Could the Dragon Now Fly Beyond Borders? Contextualizing Regulatory Aspects and Risks for China’s CBDC Cross-Border Use

Abstract

The existing literature on central bank digital currencies (CBDC) focuses mostly on relevant regulatory issues in a domestic context. However, digital yuan or digital renminbi, the CBDCs issued by China which is the world’s second-largest economy as well as the first mover in this game, will soon be experimented in cross-border commercial and financial transactions. Therefore, the regulatory concerns surrounding the cross-border use of CBDCs merit closer academic examination. This paper addresses three regulatory considerations of the cross-border use of China’s CBDCs: (1) the anti-money laundering law enforcement across multi-jurisdictions; (2) China’s retail-CBDC liquidity risks identification; and (3) the capital flow-in and settlements through future wholesale-CBDC. It points out the important prerequisite for Chinese CBDCs to be used outside its territory and identifies relevant risks. It uses Chinese CBDCs (including both retail and wholesale scenarios) as an example to analyze key legislative and regulatory aspects that shall be considered before CBDCs being circulated beyond borders. The paper makes four suggestions that could support a successful cross-border trial of CBDCs and their wide acceptance by foreign trading partners: constructing regulatory cooperation, conforming bilateral currency transferring agreements, enforcing macro-prudential regulations, and revising the legal framework of settlements. In doing so, China could gradually achieve its goal of RMB Internationalization.

*The paper was presented at “The 4th International Forum on Computational Law: Data Governance and Legal Tech” (25-26 September 2021, Tsinghua University, Beijing). It is a keynote speech in the forum’s Division III themed: “Smart Contracts and Digital Currency”.

Keywords: Central Bank Digital Currency, CBDC, Cross-Border Payment, Financial Regulation, Financial Risks, Anti-Money Laundering, Retail-CBDC, Wholesale-CBDC