The Yuan digital currency bridge test, the dollar building will fall?

On Tuesday, November 15 (EST), the Federal Reserve Bank of New York Innovation Center (“NYIC”) released a statement that it will begin a 12-week digital dollar pilot with a number of Wall Street financial institutions, including Citigroup, HSBC Holdings, MasterCard, Bank of New York Mellon, Wells Fargo, TD Bank, and Truest.

Called the regulated liability network U.S. pilot (RLN), the RLN platform will allow participating banks to issue tokens representing customer deposits that will be settled in a central bank reserve on a shared distributed ledger. Testing the “technical feasibility, legal feasibility and business applicability” of distributed ledger technology, as well as simulating tokens and exploring regulatory frameworks.

The New York Fed also said that the project “may be extended to multi-currency operations and regulated stable coins”.

Some believe this could be a precursor to a “digital dollar” offering.

But the New York Fed said the project is not intended to drive any specific policy outcomes, is not intended to indicate that the Fed will immediately issue digital dollars, and does not represent the necessary design framework for digital dollars, and that the results of the pilot program’s testing will be announced at the end.

In fact, what you don’t know is that a month and a half ago, the People’s Bank of China already announced that it had done something similar.

On September 28, the People’s Bank of China’s Digital Currency Institute, in conjunction with the Bank for International Settlements (BIS) and three other central banks, announced the completion of a pilot test of real transactions based on four national and regional central bank digital currencies (CBDC) for the Currency Bridge Project.

First of all, let’s explain what is called the Central Bank Digital Currency Bridge (m-CBDC Bridge).

Under the traditional currency system, cross-border payments that are made in US dollars essentially rely on commercial banks in developed countries and their overseas branches to act as correspondent banks for major settlement currencies such as the US dollar, and rely on the SWIFT system for information flow.

If the accepted currency (such as the US dollar) is not used, then cross-border payments become extremely complex, not only considering the exchange rate settlement between the two currencies and the US dollar, but also the efficiency and cost constraints.

From the technical principle, Currency Bridge is a Corridor Network (Corridor Network), because of the distributed bookkeeping of digital currencies, parties joining the platform can transact in a peer-to-peer manner without the need for intermediary accounts, through the circulation of credentials (Depository Receipt), in this way, the parties joining the Currency Bridge, can seamlessly provide tokenized peer-to-peer transfers between different currencies and different jurisdictions.

To put it bluntly, this has long been realized in the wildly growing crypto currency world, where distributed bookkeeping pass-through (Tokens) are used to act as cross-border payment intermediaries, ultimately realizing effective payments between two currencies, such as the FTX, the second largest exchange in the crypto currency world, which collapsed a few days ago. The FTT, for example, is the block chain token issued by the exchange.

However, the central banks of four countries and regions, including the People’s Bank of China, the Central Bank of Thailand, the UAE Central Bank and Hong Kong’s issuing bank, are so engaged, plus the Bank for International Settlements endorsement, immediately up high.

According to the description of the Money Bridge project, its participants are the central banks of China, Hong Kong, Thailand and the United Arab Emirates, 20 commercial banks and enterprises.

Commercial banks in China play an important role in this experiment. Five major state-owned banks, including China, Agriculture, Industry, Construction and Communications, represented domestic banks in the trial, while overseas branches of ICBC, Bank of China and Bank of Communications also participated as local businesses.

In order to explain the significance of this Currency Bridge test, we may need to first introduce the progress of CBDC (Central Bank Digital Currency), the central bank digital currency of countries around the world.

Central banks, as we all know, are an extension of government power, so although CBDC sounds like a “digital currency”, it is essentially a different thing from Bit coin or Ether. Electronic fiat currency

According to a BIS 2021 survey of global central banks, about 86% of the world’s 65 countries or economies are actively working on central bank digital currencies, and 14% are already moving forward with CDBC pilots.

By July 2022, the Bank for International Settlements, together with the International Monetary Fund and the World Bank, released a report titled “Central Bank Digital Currency for Cross-Border Payments,” highlighting the potential of CBDC to improve the efficiency of cross-border payments, reduce the cost of cross-border payments, and improve the transparency of cross-border payments.

With the support of former Central Bank Governor Zhou Xiaochuan, China is at the forefront of CBDC research and exploration in the world.

As early as 2014, under the advice of Governor Zhou Xiaochuan, the research and development of the central bank’s digital currency was initiated, and according to the central bank’s early positioning for CBDC, it was used to replace cash in circulation M0. Data from the People’s Bank of China’s Digital Currency Research Institute shows that the central mom’s CBDC is beginning to be used in wholesale and retail, restaurants and cultural tourism, education and healthcare, and public services. As of August 31, 2022, the pilot areas in 15 provinces (cities) had accumulated 360 million transactions and 100.4 billion Yuan, and the number of merchant stores supporting digital RMB exceeded 5.6 million.

However, I personally have been unimpressed with the domestic adoption of digital RMB.

There are two reasons for this.

1) The current stage of the RMB, thanks to the popularity of two private companies – Aliped and We Chat – has been extremely convenient and efficient for the domestic public to pay electronically in circulation, and the cost is basically negligible. Applying the digital RMB in the country is purely a case of taking your pants off, if anything, to promote and meet domestic payment needs.

2) If it is used to monitor the flow of domestic cash M0 at any time, which in turn contradicts the core spirit of distributed ledger and block chain technology, most of the public will also is apprehensive in using CBDC.

At the end of that article, I also emphasized that

You know, it is dependent on the two major private companies (Ali and Ten cent) to accumulate a little bit of user credit that China’s electronic payments have achieved a bend in the road and become a global leader.

The central bank’s main focus in adopting block chain technology and researching digital currency should be how to help the RMB win credit internationally, preferably by using the credit of 1.4 billion people for the RMB, overlaid with the world’s trust in Bit coin technology, to gradually, little by little, pry up the credit of the RMB in the whole world, and promote the internationalization of the RMB. To promote the internationalization of the RMB, instead of always going around in circles, always thinking about not affecting this and not affecting that, just thinking about strengthening the regulation and control of domestic cash flows on the existing system……

 

 

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