The central banks of China, Hong Kong, Thailand and the UAE have also joined forces to create their own digital currency initiative.
The global crypto market is a vast and lucrative space, and one that boasts a total market capitalization value of $2.22 trillion.
While Bitcoin (BTC) continues to dominate this space and accounts for more than 50% of the total market cap, new crypto assets are being developed every single year, creating a more diverse sector that drives widespread adoption across the globe.
Interestingly, the central banks of China, Hong Kong, Thailand and the UAE have also joined forces to create their own digital currency initiative. But what exactly is this initiative, and how will it impact on cross-border payments in the Asia-Pacific region?
What Form Is the New Initiative Taking?
In simple terms, this collaborative initiative intends to leverage blockchain for the purpose of seamless and low-cost cross-border payments, particularly those pertaining to international trade.
Referred to colloquially as the ‘Multiple Central Bank Currency Bridge’ (or m-CBDC Bridge), the project was conceived by the Basel-based Bank for International Settlements (BIS), with further input provided by the Hong Kong Monetary Authority (HKMA) and the Bank of Thailand (BoT).
The initiative will require participating central banks to deploy distributed ledger blockchain technology to create a proof-of-concept prototype, which will deliver on the premise of reducing foreign exchange payments and creating higher levels of efficiency.
This will certainly have a direct impact on the heavily regulated forex market, particularly in terms of minimizing transaction fees and creating an enhanced infrastructure for payments from one currency to another.
Interestingly, China remains at the heart of the m-CBDC initiative, which is why the new payment system is often referred to by some as the ‘digital yuan’.
Some have argued that this represents a direct challenge to the Society for Worldwide Interbank Financial Telecommunication (Swift), which currently brokers the bulk of global foreign currency transactions. After all, critics have suggested that Swift has increasingly become a de facto vehicle for US and EU sanctions at a time of heightened tensions with Beijing, prompting to take dramatic and tech-led action.
What does This Mean for Traditional Payment Systems?
Of course, it can be argued that the new initiative threatens traditional retail payment systems, particularly the two market leaders AliPay and WeChat Pay.
Together, these e-payment giants account for 98% of China’s vast mobile payment market, having evolved to dominate the retail space and drive e-commerce growth across the board.
However, it’s thought that the CBDC digital currency has actually been conceived as a viable backup for these systems, creating a scenario where each option will co-exist and offer far greater flexibility to businesses, customers and investors alike.
This is good news for the Asia-Pacific economy as a whole, which is becoming increasingly reliant on e-payment services for the vast majority of its revenues. Make no mistake; if either AliPay or We Chat Pay were to incur significant financial or technological issues, it would have a hugely negative impact China’s financial stability and the ability of firms to do business.
So, although China may well be concerned about the reported manipulation of Swift by US and EU authorities, they’ve also conceived their CBDC initiative as a way of supporting the national economy.