GENEVA, December 2019. Trade Finance Global spoke to Wenhui LIANG at the WTO Global Trade and Blockchain Forum, on the nature of the current state of the global trading and blockchain adoption in global trading.

Wenhui LIANG speaking to TFG at the WTO Global Trade and Blockchain in Geneva, December 2019.

Coming back from the WTO global trade and blockchain forum, I have several thoughts regarding the nature of the current state of the global trading and blockchain adoption in global trading.

Wenhui LIANG

The US has a profit model in global trading through the dollarization

It is globally accepted that the US is leading the rules of global trading with its supremacy. The recent trade war with China and the US reminded me in history the US ended up gaining more advantages through putting other countries in passive situations.

In retrospect, the US started to take its leadership in the economy through the set-up of UN, WTO (global trading) and Bretton Woods system (1944-1973).

The USD supremacy actually began in 1973 when the US ended the Bretton Woods system because they could not be able to live up to the redeem USD with gold (1 ounce to 35 USD). The reason that they lost credit in the redemption of USD with gold is that they lacked the gold reserve significantly reduced due to the Korean War and Vietnam War.

As a result, in 1973 the US pushed the Organization of the Petroleum Exporting Countries (OPEC) to enforce the agreement that USD would be an only by-default currency in the settlement of global petroleum trading.

Since then the US established a working profit model through simply issuing USD because they create the global need for USD. The global circulation of USD was speeding up.

Since 1973, the following key events have strengthened the leadership of USD, which are believed to be not the coincidence, but actions taken by the US to maintain the dominance of USD in the global trading: 

(1) Asian Financial Crisis in 1997

US FED increased the interest rate in order to reduce the supply of USD in the Asian area to decrease the liquidity of capital so that companies had to lack the cash flow to support their business.

At the same time, George Soros led his QuantumFund together with other Hedge Funds to short Thai currency to create some regional crisis in Thailand, which soon spread to other Asian countries, like Malaysia, Singapore, Japan, and Russia.

It created panic among global investors that the Asian investment environment was not stable anymore and they had to retrieve their investments in Asia, which gave a chance for the capital to go to the US capital market and USD were then used to invest in those undervalued assets in Asia.

(2) Diaoyu Islands, Scarborough Shoal event and Occupy Central event

When China was about to enter the final round of negotiation of China Japan ROK Free Trading Area (FTA), Scarborough Shoal event(2012), Diaoyu Islands(2013) and Occupy Central event(2014) subsequently occurred, which is believed that it was the US working to pose potential threat to the regional crisis which can probably lead to the deterioration of the investing environment near China.

In 2014, Russia launched a war to the Crimea and took over the jurisdiction. It gave a strong reason for the US to collaborate with the European Union and Japan to put economics sanctions on Russia, which also created the regional crisis in Asia.

(3) Kosovo War in 1999

When Euro was first introduced and put in to use, US indirectly enabled the occurrence of the Kosovo War, which is believed that they was expecting to put more negative impact on the Euro so that the dominance of USD could be maintained.

Trading within the Euro economics territory was expected to be settled mainly by Euro, which means approximately 27 trillion USD of trading that was settled by USD was going to be in Euro.

(4) Afghan War in 2001

US launched the Afghan War in order to gain confidence from investors who worried about the potential deterioration of the investment environment of the USA.

(5) Iraq War during 2003-2011:

The US launched a military attack on Iraq when the Iraq president announced the Euro to be the official currency in the settlement of Iraq oil export. The US destroyed Iraq and replaced the Iraq government with a temporary government which soon announced that USD should the official currency used in oil trading.

Time to realize the de-dollarization and frictionless global trading: Blockchain & DC EP

Since it is possible for economic power to manipulate the rules and execution of global trading, neutral ways of the solution are needed.

In addition, global trading is highly paper-intensive and labour-intensive. Trading agreements and rules are not implemented automatically. Therefore, global trading is time-consuming which leads to the issue of efficiency and liquidity of capital.

What’s more, global trading tends to favour those economic powers in terms of the implementation of rules and agreements.

In addressing these issues in global trade, international organizations and governments have been researching the use of cutting edge technology.

As for the cross-border trade, blockchain is the perfect fit. As blockchain technology could build a politically neutral infrastructure for global trading through the digitization and automation, which can minimize the single-party control.

Thanks to the lines of codes of programming languages, blockchain can take away the potential manipulation in any process of cross-border trading. As a result, any form of supremacy to lay unfair trade tariffs and ban on international trading can be monitored and condemned.

Therefore, the adoption of blockchain will be the threshold of real frictionless global trading.

As it is possible to settle the trading with less reliance on the long-history legacy system, such as Swift, and hence opens the opportunity to allow more fiat currency other than USD to be accepted in the settlement and clearing of global trading.

Specifically, centralized sovereign digital currency built on top of the DLT technology will be the optimal solution to help achieve frictionless global trading, which makes it technically possible for more than one single fiat currency (USD) to be accepted in the global trading, allowing more default global currency as the supplementary to USD.

Our interview with Dirk Bullman, ECB, on ECB approach to blockchain and fiat currencies

When it comes to the centralized sovereign digital currency, the second biggest GDP power China is going to implementing a project of the Digital Currency Electronic Payment (DC EP). DC EP is proving itself to be the successful adoption of Blockchain and the feasibility of global trading settlement without USD.

The launching of the DC EP is to replace M0 and facilitate the use of cash, which will also facilitate the globalization of China Yuan. DC EP will not only be the next generation of e-money but also an innovative application to achieve frictionless global trading. DC EP is highlighted by the following features:

1. Anonymity and AML control

To strike a balance between a certain degree of anonymity and AML control

To fully respect individuals’ demand on privacy in peer-to-peer transfer using DC EP, by default transactions are anonymous.

And it offers multi ways for users to validate their registry of DC EP wallet according to their needs of payment. In terms of the limit of payment, the registry only with telephone number only allows micro-payment while registering in the counter being higher. In a word, the sufficiency of registry info will decide the limit of spending and withdrawal per transaction and per day.

Anonymous mechanism of DC EP transfers does not require exposure of the user info who spend, which will be respecting their privacy.

2. Legal guarantee on redemption

Guaranteed redemption backed by PBC’s reserve regulation

DC EP presents one of the best practices of centralized digital currency in terms of the guarantee of redemption.

DC EP highlights itself as one of the most stable currency in that DC EP is legally equivalent to M0 (cash) and therefore any merchants have the obligation to accept DC EP and redemption of DC EP will be the liability of the financial institutions.

Therefore, DC EP offers higher security than non-state digital currency such as Libra and private e-money such as Alipay and Wechat Pay.

3. Off-line communication channel

Internet-free support environment for payment

DC EP will be able to facilitate payment and transfer in the off-line environment.

It borrows the experience used by developed technology NFC applied in mobile payment under a private network. It allows payment to be made in that it processes the bookkeeping when there is no internet and validates the payment once the internet is on. Out of security concerns, the off-line payment of DC EP will only support micro-payment.

This feature can technically take away the potential risk that if the internet and 5G communication channels are maliciously blocked by any third party.

It is believed that DC EP is both technically and politically ready to facilitate a frictionless global trading world.

In a foreseeable future, it is anticipated that frictionless trading will be achieved. In terms of fiat currency used in the settlement and clearing of global trading, there will another fiat currency to play the role of globally accepted settlement currency besides USD. From the perspective of technology, blockchain and cryptocurrency will together develop a more transparent and digital system for global trading.