PETALING JAYA: As China's central bank advances to the next stage of testing its sovereign digital currency, observers say its successful development and implementation could wean the country of its dependence on the US dollar settlement system.

In an April 24 article, China Daily said the reliance on US dollar settlement allows the US to impose unilateral punitive sanctions on companies via the threat of exclusion from the SWIFT dollar settlement system. However, "DCEP" (digital currency and electronic payment) as part of the further development of an RMB-based trade settlement system could serve to counter what it alleges is the weaponisation of the US dollar as a tool to enforce foreign policy.

"A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.

"It may also facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption," it said.