Bigger DCEP Test Continues Even as China Explores CBDC for Cross-Border Payments

China’s test of its digital currency electronic payment (DCEP) project continues in one of its major cities, and a much larger one than in Beijing earlier this month.

The southwestern Chinese city of Chengdu announced on Tuesday that it will be distributing CNY40.2 million (about $6.2 million) in the form of 204,255 digital yuan red envelopes worth between $27 to $37 each in a lottery style to locals who register through the “Tianfu Citizen Cloud” or JD e-commerce apps by Wednesday and Thursday Feb. 25. 

The Chengdu trial is tied to the Lunar New Year and will work with local retailers and the JD.com e-commerce app for winners to redeem their vouchers from March 3 to 19. 

The latest domestic pilot comes along as China joined another cross-border effort to explore the Multiple Central Bank Digital Currency (m-CBDC) Bridge Project which now ties Hong Kong, Thailand, United Arab Emirates (UAE) and, in a way, Saudi Arabia, together on a a CBDC payments initiative. 

Following a joint statement by relevant authorities on the m-CBDC Bridge which seeks to further “explore the capabilities of distributed ledger technology (DLT)”, develop “a proof-of-concept (PoC) prototype” and “facilitate real-time cross-border foreign exchange payment-versus-payment transactions in a multi-jurisdictional context and on a 24/7 basis”, there have been suggestions that the move has been what China set out to do in the first place with its DCEP. 

China had earlier entered a joint venture with SWIFT in a move some insiders say is aimed at globalising its DCEP initiative. China supposedly leads the global race for CBDCs which are expected to make monetary policy more targeted and minimize systemic risk domestically. These centralized legal tender insured by the issuing central bank aim to solve three key problems associated with cross-border payments: lack of transparency, inefficiency and the US’s weaponization of the SWIFT system.

They can also enhance international payments and facilitate a new age of global trade as the start of a new era for payments emerges all over the world and one out of every five central banks is likely to issue a CBDC in the next three years according to the BIS.

Despite being initiated by the Hong Kong Monetary Agency and the Bank of Thailand in 2019, the news of China joining the m-CBDC project which is supported by the Bank for International Settlements Innovation Hub Centre in Hong Kong is seen as a step in the Asian giant’s challenge of the US dollar hegemony. 

“The evidence is the PBOC is still focused on domestic payments. But this sort of internationalization of the renminbi is the long-term strategic goal,” Linghao Bao, analyst at Trivium China, told CNBC on the m-CBDC development.

Meanwhile, the US may be gearing up to a digital dollar at last. A US House rep, Patrick McHenry, told Bloomberg that the US Federal Reserve would have “an aggressive strategy” around the nature and privacy concerns of a digital dollar this year as he discusses the necessity of the digital currency for domestic and foreign use with Bloomberg.

“I think we have to have a digital dollar in order to be a counterweight to China. We have to have an open market, western-style investment in digital currency in order to counter what is a China approach, a Communist approach to control and to snoop and to sneak to have an enhanced role China globally. So I think we need that as a counterweight.”