Baosteel, a Chinese steelmaker, along with Australian mining firm Rio Tinto, have completed a renminbi (RMB)-denominated letter of credit (LC) transaction using blockchain technology.
The LC transaction facilitated by Standard Chartered Bank (SCB) represents the first-ever paperless cross-border deal in the iron ore industry finalized in China’s fiat currency. While only a drop in the bucket as far as international trade is concerned, the transaction appears to point towards China’s plans to challenge U.S. dollar (USD) dominance on the world stage.
For some commentators, blockchain technology opens a channel by which authorities in Beijing will seek to undermine the pre-eminence of the USD in international trade.
First-Ever RMB-Denominated Blockchain LC Transaction
According to a Global Times report on Wednesday (May 13, 2020), SCB finalized the deal over the R3 Corda-backed Contour open trade finance platform.
Commenting on the success of the transaction, SCB’s chief of documentary trade, Samuel Mathew, remarked:
We are delighted to have played an important role as the digital LC issuing bank in such a significant trade which marks the first RMB-denominated international LC between two banks via blockchain.
Contour, formerly known as Voltron, aims to improve the $18 trillion global trade finance market especially in the area of letters of credit. SCB along with other major banks like Citi, ING, HSBC, and BNP Paribas are investors in the network. Earlier in May, DBS became the first Singaporean bank to join the Contour blockchain consortium.
The use of blockchain to complete an LC transaction also takes on a more profound significance beyond mere adoption given the present global circumstances. With the COVID-19 pandemic causing supply chain shocks, the delivery of physical documentation has become more problematic.
Countering USD Hegemony
While the transaction marks another milestone for blockchain adoption in international trade, some pundits point the news as an example of Beijing’s aggressive attempt to dampen USD dominance of cross-border transactions.
Tweeting on Wednesday, Matthew Graham, CEO of Sino Global Capital opined that China sees blockchain as an avenue for challenging USD dominance in international trade. Back in 2019, China’s President Xi Jinping called for blockchain to become a “core” technology in the country.
Any viable challenge of the U.S. in the international finance scene will involve alternatives to SWIFT — the U.S.-controlled banking communication network. RMB only accounted for 1.85% of global payments on SWIFT in April. [Forbes]
With China overtaking the U.S. in economic relations with regions like Africa, Beijing can create remittance corridors between the country and partners in developing nations to facilitate similar RMB-denominated trade.
The fallout from the ongoing COVID-19 pandemic and China’s alleged lack of transparency in providing early warnings about the virus might hamper the overall global domination agenda. Thus, even with the U.S. being forced to pump trillions of dollars into its economy, the USD might be able to stave off any apparent competition from the likes of the RMB.