Digital yuan isn't a dollar replacement: Former central bank governor

BEIJING (CAIXIN GLOBAL) - China's digital yuan is designed for retail transactions, not to replace the US dollar, former central bank Governor Zhou Xiaochuan told a forum over the weekend.

His remarks came amid heated discussion over whether the central bank's digital yuan and its Cross-Border Interbank Payment System (CIPS) will enable Russia to bypass the impact of being cut off from Swift, the world's biggest interbank payment messaging system, in the wake of its attack on Ukraine.

China started research on a digital yuan, also known as e-CNY, as far back as 2014 and launched the CIPS in 2015. Some analysts have argued that these developments represented efforts to pave the way for the yuan to replace the dollar as the world's dominant reserve currency. The sanctions on Russia fuelled such debates.

Some analysts said that the crisis could offer China a chance to promote a yuan-centred global payment system, which could attract countries that want to reduce their reliance on the dollar and bypass the dollar-dominated Swift system.

In a Saturday (April 16) speech to the 2022 Tsinghua PBCSF Global Finance Forum, Zhou spoke about the role of the digital yuan amid rising geopolitical tensions, as well as other hot topics such as international regulation on digital currencies. Below are key excerpts from the speech, which have been edited for clarity.

China's e-CNY is designed for retail, for the convenience of ordinary people and merchants, not to replace the US dollar. So, even if the Chinese government now assigned the e-CNY the task of replacing the dollar, it would not be able to function.

Of course, we do not rule out the possibility that the e-CNY may have the prospect of being used for cross-border payment in the future, but I estimate that it will be applied more to cross-border retail. The e-CNY cannot be easily used as a military weapon. The CIPS is designed for yuan-dominated cross-border payment.

The system also supports a few other mainstream currencies, but so far there are not many transactions denominated in those currencies. Also, while the CIPS integrates some messaging functions, they aren't used very often.

Swift has high efficiency and a large market scale. First, there are a large number of participating financial institutions, which has formed economies of scale. As long as you enter Swift, it is very convenient to contact anyone. Second, Swift has done a good job in encryption. It is rare to hear that Swift has problems in this regard.

If a new payment messaging system is created to bypass Swift, there will be some problems. First, a transition period will be needed for the new system to function efficiently, as the number of participants could be very few and many parties involved in a deal cannot be reached using the system in the very beginning, which will affect the efficiency of trade.

Second, there may be security risks. Swift automates the processing of information, and a lot of information does not require human intervention. Its level of automatic processing is relatively high. If the new system adopts more manual processing, it's likely that it will have more loopholes.

So, Swift is not irreplaceable, but if there is an attempt to replace it, there will be a lot of work that has to be done. Before and during the transition period, there are many elements that may affect global trade.

Some people say that in order to develop a digital currency, we must legislate first and have international standards. That is a good wish, but it is impossible to make legislation totally clear in the process of research, development and innovation.

Currency issuance is a sovereign matter and does not involve international standards. So, if a digital currency is issued only for domestic payments, there is no need for international organisations to be overly concerned.

International organisations can play a role in drafting standards for cross-border payments, which involve a lot of issues, especially when it comes to exchange rates. These are all big issues to the organisations and cannot be addressed overnight.