China's digital currency could be 'functional alternative' to dollar settlement

China's central bank testing its own sovereign digital currency, observers say its successful development and implementation could wean the country of its dependence on the US dollar settlement system.

China's central bank advances to the next stage of testing its sovereign digital currency, observers say its successful development and implementation could wean the country of its dependence on the US dollar settlement system. In an April 24 article, China Daily said the reliance on US dollar settlement allows the US to impose unilateral punitive sanctions on companies via the threat of exclusion from the SWIFT dollar settlement system. However, "DCEP" (digital currency and electronic payment) as part of the further development of an RMB-based trade settlement system could serve to counter what it alleges is the weaponisation of the US dollar as a tool to enforce foreign policy. "A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.

"It may also facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption," it said.

Nevertheless, the article falls short of saying that the digital currency would displace the use of US dollar settlement. "These two settlement systems – US dollar and China sovereign digital - may operate side by side or if need be, on a mutually exclusive basis," it said.

China Daily noted that during the ongoing Covid-19 crisis, the stability of the Chinese yuan enhanced the appeal of a Chinese digital currency. The launch of Facebook's Libra earlier this year is also said to have accelerated China's development of DCEP as the American cryptocurrency would lie beyond the control of Beijing's monetary authorities.

Furthermore, the preference for "contactless" payments is growing in the country, and expected to be more so due to social distancing measures in a post-coronavirus era. In the digital payment arena, there are popular platforms in China including Alipay, owned by Alibaba’s Ant Financial, and WeChat Pay, owned by Tencent. However, transactions on these platforms are made in existing currency.

Source: TheStar