China’s central bank has joined forces with SWIFT to promote the cross-border use of the digital yuan, challenging the dominance of the U.S. dollar.
China’s central bank has joined forces with the Society for Worldwide Interbank Telecommunication (SWIFT) to promote the cross-border use of the digital yuan. Will Beijing‘s “attack on Pearl Harbor” succeed as the U.S. dollar has dominated SWIFT settlements?
The U.S. government last year sanctioned Chinese and Hong Kong officials for persecuting human rights and undermining Hong Kong’s autonomy, and banks that do business with these officials will also be sanctioned for violating the ban. One of the alternate options is to ban banks from accessing U.S. dollars and kick them out of the SWIFT system, which would prevent foreign investors from exchanging Hong Kong dollars and stop the inflow of U.S. dollars. The US dollar is the main global currency used for international payments and central bank reserves.
As relations between the U.S. and China became increasingly tense, Beijing authorities began to worry last year that they would be excluded from the dollar settlement system, and officials pondered reducing their reliance on the dollar and increasing the yuan’s international influence. At the Time, Ding Jianping, director of the Center for Modern Financial Studies at Shanghai University of Finance and Economics, said the digital yuan could be used in cross-border transactions under the auspices of a currency swap between central banks, thus bypassing systems such as SWIFT.
Now, the Chinese central bank has cooperated with SWIFT, no less than the “attack on Pearl Harbor”.
According to a recent report by Reuters, SWIFT, the General Clearing Center of the Central Bank of China, the Cross-border Interbank Payments System (CIPS) and the Central Bank’s Digital Currency Research Institute have registered a joint venture company, Financial Gateway Information Services Co. The registered capital is 10 million euros, and the four major shareholders hold 55%, 34%, 5% and 3% of the shares respectively.
China’s national enterprise credit information public system shows that the chairman of the new joint venture company is Huang Meilun, CEO of SWIFT China, and its business scope will include information system integration, data processing and technical consulting.
Although the future of this joint venture is still unclear, experts say that if the Chinese central bank’s digital yuan succeeds in its next global foray, it will compete with the U.S. dollar and could once again set off a “hot war” between China and the U.S. over technology or currency, according to the Voice of America on Feb. 11.
Abishur Prakash, co-founder of the Center for Innovating the Future in Canada, said that China’s central bank has won the cooperation of the U.S.-led SWIFT, which means that the digital yuan will take off in Western countries outside of China through SWIFT in the future. “The event has two major geopolitical implications: First, China has laid the groundwork for the globalization of its digital currency. Secondly, it is clear that its main target is the US dollar, although this also reflects the phenomenon that the US is gradually losing control over the system it has created.
Although SWIFT is ostensibly an independent financial institution located in Europe, it is dependent on the U.S. dollar global settlement system, so it often becomes a tool for the U.S. to impose financial sanctions. For example, the U.S. financial sanctions against Iran and Russia were implemented through the SWIFT system, making it impossible to settle in U.S. dollars and freezing or confiscating U.S. dollar assets.
Prakash said that if the digital yuan is successfully promoted, the world’s currency map is likely to be reshuffled. The digital yuan against the U.S. dollar would open up another battlefield for the U.S.-China technology war, and it would be a “hot war,” not just a cold war. However, there is no global consensus for the RMB to be the main international currency, nor is there a trend to de-dollarize. Therefore, the challenge for the RMB to compete with the US dollar for supremacy is indeed still very big.
In an interview with Voice of America, Lin Shih-Chieh, director of the Institute of Financial Research at Taiwan‘s Financial Research and Training Institute, pointed out that China wants to rely on SWIFT to push the cross-border business of banking and digital renminbi, while SWIFT wants to fight for the big pie of China’s cross-border market.
According to Lin Shijie, there is still a long way to go for the yuan to shake the international hegemony of the U.S. dollar. The first is that a certain ratio of RMB-denominated financial instruments must be available in international financial centers, and the second is that central banks are willing to use RMB as a reserve currency, which is beyond China’s reach in the short term.
However, the CCP’s deteriorating human rights record and tightening control over dissidents and society have led to questions about the possibility that Beijing will use the digital renminbi as its latest tool to monitor its people. The globalization of the digital yuan may also allow Beijing to further export its authoritarian system to other countries.
SWIFT Society for Worldwide Interbank Financial Telecommunication
The Society for Worldwide Interbank Telecommunication (SWIFT), an international interbank cooperation organization founded in 1973, is used by most banks in most countries around the world. SWIFT provides a safe, reliable, fast, standardized and automated communication service for banks’ settlement, thus greatly improving the speed of banks’ settlement. Due to the standardized format of SWIFT, letters of credit are mainly formatted with SWIFT messages.
SWIFT is headquartered in Brussels, Belgium, and has set up Swifting Centers in Amsterdam, the Netherlands and New York, the United States respectively, and opened a National Concentration for each participating country to provide fast, accurate and excellent services for international financial services. SWIFT operates a world-class financial message network, through which banks and other financial institutions exchange messages with their peers to complete financial transactions. In addition, SWIFT sells software and services to financial institutions, most of which use the SWIFT network.
In 1980, SWIFT was connected to Hong Kong. Bank of China in China joined SWIFT in 1983, and was the 1034th member bank of SWIFT organization, and officially opened for use in May 1985, which became an important milestone for China to connect with international financial standards. Later, China’s state-owned commercial banks and the Shanghai and Shenzhen stock exchanges also joined SWIFT one after another.
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