China is now working on connecting its nearly finished central bank digital currency (CBDC) to Hong Kong’s Fast Payment System.
Announced by the head of China’s digital yuan project in a Thursday (Dec. 9) seminar, the pilot program between the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA) is more than just an attempt to make cross-border payments easier: It is a shot across the bow of the dollar’s position as the world’s reserve currency.
Concern has been growing in U.S. financial circles for some time that China’s CBDC project — which is expected to launch by February — has the potential to offer an alternative to the dollar as the currency of cross-border trade, as well as limit its ability to enforce sanctions.
In April, Bloomberg reported that officials from the Pentagon and National Security Council had joined the Treasury and State Departments in looking at the long-term implications of China’s CBDC on the global financial system, although they were primarily concerned with sanctions evasion.
The issue also arose in the Dec. 8 hearing by the House Financial Services Committee on “Digital Assets and the Future of Finance.”
Among the six crypto industry executives testifying, there was Brian Brooks, CEO of BitFury and a former head of the U.S. main banking regulator, the Office of the Comptroller of the Currency.
Over the last decade, Brooks said, the amount of dollars held by major central banks like the Bank of Japan and European Central Bank is down a quarter.
“What that tells me is that in the future, with the rise of China and other major economies, the U.S. dollar can’t take its primacy for granted,” he testified. “And we need to start thinking about competing on utility, on features, not just based on the post-World War II monetary system. It’s really critically important.”
Another former regulator told the Senate Banking Committee much the same thing last year.
America’s “aging financial system infrastructure puts the United States at a competitive economic disadvantage to economies like China that are building new financial infrastructure based on 21st-century digital technology,” warned Digital Dollar Project Co-founder and former Commodity Futures Trading Commission Chairman Chris Giancarlo.
“For example, it typically takes days in America to settle and clear retail bank transfers,” he said. “In many other countries, it takes minutes, if not seconds. Other economies, like China’s, are advancing rapidly in deploying instantaneous, digital currency payment systems.”