Kiffmeister’s #Fintech Daily Digest (08/30/2020)

Chinese Bank Disables Digital Yuan Wallet After Soft Launch Draws Wide Attention

State-owned China Construction Bank (CCB) reportedly opened up registration for wallets using the country’s central bank digital currency (CBDC) for a few hours. The wallet’s services included payment, redemption, transfer, and credit card recharge, and there were four levels of wallet with varying balance (500,000, 300,000, 50,000 and 10,000 yuan) and payment limits. The bank was issuing each wallet with a unique identification number linked to the customer’s information, including their name, password, mobile phone number, email address, customer number, and bank card number. However, CCB quickly disabled the feature from public users.

China’s Digital Currency Will Rise but Not Rule

According to Brookings Institution Senior Fellow Eswar Prasad, for all the hype about its central bank digital currency (CBDC), China’s Cross-Border Interbank Payment System (CIPS) is a more important innovation because it makes it easier to use the renminbi for international transactions. Although China’s CBDC may eventually be linked up to cross-border payments systems, this by itself will not elevate the renminbi’s reserve currency status. However, the CIPS is able to bypass the Western-dominated SWIFT system for international payments and thus circumvent U.S. financial sanctions. Nevertheless, elevating the renminbi’s reserve currency status will require more fundamental changes, like the continuation of financial markets reforms and the removal of capital flow restrictions.  

Reuters FACTBOX: China’s onshore yuan clearing and settlement system CIPS

Backed by the People’s Bank of China (PBOC), China launched the Cross-Border Interbank Payment System (CIPS) cross-border clearing and settlement services system in 2015 to internationalise yuan use. It allows global banks to clear cross-border yuan transactions directly onshore, instead of through clearing banks in offshore yuan hubs. For now, CIPS still largely relies on SWIFT for cross-border financial messaging but it has the potential to operate independently and have its own direct communication line between financial organisations. For Chinese banks and corporates, CIPS can serve as a messaging system without the risk of exposing transaction information to the United States. 

China’s global yuan push makes inroads in Asia and Africa

As of the end of July, 984 financial institutions from 97 countries and regions were part of China’s Cross-Border Interbank Payment System (CIPS). The system was created in 2015 to help globalize the yuan, by providing an easier way for participants to settle and clear yuan-denominated payments. Members can choose to either take part in CIPS directly, meaning they maintain their own accounts within the system, or indirectly, meaning they work through direct members. More than 70% of participants are in Asia, followed by 124 in Europe, 40 in the Americas, and 37 in Africa. The African presence is due to China’s economic clout in the region, especially with its Belt and Road infrastructure-building initiative. 

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