to financial system does not simply mean offering a higher level of service, but rather undergoing a total restructuring of the system from the ground up. As an example, the fees for cross-border settlement may no longer need to be based on the transaction amount, but instead on the number of transactions. And as for the determination and management of exchange rates, although these changes will certainly create some new challenges, they will also lead to many exciting opportunities. It should be stressed that digital RMB will not completely overturn the existing system, it will only improve upon the current financial services. It is important to grasp the potential scope of what digital currency can become, while remaining aware of the work it will entail to achieve it; although there is no need for excessive worry about the changes that the implementation of digital currency will produce, it is also important not to oversimplify the process and become too confident, too soon.
Adding the power of this new technology to financial system does not simply mean offering a higher level of service, but rather undergoing a total restructuring of the system from the ground up.
Q: What sort of changes do settlement platforms need to implement to prepare for the entry of digital RMB into cross-border transactions?
Raymond: As of right now, the central bank is only responsible for the supply, regulation, and settlement of digital RMB, while the details of its operation will be left for commercialized platforms to develop and implement. Therefore, these platforms must develop advanced systems technologies that will guarantee the platform’s efficiency, security, and ease-of-use with digital currency. At the same time, they’ll need to integrate characteristics of cross-border transactions and use effective finance technologies to set fair exchange rates for digital RMB. They must maintain an active, innovative mindset in order to succeed in the era of cross-border payment digitization, where the market is constantly changing and advancing.
The central bank is only responsible for the supply, regulation, and settlement of digital RMB, while the details of its operation will be left for commercialized platforms to develop and implement.
Q: Is digital RMB truly ready for universal use, or are there still some issues that need to be worked out?
Raymond: First of all, it is of the utmost importance that inquiry systems able to convert directly between digital RMB and other currencies be established quickly; a new system will need to be built in which digital RMB serves as the intermediary and valuating currency. Secondly, this new intermediary currency will need to attract a sufficient number of users, which might be accomplished through subsidies or conversion discounts during the early stages of digital RMB’s implementation. The third issue will be in determining fair exchange rates between digital RMB and other legal tenders, which will allow businesses to receive foreign exchange earnings while preventing speculation. These are the key issues that will need to be resolved before digital RMB can truly penetrate the financial market.