Financial technology allows new entrants to test alternatives to wholesale markets for global payment and settlement systems. These new projects are in their infancy; where they have been launched, volumes are minimal. But they are growing, not least because their cutting-edge capabilities contrast with decades-old legacy systems.
A growing list of countries is show interest in possible wide-ranging settlement alternatives after an increase in sanctions related to the war in Ukraine. Distrust is at least partly responsible for this growth on the easy recourse by the West to sanctions as the main instrument of the art of government.
Discontent with dollar-centric finance is as old as US global hegemony. Sanctions targets, like Russia, have a clear incentive to find alternatives to the Western colonization systems from which they have been excluded. But the growing use of sanctions has fueled unease even among those who are not geopolitical rivals of the United States or its allies.
Sanctions are not the main driver of alternative settlement systems. Most innovators want to use new technologies to settle cross-border transactions quickly, securely and easily. But for U.S. rivals, the ability to avoid the dollar – through bilateral point-to-point transactions that don’t touch the greenback – has been coveted for years.
This is currently happening with rivals from China to Russia, and this trend shows potential for growth. said Josh Lipsky, this week’s guest on The Call and senior director of the Atlantic Council’s GeoEconomics Center. “Financial technology is finally catching up with demand,” Lipsky said. The Call is a morning video update offered to our members by theGlobal Intelligence Bureau.
This dollar is not about to lose its place as the world currency. Few see this happening soon, if ever. Central banks hold huge sums of their foreign exchange reserves in dollars, more than all other currencies combined. The dollar remains the focus of global currency markets. World trade relies on the greenback as a trusted unit of value.
Rather than replacing the dollar, the technology offers a vision of a world without a dominant currency, in which most trade occurs directly between nations, making a global currency unnecessary. This is becoming easier thanks to technologies developed with cryptocurrencies, including distributed ledgers, tokens and blockchain. But despite these technological advances, this vision is still far away.
Current global demand for the dollar has benefits for Americans, including lower borrowing costs. Losing these benefits, even marginally, would be detrimental. But the immediate threat is an erosion of the United States’ ability to sanction those who pose a threat to it, its allies, or the world order.
For years, sanctions have been a tool used in conjunction with diplomacy and the threat – implicit or explicit – of military force. But in recent years, sanctions have increasingly been seen as an alternative to the complicated process of direct engagement, making even some countries friendly to the United States uncomfortable.
This dynamic fueled discussion – although little action – for alternative payment systems at the recent BRICS summit. This caught the attention of President-elect Trump this weekend, who expressed a dark opinion of any country that moves away from the dollar.
Russia, this year’s BRICS host country, led the resistance. Since the annexation of Crimea in 2014, which led to sanctions, Russia has been working on an alternative to the Corporation for Worldwide Interbank Financial Telecommunications – known by its acronym SWIFT – as well as an alternative to Western card payment systems credit.
When new sanctions were imposed after Russia invaded Ukraine, Moscow was ready and managed to avoid some of the pain. “Since 2014, we have been developing our own systems,” said Elvira Nabioullina, governor of the Central Bank of Russia. once quoted as sayingciting the “risks” of using existing global financial networks.
Wholesale markets are following dramatic changes in retail payments. From China to the Bahamas, new payment systems are changing the way the world’s citizens pay for their retail transactions. India’s unified payments interface, free for any citizen, store owner or street stall operator, now accounts for 14 billion monthly transactions.
It was only a matter of time before waves of retail innovation swept through wholesale markets for trade settlement and wire transfers. But large-scale projects – which require multi-state cooperation – experience shifting alliances, even in their early stages.
In late October, the Bank for International Settlements, a global regulator, scrapped a proposed system called Project M-Bridge, which sought to link digital currencies from different countries. BIS said it was up to its M-Bridge members – China, Hong Kong, Thailand, the United Arab Emirates, Saudi Arabia and a number of observers – to get the new bridge crossed themselves. system at the finish line.
The BIS, in contrast, appears to support another initiative called Project Agora, which involves a different set of actors, including the central banks of the countries that dominate the current system: the United States, France, Japan, the United Kingdom United, Mexico, Korea. , and Switzerland. Dozens of central monetary banks around the world are also joining Agora.
Agora will take years, and some say the United States and its allies have been too slow to respond to growing alternatives to the dollar-based system. But the signal of a Western effort to join the fight for new, more efficient payment systems – for an upgrade to the dollar-based system – is welcome.
“The search for technology-powered payments autonomy is perhaps the most underestimated risk” to US dollar hegemony, JP Morgan said in a recent report.
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About the authors
Jay Sapsford
Jay Sapsford serves as Senior Vice President for Global Risk Analysis and helps lead the Chamber’s efforts to assess geopolitical and economic risks impacting the business world. He plays a key role in identifying global trends, risks and opportunities on behalf of Chamber members.