CBDCs
Central bank digital currencies (CBDCs) have been referred to as “the future of payments”, or even “the future of money”, and not without reason.
A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies. Undoubtedly, the pandemic has turbocharged a global financial technology revolution
CBDCs can serve many different purposes and can be designed accordingly: they can replace physical notes; they can be used to improve financial stability as a monetary policy tool, to promote financial inclusion, to fight against financial crime, improve payment efficiency and reduce intermediary risks, etc.
However, CBDCs are not cryptocurrencies, even though there is of course some relation between both categories.
The rationale behind CBDCs and cryptos is actually the opposite: whilst CBDCs are Central Bank Money adopting a digital form (therefore, legal tender issued by a central bank, representing a claim against that central bank) and thus centralized, cryptocurrencies are a key pillar of the movement known as DeFi (Decentralized Finance).
The Regional Comprehensive Economic Partnership (RCEP)
RCEP is indeed one of the world´s largest free-trade deals in history, and it was signed more than two years ago, on November 15, 2020, after eight years of negotiations.
It was initially composed of fifteen countries (all ten members of ASEAN -Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam-, plus China, Japan, South Korea, Australia and New Zealand), that will create a free trade area encompassing 28% of the global economy, 30% of the global population and reaching 2.2 billion consumers.
The deal is estimated to increase the global national income by $186 bn annually by 2030 and to add 0.2% to the economy of its member states and aims to progressively lower tariffs, reduce protectionism and boost investment. Furthermore, it will allow for one set of rules of origin to qualify for tariff reductions with other RCEP members (a common set of regulations mean less procedures, therefore easier movement of goods).
RCEP entered into force on 1 January 2022 for ten original parties: Australia, New Zealand, Brunei Darussalam, Cambodia, China, Japan, Laos, Singapore, Thailand and Vietnam. RCEP then entered into force for the Republic of Korea on 1 February 2022 and for Malaysia on 18 March 2022. Once ratified by all parties, RCEP will be the world’s largest free trade agreement by members’ GDP.
RCEP includes chapters covering trade in goods, trade in services, investment, economic and technical cooperation, and creates new rules for electronic commerce, intellectual property, government procurement, competition, and small and medium sized enterprises.
Leaving aside the economic size of the deal, it marks the first time China, Japan and South Korea have been in a single free trade agreement, and it also marks the first time China enters a nonbilateral free trade agreement of this scale.
From the perspective of China, RCEP aligns with China´s “dual circulation” vision, refocusing on domestic demand while taking advantage of trade and foreign investment. It must also be noted that ASEAN has become China’s largest trading partner followed by the EU and the United States.
In this sense, even though the negotiations to establish the RCEP started in 2012, much before President Donald Trump, it is undeniable that Trump´s protectionism encouraged this agreement. In this regard, President Trump pulled the US out of the Trans-Pacific Partnership (TPP) shortly after taking office, and started in 2018 a counterproductive trade war with China that did not only affect the two countries, but also the economies of many countries tightly integrated into the global value chain.
As stated by Premier Li Keqiang, the RCEP is “a victory of multilateralism and free-trade”. The timing of the pact could not be better. On the one hand, the proposals for formulating the 14th Five-Year Plan (2021-2025) for National Economic and Social Development, emphasize that that China will participate in multilateral and bilateral regional investment and trade cooperation mechanisms, being the RCEP consistent with this goal.
Definitely, the signing of the RCEP agreement was a good step towards supporting economic recovery in Asia, inclusive development, job creation and strengthening regional supply chains.
However, as I said, I would like to focus here on how the RCEP will impact Central Bank Digital Currencies (CBDCs). Even though, according to a report published by the Bank of International Settlements (BIS) in early 2020, 80% of Central Banks in the world are currently working on CBDCs (some are just at an initial research stage, though), Asia seems to be the place where CBDCs arouse more interest.
To me, the RCEP will pave the way for the expansion of CBDCs throughout Asia, including (but not limited to) China´s new Central Bank Digital Currency (CBDC), the digital yuan.
China´s rationale behind the Digital Yuan is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention…
Nevertheless, not only China will (or may) benefit from the potential of deploying a CBDC through the free trade area created by the RCEP.
Aside from China, many other Asian countries have shown their interest in developing and potentially deploying their own CBDCs. This list includes Thailand, Cambodia, Vietnam, Philippines… as well as Korea and Japan (both the Bank of Korea and the Bank of Japan started their testsin early 2021). Should these other countries finally deploy their own CBDCs, it will mean more market for them as well.
To what extent will the RCEP benefit China´s CBDC? Even though it is too early to say, the free trade area created by RCEP will undoubtedly be a big market for China´s digital yuan (alongside the Belt and Road Initiative), facilitating its cross-border adoption (in the same way that it could be used to facilitate the cross-border adoption of any of the other CBDCs in Asia, even though China seems to have a clear advantage due to its economic relevance and also due to the fact that its tests are much more advanced than those of the rest of neighboring countries).
Conclusions.
To sum up, thanks to the RCEP, China will not only strengthen its trade ties with its neighboring countries, but it will also be able to leverage the agreement to facilitate the cross-border adoption of its digital yuan and to start slowly challenging the global dominance of the US dollar, since, at the end of the day, one of China´s main objectives is to take some of the USD-denominated exports and convert them into yuan-based exports.
But, as I said, other countries like Korea and Japan may benefit from the RCEP too, should they finally decide to launch their own CBDCs once the test phase is over.
The author is an influential voice in the FinTech area, having advised many FinTech companies and with a very extensive network across the globe. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He is also a well-known international speaker on the areas of Central Bank Digital Currencies and Blockchain.
