Quit the dollar: Can Asia build its own digital currency and digital payment infrastructure?

In August 2019, Mark Carney, who was then the governor of the Bank of England and former chair of the Financial Stability Board, called for a global monetary system to replace the US dollar. As reported in a Financial Times article, he explained that the dollar accounts for only 10% of global trade and 15% of global GDP, but half of trade invoices and two-thirds of global securities issuance. That means countries are forced to self-insure and hoard dollars to guard against potential capital flight, leading to excess savings and lower global growth.

The ill-effects of "helicopter money" - new US dollar money printed on a massive scale and distributed among the public to stimulate the economy during a recession or when interest rates fall to zero (aka quantitative easing) - are also well documented. These include but are not limited to runaway asset prices which leads to benefits for the wealthier segments of society, a widening income gap and rising social inequality; rising global inflation; dollar debt distress among many emerging markets and developing economies (EMDEs); and growing risks to financial stability etc.

The Russia-Ukraine war has highlighted the very real threat of the weaponisation of the dollar. Overnight, countries affected by US-imposed financial sanctions could be cut off from the dollar-based global financial system, and the dollar reserves they had painstakingly accumulated could become worthless. This further sharpens the debate about the legitimacy and rationality of using the dollar as an international currency. Hence, there has been renewed talk of de-dollarisation in recent times.

But the cure is not for another national currency to replace the US dollar. The same ill effects could result as the monetary authority of a sovereign state is likely to place its domestic interests before the interests of the international community in the conduct of its monetary policy.

Hence, in the dollar's place, Mark Carney suggested exploring how such a "synthetic hegemonic currency (SHC)" as Libra (initiated by Facebook, later called Diem) "could support better global outcomes, given the scale of the challenges of the current IMFS [international monetary and financial system] and the risks in transition to a new hegemonic reserve currency like the Renminbi".

In fact, there were similar calls in the past. For example, in 2009, after the global financial crisis when US engaged in quantitative easing, the then central bank governor of China, Zhou Xiaochuan commented that there are "inherent vulnerabilities and systemic risks in the existing dollar-based international monetary system" and called for a global currency to replace the dominant dollar. However, as expected, both the US and the European Union brushed off the idea.

Post-Covid 19, Asia is well recognised to be the fastest growing region in the world. There are now much closer ties among Asian countries in intra-Asia trade and investment. For example, due to the US-China trade war, firms in China are setting up secondary manufacturing locations or shifting parts of their production and supply chain to other Asian countries such as Vietnam, Indonesia, Thailand and Malaysia to diversify their risks and exposure, i.e., the so-called "China plus one strategy".

Asia is leading global digitalisation and benefits greatly from the growth of its digital economies. A report by the IMF in September 2018 revealed that at any given income level, Asian economies are at the frontier relative to their global peers. In another report by the IMF in 2021, it is said that digitalisation in Asia is pervasive and is set to grow in the aftermath of the Covid-19 pandemic. It stands out by its sheer scale, with internet users far exceeding numbers in other regions.

Digitalisation in Asia has extended well beyond the information communications and technology (ICT) sector, with widespread internet usage underpinning e-commerce, online work and play, fintech, as well as online financial and other services.

The case for closer digital currency cooperation to support growing intra-Asia e-trade and digital economies in Asia is strong. Conditions now are ripe for Asia to take the lead globally in developing regional digital currency cooperation in the payment and settlement of regional trade and investment.

In recent times, China has been actively pilot testing the e-CNY, its central bank digital currency (CBDC) which has a clear lead over the rest of the world. However, given the controversy over the use of national currency as global currency as remarked by Mark Carney and Zhou Xiaochuan, and the international community's increasing lack of confidence in the monetary hegemony of national currency used as global currency, as seen in the weaponisation of the US dollar following the recent war in Ukraine, the case for a regional Asian digital currency akin to Diem or an integrated digital currency system for Asian countries' digital currencies for cross-border payments can be appealing.

Besides, this author is of the view that the top priority for China in the short to medium term is to reform its economy with "dual circulation" development strategy, where "internal circulation", i.e., the domestic cycle of production, distribution and consumption plays a leading role while "external circulation", i.e., international trade and investment, remains its extension and supplement, to ensure a strong and stable domestic economy.

This development strategy comes at a time when external environments become increasingly complex, hostile and destabilising, such as geopolitical conflicts including ongoing US-China trade and tech war and war in Ukraine, climate change-related disasters, supply chain disruption, food and energy crises etc.

To China, in the foreseeable future, this domestic and inward orientation is more important than any international projects such as making RMB an international and reserve currency to replace the US dollar. Also in current reality, RMB is anyway not yet widely accepted in the international community.

In that case, what are some of the alternatives that can be considered in moving away from national currencies like the US dollar being used as global currency to facilitate cross-border payments?

It is not inconceivable, and in fact quite plausible, that in the collective interest of many countries looking for ways to de-dollarise, China may actively participate in the development of digital currency cooperation in Asia, instead of pushing its own RMB internationalisation agenda.

China should and is expected to play a pivotal role in digital currency cooperation in Asia, given its sizeable digital economy which made up nearly 40 % of GDP in 2020 and leads most countries in Asia, its vast trade links with the world, fintech prowess and world-leading foray into CBDCs.

One alternative is for Asia to learn from the interesting work by Facebook on the Diem project, which unfortunately was frustrated by regulatory concerns in the West, especially the US, in particular by regulators wanting to preserve the monetary hegemony of the US dollar as global currency. Such regulatory concerns however are not present in Asian countries.

Diem is a cryptocurrency initiated by Facebook, which was intended to be used as a simple, low-fee medium of exchange to be used around the world. It aimed to provide better, cheaper, and more open access to financial services for all, and was to be run and governed by the Diem Association, an independent not-for-profit association made up of the coin's founding members, which can include diverse businesses, non-profit and multilateral organisations, and academic institutions.

The design concept and proposed governance structure of Diem are indeed attractive to countries looking for alternative payment methods for cross-border transactions away from the US dollar. In fact, more digitally developed countries in Asia may come together to explore Diem-like non-national "Asian Dollar" - a digital currency for Asia.

However, this author is under no illusion that such an endeavour is likely to meet with many challenges. One reasonable step to take is to entrust some development institutions such as Asian Infrastructure Investment Bank (AIIB) or Asian Development Bank (ADB) to conduct feasibility study with the support of governments and technical experts.

Another alternative is to build on and expedite the current development of new cross-border digital payment infrastructure in Asia known as multi-CBDC (m-CBDC) platform projects. These projects are aimed at allowing financial institutions to use CBDCs issued by participating central banks to transact directly with each other on a distributed ledger technology (DLT)-based shared platform. This has the potential to reduce dependence on (i) the inefficient traditional network of correspondent banks, and (ii) also the use of US dollar for cross-border payments.

A recent article entitled "CBDC Networks Could Defang Sanction Threats" published by Official Monetary and Financial Institutions forum (OMFIF) commented that following the war in Ukraine, Russia's central bank is working on a digital rouble and has expressed interest in its value as a means of facilitating cross-border payments which is free from Western political influence.

On the m-CBDC shared platform, each participating central bank issues its own CBDC in its own domestic currency. Participating commercial banks are then able to hold these CBDCs directly, gaining access to foreign currencies without the need for accounts with correspondent banks. As all participating banks could potentially hold the different CBDCs directly, they would be able to transact directly with each other in the participating currencies.

Currently, there are two such major ongoing projects in Asia - "Project Inthanon-LionRock" and "Project Dunbar".

Project Inthanon-LionRock is a cooperation between the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People's Bank of China, and the Central Bank of the United Arab Emirates. Project Dunbar is a collaboration between Bank Negara Malaysia, the Monetary Authority of Singapore, the Reserve Bank of Australia, and the South African Reserve Bank. Both projects are supported by the Bank for International Settlements (BIS) Innovation Hub in Hong Kong and Singapore respectively.

By working towards the interoperability between the two projects and extending the platform's coverage of countries from Asia, a Pan-Asian m-CBDC shared platform for cross-border digital payment infrastructure is within reach in time to come.

Related: Will e-CNY spur the internationalisation of the RMB? | Building an integrated digital economy: How Asia can continue to thrive in the post-pandemic era | Digitalisation: How China's smaller investment banks could compete with big foreign players | Will China's digital currency accelerate the internationalisation of the RMB? | As China's digital currency moves ahead, can Facebook's Libra match up? | Will de-dollarisation help China and Russia shape a new world order?