Securing global digital finance

Concerns over stability in the global financial system when it comes to cross-border payments can be assuaged by the widespread use of central bank digital currencies – and 19 G20 members are already in the advanced stages of CBDC development

After Russia illegally invaded Ukraine in February 2022, the sanctions imposed by the international community to indicate its collective disapproval included excluding Russia from SWIFT (the Society for Worldwide International Transfers), the original cross-border financial transfer system. This action prompted concern about the stability of the global payments system, particularly with regard to cross-border payments.

Further concern arose that the apparently ever-closer relations between Russia and China, two large economies positioning themselves to counter the United States, could result in the creation of an alternative to SWIFT with their fellow BRICS members of Brazil, India and South Africa. However, the United States – despite domestic strife in recent years – remains the predominant global economy, with trading partners that continue to rely on traditional channels, rather than dealing with China and other BRICS countries through their alternative payment system. At a BRICS business forum in 2022, Russian president Vladimir Putin invited banks from BRICS countries to connect to the System for Transfer of Financial Messages, Russia’s alternative to SWIFT. To date, there has been little evidence of the use of this rival system, or indeed appetite or even need for one. An alternative to SWIFT would hold no benefit, for example, for China or India, two large BRICS economies whose substantial and continuous trade volumes with the United States and Europe continue to far outweigh those with Russia, as well as those with each other.

Meanwhile, although some observers voiced concern that sanctioned parties might use cryptocurrencies to transfer funds out of Russia, many countries introduced legislation to prevent such sanctions evasion. Moreover, blockchain and cryptocurrency enthusiasts counter that evasion is not technically possible because transactions on blockchain are officially public.

A significant concern

Nonetheless, global financial stability remains a significant concern as G20 leaders prepare for their summit in New Delhi. They would be well advised to embrace central bank digital currencies to mitigate friction in international payment systems. Historically, cross-border payments have been criticised most commonly for their high cost, varying speed and insufficient transparency. With a view to addressing these issues, in 2020 G20 finance ministers and central bank governors endorsed a roadmap to enhance cross-border payments. It had been developed by the Financial Stability Board, in coordination with the Committee on Payments and Market Infrastructures of the Bank for International Settlements and other relevant international organisations and standard-setting bodies.

Greater usage 

In 2021, in a report to the G20, the Committee on Payments and Market Infrastructures, the BIS Innovation Hub, the International Monetary Fund and the World Bank identified questions that countries planning to use CBDCs would need to consider in order to improve cross-border payment systems. They approached the issue from two perspectives, first from the practical view of how to set up a cross-border payment infrastructure with CBDCs, and second from a macroeconomic view that examined the potential increase in cross-border flows and consequent potential financial stability risk, currency substitution, and reserve currency configurations and backstops. According to the Atlantic Council’s CBDC Tracker, 19 G20 members are currently in the advanced stages of CBDC development, including nine already in the pilot stage, and 11 other countries such as the Bahamas, Nigeria, Jamaica and Ghana have already fully launched a CBDC.

Widespread use of CBDCs would indeed mitigate potential delays in cross-border wholesale payments. However, the global payment system has evolved in such a way to ensure stability in the financial system. Every country’s system has been designed to accommodate the stresses and strains that the political global economy places upon it.