Chinese digital yuan has been used to settle an oil transaction for the first time. The Shanghai Petroleum and Natural Gas Exchange (SHPGX) PetroChina international revealed that it bought 1 million barrels of crude oil on October 18 2023.
According to a report by the China Daily, the transaction was a response to a call by the Shanghai Municipal Party Committee and Municipal Government to use the Chinese Central Bank digital currency (CBDC), also referred to as the e-CNY in cross-border trading. The exchange did not disclose the seller and the price of the transaction.
Overview
Promotion tactics have helped drive the e-NYC to the forefront of CBDCs. On October 19, 2023, the OPEC basket of oil from 13 producers was $95.72 per barrel. According to the country’s central bank governor, Yi Gang, digital yuan transactions hit 1.8 trillion yuan ($248.33 billion) at the end of June. The China Daily highlighted that the crude oil deal is another significant step forward for the digital yuan and also marks an overall major step in the use of the yuan on the international market and in the global overt towards decentralisation. The China Daily report revealed that at the beginning of this year, the use of the yuan in cross-border settlements was up 35% year-on-year, reaching $1.39 trillion.
Background
The yuan was first used for a liquefied natural gas (LNG) purchase on SHPGX in March when the French TotalEnergies agreed to sell LNG to the China National Offshore Oil Corporation (CNOOC). The second LNG deal in yuan occurred last week between CNOOC and French Engie without involving the digital yuan. Experts from Bitcoin Decode (read here) mentioned that on October 19 2023, First Abu Dhabi Bank announced that it had signed a digital cooperation agreement with the Bank of China; the agreement was signed at the Belt & Road Forum for International Corporation (BRFIC) Digital Economy Forum by Sameh AI Qubaisi and Zhang Xiaodong. The move strengthens cooperation on digital currency to serve the China-UAE digital currency corridor better.
The signing of the agreement was made in the presence of a Member of the Standing Committee of the Political Bureau of CPC Central Committee of China, Cai Qi, and His Highness Sheikh Saud bin Saqr AL Qasimi and the UAE delegation. This collaboration between the two institutions marks a significant step forward, and it was the only agreement signed by financial institutions. China and the UAE participate in the mBridge platform to support cross-border transactions with CBDC.
On September 25 2023, Hong Kong’s Monetary Authority CEO, Eddie Yue, outlined the plans for the CBDC project, including central and commercial banks involved. The project was initiated in 2021, with the participation of the HKMA and the central banks of China, Thailand and the UAE, as well as commercial banks from each of those jurisdictions and the Bank for International Settlements Innovation Hub. Yue said, “Now, mBridge will expand and be commercialised. We are expecting to welcome more fellow central banks to join this open platform”. Yue added, “And very soon, we will launch what we call a minimum viable product, with the aim of paving the way for the gradual commercialisation of mBridge”. CBDCs have gained increased attention in recent months, with the European Central Bank (ECB) announcing that it will start preparing for a potential digital euro next month. The two-year preparation will include further testing, finalising a rulebook and selecting providers who can develop the technological infrastructure.
Issuance decisions will not be included in the new phase. ECB President Christine Lagarde said, “We need to prepare our currency for the future”. Lagarde added, “We envisage a digital euro as a digital form of cash that can be used for all digital payments, free of charge, and meets the highest privacy standards. It would coexist alongside physical cash, which will be available, leaving no one behind”. An Executive Board Member of the ECB, Fabio Panetta, said, “There is still a long journey ahead of us, and further close cooperation between European institutions will be needed to determine the optimal design of a digital euro”. While other regions move closer to their CBDCs, the United States seems ready to wait on the sidelines.
On October 17 2023, Federal Reserve Governor Michelle Bowman mentioned that she sees more risks than rewards in potentially issuing a dollar-based CBDC. Bowman noted, “that public arguments in favour of issuing a CBDC include addressing frictions within the payment system, promoting financial inclusion and providing the public with access to safe central bank money”. Bowman added, ‘These are all important issues. I have yet to see a compelling argument that a US CBDC could solve these problems more effectively or efficiently than alternatives or with fewer downside risks for consumers and the economy”.
In August 2023, Abu Dhabi signed an agreement with India to settle oil deals in rupees. China’s move to settle cross-border oil deals with digital yuan shows its commitment to securing and moving with time.
