Lack of innovation across global payment systems puts US global influence at risk

As central banks globally research and launch digital currencies, America must lead the world in payments innovation and cooperate with other countries on international standards, as a matter of robust foreign policy

Fifty years ago, shortly after the disintegration of the Bretton Woods system, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) was created. It was the result of 239 banks from 15 countries, including the United States, working together to address a pressing issue: the lack of reliable and secure technology to facilitate cross-border payments. SWIFT does not physically transfer any money but serves as a messaging system for banks to communicate cross-border financial transactions, such as payment orders and related data. As someone once said, it’s the “WhatsApp of global finance.” Today, SWIFT serves as the backbone of all global payment infrastructure, spanning over 200 countries, facilitating over half of all cross-border transactions, and processing close to $300 billion in payments every day.

While, at inception, SWIFT was designed to be politically independent, over the last 20 years, it has become a key tool for American foreign policy. Post 9/11, the United States successfully pressured the Belgium-based institution to grant it unparalleled access to SWIFT-transmitted data, making it easier to monitor global compliance with US-imposed sanctions. This has come at the dismay of the EU and other SWIFT members who are actively developing technology to bypass SWIFT altogether.

This is the backdrop against which the People’s Bank of China (PboC) has launched its Digital Currency Electronic Payment system (DCEP). DCEP is designed to replace physical cash in the form of money stored in a digital wallet tied to accounts at state-owned commercial banks. What makes DCEP different from the electronic financial transactions that occur when we use our credit or debit card is that each DCEP coin is connected to a central ledger that can be accessed, in some models, by both the PBoC and state-owned commercial banks. Like cash, the technology allows you to transfer money from one wallet to another without the need for internet connection. From a monetary policy perspective, PBoC would have real-time economic data as well as the ability to directly impact monetary policy by, for example, setting expiration dates for the Yuan to encourage timely spending or lowering Yuan reserves available in each user’s digital wallet to directly tighten monetary policy in a matter of seconds.

While other countries, including the United States and Japan, have indicated they are researching similar technology, China’s innovation in this sector is unrivaled. China is testing its digital currency in Hong Kong, Thailand, and the UAE and has established a joint venture with SWIFT to allow for cross-border transactions more broadly. China is also embedding technology to support DCEP into smartphones shipped to Africa. Chinese-manufactured smartphones account for close to 50% of the African market and a dozen or so African central banks have publicly considered using the Yuan as a reserve currency.

If these trends continue, and many might argue with me on this one, but it could lead to a new world order where China will have more control of and real-time access to a larger portion of global transactions and the Yuan gains more prominence globally. As we’ve learned from the US’s preeminence over SWIFT, interoperability of DCEP will give China more access to key foreign policy tools such as economic sanctions as well as greater dominance over global trade. Already, we are seeing an increase in global Yuan reserves, which is projected to be the world’s third largest reserve currency by 2030, surpassing Japan and the United Kingdom. Russia’s share of Yuan reserves, for example, went from 2% in 2018 to over 14% in 2019 and the US dollar now accounts for 46% of all trade between China and Russia, a large drop from the 90% levels just 5 years ago.

The lack of innovation in global payment systems over the last 50 years has left a consequential gap in global leadership that China is swiftly capitalizing on. America’s foreign policy strategy should more clearly reflect the times and publicly address global payment innovation head on. The Biden administration should create a well-funded special designation task force for payment experts and technologists to focus solely on the intersection of America’s foreign policy strategy and our global payments system. In doing this, we must leave any traces of “America first” attitudes behind and innovate through collaboration with other countries and jurisdictions. We are undoubtedly at a turning point when it comes to the future of the global payment system as well as America’s hegemony and broader role in the world. If the seismic impact of the development of SWIFT taught us anything it’s that alone we build faster, but together we build stronger and larger.