Research Report | Seeing the "de-dollarization" from the central bank's digital currency

Overview Overview

On October 27th, the first Bund Financial Summit was held in Shanghai. Since October 24th, the blockchain technology development status and trend of the 18th collective learning meeting, just raised the blockchain to the national strategy, the blockchain has also become a hot topic at the Bund summit. At the Bund Summit, Huang Qifan delivered a speech entitled "Digital Reshaping the Global Financial Ecology." Among them, the role of the central bank digital currency (DCEP) in reshaping the trade settlement system, Huang Qifan said that the existing enterprise and inter-state payment and settlement system relies heavily on the US SWIFT and CHIPS systems, but they have gradually become the hegemonic tools of the United States. And inefficiency. With the blockchain technology gradually maturing, rebuilding a new clearing settlement network has become the consensus of many countries.

Report report

The core of digital currency – de-dollarization

At present, 24 national governments including the European Union, Japan, and Russia and more than 90 multinational companies are already conducting relevant research. The process of establishing digital currency is also the process of “de-dollarization”. The “de-dollarization” of various countries has always been a common issue. Countries have never stopped getting rid of the US dollar clamp and challenged the status of the US dollar's international clearing currency. The digital currency coincides with its meeting and becomes another new battlefield for “de-dollarization.” This article will use the EU and China as examples to review “going to the US dollar. History and discussion of the way to "do dollarization."

Why go to dollarization?

The basic mechanism of today's "dollar standard" is widely known, and the term "petroleum dollar" is well described. The system is based on an informal agreement between the United States and Saudi Arabia in the mid-1970s. Oil and all other important commodities are traded in US dollars and traded only in US dollars.

Oil producers recycle these oil dollars into US Treasury bonds. This cyclical flow of the dollar allows the United States to accumulate nearly $23 trillion in huge debts without worrying about its financial stability.

At present, no single world economy can completely abandon the US dollar. The reason is very simple. The US dollar is absolutely dominant in international settlement. And dollar assets account for a large share of the official foreign exchange reserves. Currently, 70% of all trade transactions in the world are settled in US dollars and 20% are settled in Euros. Compared with other currencies, the value of the US dollar is very high, which is why American consumers get imported goods at very low prices. It brings considerable financial profits to the United States and makes the international community’s demand for the US dollar very high. High, in the end, the US government can refinance its debt at very low interest rates.

The dollar’s ​​share of the global currency reserve is about 63%-65%. Through CHIPS+SWIFT clearing, the ratio of interbank payments and transfers to the US dollar is estimated to be between 40% and 45%. Since not all international settlements and payments go through the SWIFT system, the actual dollar share in international settlements is even higher, reaching 70%.

SWIFT currently links more than 10,000 banks and financial organizations in 210 countries around the world. There are 4 billion transactions transmitted through the SWIFT network each year. Total daily payments are measured in trillions of dollars. The major share of all cross-border payments worldwide is through SWIFT.

The US’s radical foreign policy, the imposition of sanctions, the means to control imports and the reduction of imports have led to the world’s depreciation of the dollar. Obviously, the international community will not succumb to the hegemony of the dollar. More and more countries are seeking to get rid of their dependence on the dollar and establish alternative finance, settlement systems and reserve currencies. This is the only way for financial independence in various countries. Therefore, it is imperative to "de-do dollarization."

EU's action to de-dollarization

Between 2000 and 2008, some economies in Latin America, Europe and Asia were prevalent in dollarization. The 2008 financial crisis has made the US dollar's "bad track" unveiled in the face of the world. The call for "abandoning the US dollar" is loud, but in the next few years the trend has stalled and even reversed to some extent.

The dollar advantage was not built overnight. It experienced the Second World War and the post-war Bretton Woods system and accumulated a large amount of capital. In the case of the euro, according to the latest report of the International Monetary Fund, the euro has accounted for 36% of international transactions, close to the dollar (40%), but in the world's foreign exchange reserves, the dollar accounted for 62%, the euro Only 20%. (Note 1) The EU imports oil and natural gas worth about 300 billion euros a year. To date, only 2% of energy imports in Europe come from the United States, but 80% of energy imports are still denominated in US dollars. What's more, European companies even use US dollars to settle when they buy Airbus.

For a long time, the euro has been subject to circulation and settlement treatment that is inconsistent with its economic status. However, given the large-scale trade and political relations between the EU and the United States, the EU has not been able to make effective measures to improve the status of the euro. But on the issue of Iran, Europe has taken a tentative step toward de-dollarization.

Stimulated by the US restart on Iran’s sanctions, on December 5 last year, the European Union announced a draft plan to improve the status of the euro, requiring member states to increase the use of the euro in “strategic industries” such as energy, commodities, and aircraft manufacturing. Encourage the development of the EU payment system. On December 10th, the European Union's High Representative for Foreign and Security Policy, Mogherini, announced that the EU would create a new payment channel, the Special Purpose Tools (SPV) mechanism, within a few weeks.

The most striking of these is INSTEX, which is designed to maintain trade with Iran through non-US dollar, non-SWIFT transactions through a “barter” trade, while shielding EU and Iranian companies from US sanctions.

France, Germany, the United Kingdom and the European Union have been very cautious in limiting SPV to commodities that are not subject to US sanctions in any case – food, medicine and medical equipment, ie humanitarian products.

Although INSTEX and the supportive speeches and diplomatic moves of the European Union and its major powers support the Iranian nuclear deal in 2015, the Iranians are relieved of the new US sanctions and the US withdrawal from sanctions. At the same time, a strong foreign policy statement is made that Europeans can do their own big things while trying to avoid angering the United States to an unnecessary level. This is essentially a way of getting to the right and left, although it is an attempt, but it is not determined.

China’s move to dollarization

Compared with the EU's timidity, China's de-dollarization action is very determined. Stimulated by US economic sanctions, China is not only planning to use digital currency to counter dollar hegemony in order to exclude the dollar from international trade.

In recent months, China has signed domestic currency exchange agreements with Canada and Qatar, which has become an active member of this “de-dollarization” campaign. The RMB 200 billion currency swap (about US$30 billion) has enabled Canada. It became the first offshore RMB center in North America and increased trade between the two countries by a factor of 1-3.

The direct currency swap agreement between China and Qatar reached US$5.7 billion. Although this amount is not large, it is the first time that the renminbi is bright and "digging the dollar wall." It is no secret that the oil-producing countries in the Middle East have little trust in the US dollar due to inflation. Therefore, it is just around the corner that other OPEC countries have signed currency swap agreements with China.

In March 2017, the Central Bank of Russia opened its first office in Beijing. Russia will issue government bonds in RMB. In recent years, the two sides have increased their efforts in currency swaps. Bilateral trade is not settled in US dollars, but in rubles and renminbi. In 2017, Sino-Russian trade reached US$66 billion.

At the same time, China is preparing to launch a crude oil futures contract that is denominated in renminbi and convertible into gold. Since China is the world's largest oil importer, this move could have a major impact on the global impact of the dollar.

The bilateral currency agreement between China and Iran’s Rial can play an important role in increasing the volume of trade between the two countries. In 2017, trade between Iran and China increased by 22% compared to 2016, reaching approximately US$30.5 billion. Iran has the world's fourth largest proven crude oil reserves, accounting for about 10% of the world's reserves. Iran's crude oil exports to China increased by 25.2% from 2016 to reach US$2.7 billion.

In fact, INSTEX's “Barter” model is not a groundbreaking model. Instead, it will publicize the trade pattern of Kunlun Bank and Iran's “Petroleum RMB” in 2012 (about the details of Kunlun Bank's trade bypassing SWIFT with Iran). See "One Hundred Years of Solitude – The Magic Realism of the Renminbi").

All currency swap settlements will gradually adopt CIPS as the main payment system, and may promote the cross-border payment settlement scale of RMB to a certain extent.

The way to go to dollarization – looking for hard currency

Although the EU's actions are quite groundbreaking, in terms of actual effects, it can be said that "the thunder is loud and the rain is small." Although China's multi-line flowering, playing "combination boxing" – currency swap, oil renminbi, CIPS and the upcoming central bank digital currency, but because of the weak foundation, still can not challenge the solid foundation of the dollar accumulation and acceptance in the international scope degree. Creating a just-needed environment through trade is just a "skill," and what really supports its currency is the "dao", which is the credit consensus.

Looking at the history of the current international clearing currency, the dollar, we can see the two historical periods that the dollar has experienced, namely:

  • Gold dollar
  • Oil dollar

The gold dollar originated from the Bretton Woods system established after World War II. It is linked to the US dollar and gold. The model of other countries' currencies linked to the US dollar and fixed exchange rate has satisfied a "credit consensus." Because gold, as a hard currency and general equivalent, has gained worldwide consensus in its long history, the dollar linked to gold has gained strong support, although US national power and trade activities have also played a role in supporting the value of the dollar. But the golden dollar is the basis of confidence in the international community.

But with three dollar crises, the Bretton Woods system eventually collapsed. Countries suddenly discovered that a large amount of US banknote printing, political interventions, and a serious trade deficit would cause the gold standard system to collapse and the "credit consensus" to go bankrupt. In the gold standard era, holding dollars can be exchanged for gold. The credit of the dollar is based on the debt repayment of gold. With the bankruptcy of the gold dollar, the dollar has found a new anchor for itself – oil.

The process of forming this new "credit consensus" is like this. First of all, oil, as the blood of industry, is the most essential natural resource for the development of industrial civilization. This rigid demand has made oil a "hard currency" for the world economy. The United States has used its own force to agree to provide arms and protection to Saudi Arabia through the then US President Nixon, so that all Saudi oil trades will be settled in US dollars. Since Saudi Arabia is the largest oil producer in OPEC and the world's largest oil exporter, other countries have quickly adopted US dollars for oil trading, and the oil dollar system has since been established. By linking its own currency to hard currency, the dollar once again completed the conversion of the "credit consensus."

The oil dollar system ensures strong demand for US dollars and US Treasury bonds from countries around the world, because oil-importing countries need a large amount of dollars to buy oil, which must be purchased in the market, which has created a market demand for the US dollar. If not for oil imports, these countries may not want to buy large amounts of dollars. Therefore, the oil dollar system artificially created additional market demand for the dollar. Since these countries have received large amounts of dollars in oil purchases, oil-selling companies convert dollars into local currencies, and the dollar continues to accumulate in oil exporting countries such as OPEC. These countries then send the US dollars back to the United States by purchasing US Treasury bonds. What does the US need to do? Additional dollars are issued.

With the expansion of credit, the United States, which is crazy about printing money, began to gradually hold the world economy, while the credit of the dollar is quietly depreciating. For countries, the convenience brought by the dollar is being weakened by the increasingly dominant sovereign traits. The shift from the monopoly of the dollar to multipolar currencies will begin and will begin to have important consequences. Oil exporting countries do not tend to maintain high oil prices to increase their income, but to maintain and increase their market share. At the same time, oil-producing countries are no longer interested in turning their income into a "oil dollar", but are beginning to pursue control from the United States, that is, "de-dollarization."

In summary, if you want to challenge the status of the US dollar and even replace the US dollar as an international reserve currency, then finding a "hard currency" in the new era is the top priority.


In fact, in the final analysis, the digitization of the renminbi itself has a certain "revolutionary" attribute. The reasons for restricting capital flows in China are very complicated, but the reasons are useless. Providing solutions is the most favorable environment for the renminbi. The formation of the Bretton Woods system has its incoherence from a special historical period, and this worldwide reshuffle is unlikely to occur in the current international community. Then, "stable and steady" forms a "credit consensus", which is the most secure way for a country to replace the US dollar as the international reserve currency. When another hard currency that can form a new "credit consensus" emerges with the development of technology, and the national currency is linked to it, then becoming the world's reserve currency will no longer be a dream.

Note 1: The Global Times “de-dollarization, an international trend”