Could digital-payments systems help unseat the dollar?
After Russias invasion of Ukraine in 2014, a financial battle began. Western card networks pulled out of Russia and politicians called for it to be cut off from the SWIFT messaging system for international payments. In response Russia built a central-bank owned card network called Mir. So when its bigger invasion in 2022 led to more sanctions, domestic commerce in Russia hardly felt it. Other countries wishing to escape Western dominance have taken note. China has shut out Western card networks. Indian nationalists talk up UPI and its RuPay card as ways to reduce dependence on the West. Some hope that digital-payment platforms will help reduce dependence on SWIFT and the dollar, still the worlds dominant currency. India has linked UPI with Singapores fast payments system and is in talks with 30 other countries to help them adopt the UPI model, creating international financial links. It could eventually become a network of low value cross-border retail payments, says one executive at a leading Indian fintech. But it is Chinese efforts that attract most attention in the West. Its cross-border interbank payment system (CIPS), launched in 2015, uses real-time settlement to move money. It had expanded to 1,430 participants by early this year, more than half of them based outside China. Transaction volumes grew by 75% in 2021 and CIPS processed over $50bn a day in 2022. Although that is 40 times smaller than CHIPS, an American clearing house, it offers an alternative to the Western system in the event of sanctions. France has reportedly used yuan to sell liquefied natural gas. Brazil uses the currency for some trade, as does Russia. The yuans share of trade finance has more than doubled from 2% to 4.5% since February 2022. Douglas Arner of the University of Hong Kong thinks that central-bank digital currencies could pose a bigger threat by creating a common standard for cross-border payments. One trial by the Bank for International Settlements (BIS), a club of central banks, called mBridge, linked the central banks of China, Hong Kong, Thailand and the UAE using a distributed ledger to settle cross-border payments. Overseas trade can be cumbersome because few banks have accounts in other countries. A sender bank must transfer funds to a correspondent bank that has an overseas account, driving up costs. In theory systems like mBridge could reduce costs. In a trial in 2022, 20 banks across the four places transacted some $22m in 164 payments. The BIS has yet to disclose how efficient this was: indeed, it had to turn to traditional markets outside its platform because it did not have enough liquidity. But Mr Sun of HSBC, which joined the trial, says that the system worked technically. The questions left concern alignment of standards and finding enough liquidity. Others are sceptical. Many argue that, however good the technology, the yuan cannot grow further unless China opens up its capital account. One Chinese analyst says flatly that The PBOC is aware of the limits of the e-CNY as a tool for RMB internationalisation. Instant-settlement technology can also make mistakes in transfers more likely. Yet new cross-border payment systems will surely cut the cost of trading outside the dollar and SWIFT, says Daleep Singh, a former White House architect of sanctions. Mr Singh wonders why America has given up its seat at the table on CBDCs. As Gita Gopinath and Jeremy Stein, two economists, explain in a 2021 paper, a currencys dominance historically begins with trade invoicing. As popularity grows and capital markets deepen, it becomes more attractive as a reserve currency. Neither the yuan nor any other currency is anywhere near being a serious challenger to the dollar. But if digital finance makes it less costly to avoid the greenback, that could cause some concern in America.