Cross-Border Trade - Role of Digital Currencies in Facilitating Payments

Central Bank Digital Currencies are digital tokens issued by central banks. They are in a way the digital version of cash; their value is guaranteed by a central bank. While several countries are developing their digital currencies, China is well-positioned to take the lead with the digital yuan.

Advantages of Central Bank Digital Currencies in Cross-Border Payments:

1. Low Transaction Cost: According to the World Bank, the global average cost for retail transfers is 6.51% of the total amount sent. In Sub-Saharan African countries, the average cost is as high as 8.19% of the total amount. Central Bank Digital Currencies can effectively reduce the number of intermediaries, limiting the need for multiple and consecutive connection hops.
2. Instant Cross-Border Transactions: Almost all current instant payment systems operate locally only. The only way to achieve instant transactions in cross-border transfers is by removing intermediaries, reducing excessive connection hops.
3. Digital Infrastructure Easier to Scale: Due to their digital nature, China can easily distribute its digital yuan through existing payment platforms like Alipay and WeChat Pay wallets. This increases the scalability of the digital yuan as it can easily leverage the existing well-established infrastructure.

China's Cross-Border Digital Currency Initiatives:

• Multi-Central Bank Digital Currency Bridge: The Digital Currency Research Institute of the People's Bank of China and the Central Bank of the UAE recently joined the Multi-Central Bank Digital Currency Bridge.
• Blockchain Service Network: China's government-supported initiative plans to build an ambitious digital currency network in the next five years.