With China’s digital RMB cross-border settlement system now fully connected to the ten ASEAN countries and six Middle Eastern nations, questions must be asked about the continued utility of the SWIFT system used by financial institutions worldwide, and we in the Caribbean region could learn from this recent development.

 

In the closing days of March, a flurry of articles was released on China’s Central Bank Digital Currency ushering a new era in global trade.  According to African research and information services firm, Proshare, “…the People’s Bank of China (PboC) has announced that its digital RMB cross-border settlement system will be fully connected to the ten ASEAN nations and six Middle Eastern countries, implying that about 38% of global trade could bypass the US dollar dominated SWIFT network.”

Although the Proshare article was published after our most recently released podcast episode was recorded on CaribCoin, the thrust by China to establish a global alternative to the SWIFT network is particularly relevant to the Caribbean region, as we move towards establishing our own regional payment platforms and reduce our reliance on the SWIFT for intraregional money transfers.

 

SWIFT? What is it?

The SWIFT (Society for Worldwide Interbank Financial Telecommunication) system is a global messaging network that financial institutions use to securely exchange information and instructions for financial transactions, which is considered the backbone of international money transfers. SWIFT does not actually transfer funds. Instead, it is a secure platform that uses a standardised coding system, SWIFT codes or Business Identifier Code (BIC) codes, to identify banks and financial institutions globally and to exchange standardised financial messages between banks, instructing them to transfer funds.

Due to the well-established network of over 10,000 financial institutions in over 200 countries worldwide, its robust security, standardised messaging format and interoperability across different market infrastructures, languages, networks and asset types, SWIFT has become a trusted system for international financial transactions. However, it also has some drawbacks.

First, international SWIFT transfers can take several business days to complete, as transactions need to pass through several intermediary banks. Second, it also means that these transactions can be expensive, due to fees charged by these intermediary banks, which can make the end cost of a transaction hard to predict. Many of us have experienced either sending or receiving funds by international transfer, with the funds received being several dollars less than the sent amount.

Third, it is very difficult to track the exact location of a transfer in real time. Typically here in the Caribbean, if you have sent a payment that seems to be taking a long time to get to the recipient, the sending bank can only confirm whether or not the transfer has been sent. On the flip side, if you are awaiting to receive a payment, your bank, as the receiving bank, can only confirm whether the money has been received. Trying to track the funds can be a headache, as your bank might only be able to raise a query through the banking network for which an answer may be received days or weeks later.

Finally, and perhaps most applicable in today’s geopolitical climate, due to its role in global finance, the SWIFT system can be used as a tool for applying financial sanctions, which can disrupt international financial flows to countries. For example, in 2012 and 2018, Iranian banks were disconnected from the SWIFT network, to curb Iran’s nuclear programme, which adversely affected effect in the country’s economy, by limiting its ability to conduct international trade, especially oil exports. Similarly, in 2022, as part of the international sanctions imposed on Russia following its invasion of Ukraine, several Russian banks were excluded from SWIFT.

 

So what’s so special about a digital RMB?

The Chinese renminbi (RMB), which is the official currency of China, also has a digital equivalent known as the e-CNY (or Digital Currency Electronic Payment, DCEP), a central bank digital currency (CBDC) issued by the People’s Bank of China (PBOC). Similar to other CBDCs, of which we have a few in the Caribbean region, it is a digital version of the RMB, with its value pegged 1:1 to the physical or fiat currency.

Like other CBDCs and digital currencies, digital RMB (also known as digital yuan) transactions are faster and cheaper than traditional methods. However, unlike Caribbean-based CBDCs, the digital RMB can facilitate both domestic and international transactions, with the latter in particular being considerably faster, seconds as opposed to days or weeks, and orders of magnitude (such as a tenth) cheaper than SWIFT transactions.

Although the digital RMB is being rolled out across China and has been gaining traction, it is also being used internationally. A major example is the “Project mBridge,” a collaborative effort involving the central banks of China, Thailand, the United Arab Emirates, Hong Kong and the Kingdom of Saudi Arabia, “to tackle some of the key inefficiencies in cross-border payments, including high costs, low speed and operational complexities.”

With Project mBridge considered a success, the use of the digital RMB cross-border settlement system has now been extended to over 16 Southeast Asian and Middle Eastern countries. Further, 87% of countries worldwide are reported to have systems compatible with the digital RMB(Source: Proshare). It is thus becoming a working alternative to existing cross-border settlement systems.

 

What does this mean for us in the Caribbean?

If there is any important takeaway from the changes occurring in global trade, finance and cross-border settlement, is the fact the Caribbean region is on the right track to establish its own regional payment rails. The use of the digital RMB for cross-border payments should accelerate existing efforts to implement the Pan African Payment and Settlement System (PAPSS) and CaribCoin in the region and at the very least, claw back some control of regional payments, instead of having to use SWIFT whenever transactions require a change in currency.

Ultimately, the digital RMB cross-border settlement system is signalling a rewriting of traditional norms, thanks to technology. Blockchain technology, the internet, and digital currency rails, among other digital systems and technologies, are turning existing power dynamics on their heads and forcing us to question the continued utility and viability of long-entrenched systems.

 

 

Image credit:  Wikipedia;  Freepik; Wikimedia Commons