While the People's Bank of China (PBOC) has given no indication of what role blockchain plays in its digital yuan (eCNY), if any, distributed ledger technology (DLT) is playing a central role in the slow internationalisation of the yuan.

In a FinTech Week panel discussion on Tuesday about mBridge, the largest cross-border central bank digital currency (CBDC) project, Mu Changchun, director of the PBOC's Digital Research Institute, explained how the platform is designed to allow participation by central banks whether or not they have already established their own domestic CBDC system, possibly negating the need for dollars in foreign exchange.

"You can also adopt these existing traditional payment systems such as RTGS [real-time gross settlement] or FPS [Faster Payment System], so that central banks or monetary authorities can issue their own CBDC on mBridge without establishing their own CBDC system," Mu explained. "For example, mBridge CBDCs can be issued with the same amount of funds deducted from the relevant bank accounts or reserve accounts in the RTGS system."

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Mu Changchun, director general of the digital currency project at the People's Bank of China, appearing remotely while speaking on a panel discussion about the cross-border digital currency settlements platform mBridge. alt=Mu Changchun, director general of the digital currency project at the People's Bank of China, appearing remotely while speaking on a panel discussion about the cross-border digital currency settlements platform mBridge.>

Despite DLT being "not so perfect for a payment system", Mu said that it has proven beneficial when there are "so many parties involved". "In order to solve the heterogeneous issues or the trust issues, a DLT is perfect for self-management or autonomous management," he said.

The mBridge is a joint project between the PBOC, Hong Kong Monetary Authority (HKMA), Bank of Thailand, Central Bank of the United Arab Emirates (UAE), and the Bank of International Settlements' Innovation Hub Hong Kong Centre. It has been a closely watched experiment as the only large-scale use of blockchain to settle international payments.

The PBOC said in September that an mBridge trial running from August 15 to September 23 saw 20 commercial banks transfer 150 million yuan (US$22 million) across 160 payments, and 80 million yuan worth of digital fiat was issued onto the platform.

The success of mBridge, which stands for multiple-CBDC Bridge, is seen as a possible avenue for Beijing to push yuan internationalisation while maintaining tight control. The goal of a more international yuan has long been hampered by tight domestic capital controls, which helps reduce the risk of capital flight but makes the yuan less useful for foreign exchange.

International settlements in yuan have already been rising over the past couple of years. The share of China's trade settled in yuan had reached nearly 30 per cent by August, up from less than 20 per cent two years before.

China so far remains far ahead of other large economies in trialling a CBDC, as the PBOC ramped up development of the eCNY shortly after Facebook announced in 2019 that it was working on its own stablecoin called Libra, later renamed Diem before being discontinued.

Collaboration with the HKMA also shows how Hong Kong continues to promote itself as the bridge between China and the rest of the world.

Last week, the mBridge participants issued a report on lessons learned from the trial in August. This came just ahead of FinTech Week, during which Hong Kong announced a loosening of restrictions on digital assets as the city looks to boost its international competitiveness in this area.

Amid tight Covid-19 travel restrictions and regulatory uncertainty in Hong Kong, more attention has gone to markets like Singapore and Dubai, which have reopened their cities to travellers more quickly and are perceived as more friendly towards the cryptocurrency industry.

As its participation in the mBridge project suggests, the HKMA has also been working on its own digital currency, but retail use - as allowed with the eCNY in several designated cities in China - remains years away, according to Nelson Chow, the HKMA's chief fintech officer.

It will take a "couple of years" for both technical and legal reasons to launch a digital Hong Kong dollar (eHKD), Chow said in a panel discussion on retail CBDCs on Monday.

"We have to make sure that it's safe and sound, that it is robust and it's resilient," he said. "Another aspect is actually legal. We have to go through possible legislative change and ensure that this e-Hong Kong dollar is fit for purpose."

Chow described three phases of development for an eHKD: establishing the technical requirements, piloting and implementation. "We hope that rail one and two will equip us with sufficient maturity to go into rail three relatively quickly," Chow said.

In trialling a wholesale CBDC, however, Hong Kong appears much further along as it works with mainland China, Thailand and the UAE.

"To me, the mBridge project ... has shown an enormous potential for speeding up cross-border payments and reducing costs, and has shown at the same time that the central bank digital currency area goes beyond retail CBDCs, since wholesale CBDC projects like mBridge, whose platform mBridge Ledger is Blockchain-based, offer many opportunities as well," Oriol Caudevilla, fintech and blockchain adviser and board director at the Global Impact FinTech Forum, said of the latest mBridge report.

A side explaining the mBridge platform facilitating cross-border digital currency transactions among participating central banks, shown during Mu Changchun's remarks in a panel discussion at Hong Kong FinTech Week. Photo: Matt Haldane alt=A side explaining the mBridge platform facilitating cross-border digital currency transactions among participating central banks, shown during Mu Changchun's remarks in a panel discussion at Hong Kong FinTech Week. Photo: Matt Haldane>

Given the potential impact of a CBDC on monetary policy, financial stability was also a major theme in related panels in the first two days of FinTech Week events.

The mBridge report highlighted the legal issues this presents. Regulatory changes, the report notes, may be needed "to achieve full legal certainty and clarity".

In the mBridge panel discussion, Mu also quoted from part of the report emphasising the autonomy of participating jurisdictions. The platform's modular approach "allows participating central banks and monetary authorities to validate, adapt and extend functionality according to their different requirements and aims to support each jurisdiction's autonomy in implementation in adoption of the platform", he said.

Additional reporting by Xinmei Shen.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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