In a recent proposal, Top Chinese officials have suggested the creation of a regional digital currency. This initiative would be backed by four main Asian currencies which include the Yuan, Hong Kong dollar, Korean Won and Japanese Yen. Should it be accepted, the PBoC will be tasked with steering the project.
Co-signed by nine top advisers, the proposal was presented to Chinese regulators on May 21 in the ongoing annual political gathering. This submission was done by Sequoia's China Managing partner, Neil Shen, during the premier session of the Chinese People's Political Consultative Conference (PCC). Basically, this is the level which independent entities and organizations in China get an opportunity to advice the government prior to the National People's Congress (NPC).
The Digital Currency Structure Proposal
The proposal describes this joint digital currency as a ‘stable coin'; mainly because it will be pegged on a varied basket of ‘stable' currencies. It goes on to highlight that the weight of these four Asian currencies will be based on an IMF model dubbed ‘special drawing rights‘ (SDR). Ideally, all the four fiat currencies will be assigned a weight based on the underlying value of their supporting economies. This is pretty similar to what Libra had earlier proposed before an update of its whitepaper this year.
Some of the benefits that were outlined in favor of the coin include facilitation of regional trade amongst the four countries. Most especially in the clearance and settlement of cross-border payments. The proposal notes that PBoC and Hong Kong Monetary Authority could work together in creating a regulatory framework for this ecosystem. Also suggested was the creation of a regulatory sandbox and the ramping up of Hong Kong's system in order to boost the efficiency in cross-border payments.
In summary, this stablecoin is set to present an opportunity for private entities to seamlessly trade through digital assets. Furthermore, they can move the digital currency within the existing financial ecosystem through custodians or banks. Currently, emphasis appears to be on Hong Kong which acts as the main financial gateway in the region. The city is estimated to process over 70% of Yuan cross-border payments.
China's Digital Yuan
Could this be another strategy to empower the recently piloted digital Yuan? Back in April, the Asian giant rolled out its much-anticipated digital currency sparking conversations around CBDC's development. The new regional digital currency proposal now suggests there could be an opportunity to integrate the digital Yuan should China and peer authorities give a go ahead. It still, however, too early to tell as the proposal is set to be reviewed in the coming weeks as the NPC session kicks off in China.