Western central banks are lagging behind in developing digital currencies, with China much further ahead in financial digitalisation – and the rules of the global payments system must be sure to keep up
Given this year’s disruptive political and economic turbulence, amplified by recent digital advances in most walks of life, it is fortunate that the global payments system has evolved in such a way as to remain robust and stable through these and other times of uncertainty.
In response to Russia’s invasion of Ukraine in February, after consulting with the United States, Japan and other countries, in March the European Commission disconnected seven Russian banks from SWIFT, the interbank messaging system that facilitates most cross-border commercial payments between firms in different countries. The US announced sanctions against Russia’s two largest financial institutions as well as its central bank. Europe also approved sanctions on the Central Bank of Russia and several Russian financial firms. Although these decisions appeared shockingly destabilising for global wholesale payments at the time, the western world’s interbank payments systems have remained interconnected and stable during these times of turmoil and generally unaffected by those sanctions.
Meanwhile, long concerned with the possibility of its own disconnection from US- and EU-led payments channels, the People’s Bank of China has been building a renminbi-denominated payments network – the Cross-border International Payments System – since 2012 to complement the Chinese National Automated Payment System that was set up in the 1980s and 1990s during the implementation of China’s widespread economic reform. In 2015, China successfully put phase one of CIPS into operation, with participants from 50 countries and regions across six continents. The creation of this system prompted concerns that China and Russia were building their own parallel version of SWIFT, with other BRICS countries potentially gravitating towards the system used by China, their largest trade partner.
At the BRICS summit hosted by China in June, Sergei Storchak, the chief banker of Vnesheconombank, Russia’s economic development bank and among the main banks subjected to sanctions, said that BRICS members and other interested countries should consider establishing their own independent global financial system, based on the Chinese currency or perhaps choose another currency. BRICS members’ objections to the “weaponization” of the dollar and the euro bound them together.
A central bank digital currency
Meanwhile, the People’s Bank of China has gone further than any other large-country central bank in piloting a central bank digital currency. It rolled out the digital renminbi in 2021 and introduced it in Olympic Games venues in Beijing and Zhangjiakou in early 2022. In October 2021, the PBC reported that 132 million digital and corporate wallets had been downloaded, with balances totalling 56 billion renminbi ($8.8 billion). As of early 2022, there were as many as 261 million wallets with transaction balances worth 87 billion renminbi ($13.75 billion).
Using conventional currency, importers seeking to make a purchase from another country must send instructions from their financial institution, which then settles the transaction in central bank money and through a clearing house. However, because a central bank digital currency is by definition not a liability of any private financial institution, its retail use eliminates the need for an importer to send those instructions. Along with the PBC, several western central banks – the Bank of Canada, Bank of England and the US Federal Reserve – are working out their own digital currencies, although moving more slowly. China is further ahead in financial digitalisation in general, as its economic development has leapfrogged electronic payments by moving directly from a paper-based system to digital financial practices. The majority of payments flowing into and out of Russia in recent years have been denominated primarily in euros and US dollars. Western leaders would nonetheless be well advised both to step up the development of their central bank digital currencies and to monitor BRICS trade and currency flows closely if concerns regarding the emergence of a BRICS alternative to SWIFT continue.