UAE and China Complete $13.6 M Cross-border Transactions Using CBDCs

2024-02-19, 09:00

The United Arab Emirates sent 50 million Digital Dirham (AED), worth about $13.6 million to China as part of its pilot program.

Despite the emergence of stablecoins the United States dollar still maintains its financial dominance.

To prevent any future threat to the U.S dollar dominance the United States should introduce a CDBC.

Keywords: mBridge network, boost dollar dominance, CBDC Transaction, Cross-Border Transaction, central bank digital currency, digital assets, US dollar stablecoin, digital currency, blockchain settlements

Introduction

In the past few years we have noticed an increase in the number of blockchain projects like decentralized exchanges. Of late, several governments such as El Salvador and Hong Kong have been active in promoting innovation in the blockchain sector.

UAE and China’s recent cross border transactions using CBDCs worth over $13.6 M is a testimony of some national governments’ interest in adopting the decentralized ledger in their developmental paths.

Today, we look at how UAE and China successfully sent over $13.6 M of CBDCs as part of their pilot program. We will also assess the United States financial dominance.

China Conducts CBDC Tests, Sends $13.6 Million in High profile UAE Event

The United Arab Emirates has attained a remarkable milestone in its quest to use central bank digital currency in cross border transactions when, together with China, successfully sent more than $13.6 million during a pilot program.

In this case, UAE, transferred 50 million Digital Dirham (AED), worth approximately $13.6 million to China. The Chinese central bank also transferred digital RMB as part of testing the remittance payment based on the mBridge blockchain.

Sheikh Mansour bin Zayed Al Nahyan, Chairman of the Central Bank of the UAE initiated that ground-breaking transaction in the presence of more than one thousand attendees, including foreign dignitaries. Zhang Yiming, the Chinese Ambassador to the UAE, was among the special guests that witnessed the testing of the payment that supports CBDC multilateral financial exchanges.

As a fact, this network which had its first trial in 2014 connects central banks of China, UAE, Hong Kong and Thailand. The success of those two blockchain settlement payments using the “mBridge” platform indicates the transformative power of Central Bank Digital Currencies (CBDCs). Also, that development is an important step for China which aims to de-dollarize due to the increasing tension with the United States.

MBridge for Multi-CBDC Cross-Border Transactions

The introduction of the multi-CBDC arrangements will revolutionize the international financial remittance and enhance efficiency and transparency of international trade.

The Central Bank of the United Arab Emirates, Bank of Thailand, Hong Kong Monetary Authority and the Digital Currency Institute of the People’s Bank of China are the organizations behind the mBridge, a multi-national digital currency platform established by the Bank for International Settlements.

Leveraging distributed ledger technology (DLT), the mBridge network aims to eliminate inefficiencies that exist in cross-border transaction s. Some of the challenges which the proposes to eradicate include operational complexities, slow transactions, cost ineffectiveness and lack of transparency.

In other words, the digital assets which the mBridge network supports will reduce traditional barriers to international transactions resulting in cheaper, faster and more transparent cross-border payments, easy to track and verify. Also, the success of the project indicates the possibility of international cooperation among central banks which will create efficient and seamless global payments s.

As an example, the mBridge network will enable China and Hong Kong, represented by the People’s Bank of China and the Hong Kong Monetary Authority, to establish small-scale remittances between them. With this facility, Hong Kong residents will be able to use digital Yuan wallets and make crypto transactions with Chinese citizens and organizations.

Racing for Digital Dominance: The Urgent Quest for a US Central Bank Digital Currency

Considering the current development in the blockchain sector where many countries are working towards introducing central bank digital currencies it is in the United States’ best interest to establish a US dollar stablecoin (CBDC) to maintain its financial dominance.

There is no doubt that based on the current trend and scenario the United States still has dominance in the financial sector. In fact, since the Second World War the US dollar has been the world’s reserve currency.

Forbes reports that 88% of foreign exchange transactions are conducted in the United States dollar. And 60% of cross border transactions are settled in the U.S dollar. The major reason for this dominance is that the US currency is very liquid, making it a favourite among businesses and individuals.

To support their foreign trade most countries keep reserves which are, usually, in the form of U.S. Treasury bonds. The emergence of stablecoins has not affected the United States dollar dominance in the financial sector.

Since most of the stablecoins are pegged against the United States dollar most US dollar stablecoin issuers keep sufficient reserves in that fiat currency to protect their digital assets against depegging.

Further to this, Tether USD (USDT) facilitates cross border transactions, even to sanctioned countries like Venezuela, Iran and Russia. Also, countries that have high inflation rates like Argentina and Zimbabwe have adopted the US dollar as a legal tender, further expanding its dominance.

Again, citizens of countries such Nigeria that have high inflation rates but have not adopted the US dollar often use USDT or USDC, another US dollar stablecoin. Nonetheless, the emergence of Bitcoin and stablecoins pegged in other currencies like Euro or GBP threatens the US dollar dominance.

To this effect, Andrew Peel, Morgan Stanley’s crypto head, said, “The U.S. dollar’s dominance as the cornerstone of the international financial is now being reconsidered in the face of evolving geopolitical shifts.”

He continued, “Notably, the recent growth in interest of digital assets such as Bitcoin, growth of stablecoin volumes and the promise of Central Bank Digital Currencies (CBDCs), have potential to significantly alter the currency landscape. These innovations, while still in their nascent stages, hold opportunities to both erode and reinforce the dollar’s hegemony in global finance.”

In light of these developments, only the introduction of a Federal CBDC will boost the dollar dominance for the next few years. Already, 11 countries have launched their CBDCs. In 2023 China, one of the strongest United States economic competitors, introduced a pilot project for its digital Yuan.

It is important to note that unreasonable crypto regulations in the United States may push stablecoin issuers out of the country. In the meantime, the United States has not shown any clear intention to launch its digital currency (CBDC) to facilitate global blockchain settlements.

Conclusion

Recently, China and the United Arab Emirates conducted successful transfers of their digital currencies. In an event attended by over one thousand visitors, UAE sent $13.6 million worth of CBDC to China. China also transferred its digital Yuan using the mBridge infrastructure. Although the United States dollar still maintains its financial dominance, the emergence of CBDCs poses a great threat to it.

Author: Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions.

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