China can bypass SWIFT by staking digital cash

The main pillars of US economic hegemony are SWIFT, CHIPS and the dollar. Arming one of them against the banking system of Russia, the 11th largest economy, will convince China that it needs an alternative to the trifecta to escape American might.

Based in Brussels, but with a data center in Virginia, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a “financial panopticon” that allows Washington to monitor cross-border fund flows. However, the actual police often come from New York, where 95% of global dollar payments are irrevocably settled.

The Clearing House Interbank Payments System, or CHIPS, is a private club of financial institutions. Its 43 members settle $1.8 trillion in claims every day using a prefunded account at the Federal Reserve. They all have offices in the United States and are subject to US law, making it easier for authorities to catch and punish. Millions of dollars in fees aren’t quite worth the nearly $13 billion that CHIPS members like BNP Paribas SA, Standard Chartered Plc and others have paid in fines over nearly two decades of sanctions violations related to the ‘Iran.

As an instrument of American power, CHIPS has not gone unnoticed in Beijing. In the Canadian court battle to prevent the extradition to the United States of Huawei Technologies Co. chief financial officer Meng Wanzhou, the Chinese company has challenged HSBC Holdings Plc’s decision to process $100 million in Skycom transactions At New York. Huawei argued that since HSBC was aware of its ties to Skycom, a Hong Kong-based partner that sold equipment to Iran, the bank should have funneled the funds through a smaller offshore dollar clearing system in the region. Chinese special administrative – thus avoiding putting the money on American soil.

To get rid of the yoke of CHIPS, China has prepared its own cross-border interbank payment system. CIPS settles international receivables in yuan and can potentially manage its own courier network. (Since 2016, it has used SWIFT as its communication channel.) CIPS has grown rapidly. But as long as 40% of international payments worldwide are in dollars, a clearing facility for the yuan—which has a 3% share—cannot replace CHIPS. This is where the e-CNY, the digital yuan that is currently the subject of many pilot projects, comes into play.

The token is “technically ready” for cross-border use, according to a white paper released last year by the central bank, although it is “designed primarily for domestic retail payments at present.” That could change. If a Chinese company or individual were to face the threat of not being able to send money overseas because CHIPS would not clear the payment or SWIFT would not forward the instructions, an intermediary in a friendly country could still be persuaded to accept e-CNY, and transmit a stablecoin payment in dollars to the foreign counterparty of the Chinese buyer.

The intermediary is not exposed to any credit risk as it deals with sovereign liquidity, backed by the taxpayers of the world’s second largest economy. There will also be no settlement risk. The blockchain will make all transactions “atomic”, meaning that money will change hands – in token forms – without exposing any of the counterparties to limbo where they had parted with something of value without receiving the agreed consideration. . If the Chinese buyer does not have a valid yuan to spend, the seller will not receive payment; the intermediary will not be out of pocket. And to convert their digital yuan back into dollars – or a stablecoin like Tether or USD Coin that mimics the US dollar – the middleman only needs people from the rest of the world to want to buy Chinese goods and assets, for which they will be needed to send e-CNY.

SWIFT will never see the transaction, CHIPS will not have to erase it. Indeed, no Western bank is needed to transfer funds across borders. Even if the United States prohibits stablecoins from doing business with Chinese residents, it will not be able to prevent third-country entities from buying dollar tokens on a cryptocurrency exchange to pay regulated companies. in the USA. America’s sphere of economic dominance could shrink – not in a year or two, but perhaps a decade or more.

And that’s probably the greatest thing about hegemonic power. It is unmatched as long as the consequences of its coercive use – collapsing banking systems, falling national currencies, slumping stock markets – are left to the imagination of potential targets. However, when the muscles are actually flexed, the long-term result can be unpredictable: it could either put off future rivals or encourage their search for a viable alternative. Can e-CNY be the latter? Beijing may not know the answer, but after Russia’s semi-expulsion from SWIFT, it might want to know.

More from this writer and others on Bloomberg Opinion:

The almighty dollar is not the currency to fight Russia: Paul Davies

Digital money can prevent crashes on the $19 trillion highway: Andy Mukherjee

• The invasion of Ukraine is a tragic sin: Leonid Bershidsky

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.