In August 2019, Mark Carney, then Governor of Bank of England and former chair of Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, called for global monetary system to replace the US dollar. He explained that “…the dollar accounts for only 10 per cent of global trade and 15 per cent of global GDP but half of trade invoices and two-thirds of global securities issuance…countries are forced to self-insure and hoard dollars to guard against potential capital flight, leading to excess savings and lower global growth…”
The ill effects of “Helicopter Money” – new US dollar money printed by a massive scale and distributed among the public to stimulate the economy during a recession or when interest rates fall to zero (a.k.a. quantitative easing) is also well documented. These include but not limited to runaway asset prices and thereby benefit the wealthier segments of society, widening income gap and exacerbating social inequality; rising global inflation; dollar debt distress among many emerging-market and developing economies (EMDEs) and growing risks to financial stability etc.
Weaponization of International Currency
The war in Ukraine broke out on 24 Feb this year has highlighted the impact of the weaponization of the dollar on affected countries. Overnight, countries affected by the financial sanctions imposed by US can be totally cut off from the dollar-based global financial system, and the dollar reserves they have painstakingly built could become worthless. This further sharpens the debate about the legitimacy and rationality of using dollar as international currency. Hence, renewed talk about de- dollarization in recent time ensues.
But the cure is not to have another national currency to replace US dollar as the international and reserve currency as the national currency which replaces US dollar may exhibit the same ill effects mentioned above as the monetary authority of a sovereign state is likely to place its domestic interest before the interest of the international community in the conduct of its monetary policy.
Hence, in dollar’s place, Mark Carney suggested perhaps we should explore “…some form of truly global currency similar to Facebook Inc’s proposed Libra (later known as Diem) would be a better option. That would be preferable to allowing the dollar’s reserve status to be replaced by another national currency such as China’s Renminbi…”
In fact, there were calls similar to that of Mark Carney in the past. For example, in 2009 after the global financial crisis when US engaged in quantitative easing, the then central bank governor of China, Zhou Xiaochuan commented on “inherent vulnerabilities and systemic risks in the existing dollar-based international monetary system” and called for a global currency to replace the dominant dollar. As expected, however both the US and the European Union brushed off the idea.
Digital Asia should rise to the occasion
Post-COVID 19, Asia is well recognised to be the fastest growing region in the world. There are now much closer ties among Asian countries in intra-Asia trade and investment. For example, due to US-China trade war, firms in China are setting up secondary manufacturing locations or shifting parts of their production and supply chain to other Asian countries such as in Vietnam, Indonesia, Thailand and Malaysia to diversify their risks and exposure, i.e., the so-called China Plus One strategy.
Asia is leading global digitalization and benefit greatly from the growth of its digital economies. A report by IMF in September 2018 revealed that at any given income level, Asian economies are at the frontier relative to their global peers. In another report by IMF in 2021, it commented that digitalization in Asia is pervasive and is set to grow in the aftermath of the COVID-19 pandemic. It stands out by its sheer scale, with internet users far exceeding numbers in other regions. Digitalization in Asia has extended well beyond the information communications and technology (ICT) sector, with widespread internet usage underpinning e-commerce, online work and play, fintech, as well as online financial and other services.
The case for closer digital currency co-operation to support growing intra-Asia e-trade and digital economies in Asia is strong. Conditions now are also ripe for Asia to take the lead globally in developing regional digital currency co-operation in the payment and settlement of regional trade and investment.
RMB Internationalization not Immediate Priority
In recent time, China has been actively pilot testing the e-CNY, its central bank digital currency (CBDC) which has a clear lead over the rest of the world. However, given the controversy over the use of national currency as global currency as remarked by Mark Carney and Zhou Xiaochuan, and the international community’s increasing lack of confidence in the monetary hegemony of national currency used as global currency, such as the weaponization of US dollar following the recent war in Ukraine, the case for a regional Asian digital currency akin to Facebook’s Diem or an integrated digital currency system for Asian countries’ digital currencies for cross-border payments can be appealing.
Besides, this author is of the view that the top priority for China in the short to medium term is to reform its economy with “dual circulation” development strategy, where “internal circulation”, i.e., the domestic cycle of production, distribution and consumption plays a leading role while “external circulation”, i.e., international trade and investment, remains its extension and supplement, to ensure a strong and stable domestic economy.
This development strategy comes at a time when external environments become increasingly complex, hostile and destabilizing, such as geopolitical conflicts including ongoing US-China trade and tech war and war in Ukraine, climate change-related disasters, supply chain disruption, food and energy crises etc. To China, in the foreseeable future, this domestic and inward orientation is more important than any international projects such as making RMB an international and reserve currency to replace the US dollar. Also in current reality, RMB is anyway not yet widely accepted in the international community.
Then, what are the alternatives to move away from national currency like US dollar being used as global currency facilitating cross-border payments?
“Asian Dollar” – A Regional Digital Currency for Asia
It is not inconceivable, and in fact could be a plausible tactical move for China, in the collective interest of many countries looking for ways to de-dollarize, to actively participate in the development of digital currency co-operation in Asia, instead of pushing its own RMB internationalization agenda. China should and is expected to play a pivotal role in digital currency co-operation in Asia, given its sizable digital economy which made up nearly 40 % of GDP in 2020 leading most countries in Asia, its vast trade links with the world, fintech prowess and world leading CBDC experimentation.
One alternative is for Asia to learn from the interesting work by Facebook on Diem project, which unfortunately was frustrated by regulatory concern in the West especially the US regulators to preserve the monetary hegemony of US dollar as global currency. Such regulatory concern however is not present in Asian countries.
Diem is a cryptocurrency to be created by Facebook, intended to be used as a simple, low-fee medium of exchange to be used around the world. It also aims to provide better, cheaper, and more open access to financial services for all. It is intended to be run and governed by the Diem Association, an independent not-for-profit association made up of the coin’s founding members, which can include diverse businesses, non-profit and multilateral organizations, and academic institutions.
The design concept and proposed governance structure of Diem are indeed attractive to countries looking for alternative payment method for cross-border transactions away from US dollar. Digitally more developed countries in Asia may come together to explore Diem-like non-national “Asian Dollar” – a digital currency for Asia. However, this author is under no illusion that such endeavour is likely to meet with many challenges. One reasonable step to take is to entrust some development institutions such as Asian Infrastructure Investment Bank (AIIB) or Asian Development Bank (ADB) to conduct feasibility study with the support of governments and technical experts.
Pan-Asia m-CBDC shared platform
Another alternative is to build on and expedite the current development of new cross-border digital payment infrastructure in Asia known as multi-CBDC (m-CBDC) platform projects. These projects are aimed at allowing financial institutions to use CBDCs issued by participating central banks to transact directly with each other on a distributed ledger technology (DLT)-based shared platform. This has the potential to reduce dependence on (i) the inefficient traditional network of correspondent banks, and (ii) also the use of US dollar for cross-border payments.
A recent article entitled “CBDC networks could defang sanction threats” published by Official Monetary and Financial Institutions forum (OMFIF) commented that following the war in Ukraine, Russia’s central bank is working on a digital rouble and has expressed interest in its value as a means of facilitating cross-border payments which is free from western political influence.
On the m-CBDC shared platform, each participating central bank issues its own CBDC in its own domestic currency. Participating commercial banks are then able to hold these CBDCs directly, gaining access to foreign currencies without the need for accounts with correspondent banks. As all participating banks could potentially hold the different CBDCs directly, they would be able to transact directly with each other in the participating currencies.
Currently, there are two such major on-going projects in Asia – Project “Inthanon-LionRock”and Project “Dunbar”.
Project “Inthanon-LionRock” is a cooperation between the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates; and Project “Dunbar” is a collaboration between Bank Negara Malaysia, the Monetary Authority of Singapore, the Reserve Bank of Australia, and the South African Reserve Bank. Both projects are supported by Bank for International Settlements (BIS) Innovation Hub in Hong Kong and Singapore respectively.
By working towards the interoperability between the two projects and extending the platform’s coverage of countries from Asia, a Pan-Asia m-CBDC shared platform for cross-border digital payment infrastructure is in sight in time to come.
Dr Pei Sai Fan is an adjunct professor in NUS, NTU, SMU and SUSS, and angel investor, adviser and mentor to fintech start-ups. He was formerly director of Banking Supervision of MAS (Monetary Authority of Singapore) and MAS Academy
July 2022