This piece in OMFIF presents a bit of a different take on the potential impact of using payment rails as a deterrent (or punishment) for state aggression. As the world has become more economically interdependent during the past 20 years, so has the need to have access to cross-border payment rails. One of the more widely used networks for business to business (and bank to bank, etc.) payments or funds movement is SWIFT, which has cut off some of Russia’s largest banks. SWIFT is a financial messaging system, but is the underlying method for clearing much of the world’s cross-border commerce. The author suggests that CBDCs can undermine such actions.
‘Removing Russian participants from Swift and the dollar payments network will deal a powerful blow to Russia’s economy, but the power of the measure may soon start to wane as cross-border CBDC networks become an urgent priority…
Russia’s invasion of Ukraine has triggered a wave of sanctions on individuals and financial institutions from the West. The traditional hallmarks are there — restrictions on purchases of Russian debt, trading restrictions — as well as some new ones, like asset freezes on central bank foreign exchange reserves…
The decision to lock (most) Russian institutions out of Swift was a contentious one but something of a red herring. In and of itself, Swift is not a payments network. It simply carries the messages used to describe payments. That means that Russia can use other messaging services to send payments, although these are slow or not well-used and many of their counterparties will be unwilling to deal with them because of other sanctions.’
This is a more long-term potential issue, since there are only a couple of ‘live’ CBDCs currently in use, the most widely transacted version being the e-yuan, which we recently commented upon. These and the many dozens of others being piloted or researched across the globe (including the e-dollar, which is likely at least two years away) are retail versions, not wholesale, so not built for purpose in the B2B space. The real point is that bad actors can always find alternatives, especially given some time and innovation. This is a complicated space and we’ll be keeping an eye on it.
‘The West will still be able to forbid banks from trading with sanctioned counterparties, but key trading partners may decide to do so anyway. Network effects matter for trading blocs, so too much fragmentation is bad for business. The result may well be a split — the US and Europe on one side and a Sino-Russian alternative on the other. As serious challengers emerge to Swift’s platform and the Fed’s clearing networks, the threat of prohibiting access will lose its sting.’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group