International Payment and Settlement System in Urgent Need for Profound Reforms

November 20, 2024

About the author

The global landscape of economic security and cooperation faces numerous challenges, such as geopolitical conflicts, economic blockades, and financial sanctions. As the undergirding infrastructure for global trade and investment, the international payment and settlement system is now the cynosure for all. This system enables cross-border trade, investment, and financial dealings. When business is done between countries, an inability to transact using either country's currency can hinder the completion of deals.

Currently, the vast majority of cross-border transactions are completed through clearinghouse transfers and account settlements, with direct cash dealings playing a negligible role. Clearinghouse transfers require payment instructions from both trading parties to ensure accurate account crediting. If each country uses different payment instructions, languages, and protocols, the efficiency of international payment and settlement systems will be very low. Therefore, an ideal approach might be for countries or clearinghouses to open accounts at a unified global clearing center for seamless inter-institutional fund transfers. However, the establishment of such a center faces significant hurdles due to the sovereign nature of currencies, which are subject to disparate national laws. Thus, country-specific clearing centers and cross-border interbank payment and settlement systems have emerged. For instance, the US operates the Clearing House Interbank Payments System (CHIPS), while China runs the Cross-Border Interbank Payment System (CIPS).

Another solution involves creating a unified global platform for interbank financial information transmission, exemplified by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Established in 1973, SWIFT was intended to manage, transmit, and process global interbank payment instructions on the principles of neutrality, professionalism, security, and efficiency. Even during the Cold War, SWIFT was utilized by both the US and the Soviet blocs. Today, SWIFT has evolved into a specialized organization with over 11,000 institutional members from more than 200 countries and regions, significantly enhancing the development of the international payment and settlement system through its adherence to commercial operations and political neutrality. Notably, SWIFT functions solely as a financial communication platform, i.e., a messaging network within the international payment and settlement system, without requiring its members to open accounts with it.

However, following the 9/11 terrorist attacks in 2001, the US demanded that SWIFT provide data on USD transactions under the pretext of counterterrorism. Since then, the US and Europe have increased their intervention in SWIFT, using it to impose sanctions on certain countries and institutions by blocking their access. Immediately after Russia launched its special military operation against Ukraine in 2022, SWIFT excluded several major Russian banks. Nonetheless, since Europe relies on Russian natural gas and needs to settle transactions in the corresponding currencies, not all Russian institutions have been cut off from SWIFT. Still, this action has raised eyebrows in many countries, prompting nations to explore the creation of independent and secure alternatives. This has significantly impacted both SWIFT and the international payment and settlement system.

To address these challenges, there are several potential solutions for the international payment and settlement system:

First, SWIFT should establish a sound governance mechanism that restores its neutrality, professionalism, security, and efficiency. As a global service provider, SWIFT must be managed collectively by the international community instead of being controlled by a few nations, although this is easier said than done. Such a governance mechanism also suggests that profound reforms are necessary within the international payment and settlement system.

Second, countries currently excluded from SWIFT can develop an alternative platform jointly so that the two platforms can grow together through competition. It is technologically feasible to create a new financial messaging platform based on the standards established in SWIFT's extensive history. However, the primary challenge lies in how to ensure the new organization is truly neutral, secure, fair, just, and not controlled by a few countries. If individual countries were to set up their own platforms, the overall effectiveness and efficiency would be compromised.

Third, drawing from digital currency technologies, a new international payment and settlement system could be created. Take Bitcoin as an example. Since its launch in 2009, it has become a secure, super-sovereign cryptocurrency to circulate globally. However, Bitcoin's exclusive system and limited supply (capped at 21 million) render it an inefficient medium for international transactions.

Stablecoins offer another possibility. Stablecoins like Tether (USDT), USD Coin (USDC), and Gemini dollar (GUSD), which are pegged to sovereign currencies, have proven effective for years in facilitating cross-border payments and settlements. Though employing stablecoin technology to develop digital sovereign currencies for cross-border transactions could lead to an international payment and settlement system dominated by individual nations rather than collectively controlled, the potential advantage in cost-effectiveness makes the approach worthy of further research.

A fragmented global governance system could affect cross-border trade, investment, and financial dealings, however, potentially this could also lead to the creation of a new system or a series of alliances or other blocs. We should remain optimistic, as the present challenges could be a blessing in disguise.

 

This article is from the October issue of TI Observer (TIO), which delves into these upheavals, examining the impact that shifting trade relationships, "de-risking" strategies, and the rise of unilateralism might have on the world's efforts for peace and development. Drawing insights from the Sub-Session on International Relations of the 8th Taihe Civilizations Forum (TCF), this issue explores potential avenues for global cooperation amid an increasingly complex and polarized international landscape. If you are interested in knowing more about the August issue, please click here:

http://en.taiheinstitute.org/UpLoadFile/files/2024/10/29/16414365c3475a1a-3.pdf

 

——————————————

ON TIMES WE FOCUS.

Should you have any questions, please contact us at public@taiheglobal.org