New money: a crucial juncture for the future of international payments
With the rise of alternative systems and central bank digital currencies amid ongoing geopolitical instability, the choices made at the Rio Summit could reshape global financial stability and governance
The G20 summit in Rio on 18–19 November 2024 comes at a critical time for determining the future of the international payments system. That system has worked very well for the past 80 years, led by the now US-centred private sector and its Society for Worldwide International Financial Transfers (SWIFT) system to deliver rapid, inexpensive money transfers across borders and oceans to sustain international commerce, without the need for an intergovernmental agreement or organisation to serve as an international lender of last resort. But now an aggressive, expansionist Russia is seeking to create a government-led alternative, mobilising its fellow BRICS members led by China, India and Brazil in support. Which choice will the leaders at the G20 Rio Summit collectively make?
Thus far, despite the continuing global geopolitical and consequent economic turmoil of the past year, the international payments system has remained resilient in the face of Israel’s response to the Hamas attacks on 7 October 2023 and the ongoing conflict between Russia and Ukraine. Sanctions were placed on Russian banks after Russia annexed Crimea in 2014, and were increased after it invaded Ukraine on 24 February 2022. Then, sanctions were imposed on some Russian banks involving the use of SWIFT.
Even before these international sanctions on Russia, the BRICS countries – Brazil, Russia, India, China and South Africa – had started to develop their own alternative payment system. Now known as BRICS+, with Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates invited to join, it seeks to update and reshape the norms of global governance and trade relations that have historically been fashioned by the Atlantic democracies. The Boston Consulting Group has calculated that the 10 BRICS+ countries account for one-quarter of global gross domestic product, two-fifths of global trade in goods and nearly half of the world’s population. The BRICS+ countries have now set up their own international payment system, BRICS-PAY, to facilitate payments among themselves in their own currencies.
An alternative to SWIFT
In addition, Russia has developed the System for Transfer of Financial Messages as an alternative to SWIFT. In an address to the BRICS business forum in June 2022, a few months after the invasion of Ukraine, President Vladimir Putin invited banks from BRICS countries to connect to it for payments among themselves rather than use SWIFT, which is so strongly associated with the Atlantic alliance of developed industrial economies.
However, there has not been much appetite for a rival system to SWIFT. Given their continuing large trade
with the United States and Europe, China and India, the largest BRICS+ economies, have shown little interest in Russia’s alternative payment system, as its use holds little, if any, added value for them. The newest, somewhat smaller members may stand to benefit more if their trading patterns are oriented more towards the BRICS. But there is little information available about the BRICS-PAY system, other than what is published in the BRICS Business Council’s annual reports. They do not include BRICS-PAY volume numbers.
With the recent rise of cryptocurrencies, there are concerns that sanctioned parties might use them to transfer funds out of Russia. Legislation has been introduced to prevent the evasion of sanctions in this manner, but has been irrelevant as cryptocurrencies use blockchain for their transactions and therefore are traceable, so evasion is not technically possible.
Central bank digital currencies offer the most convincing evidence of the prospective stability of global wholesale payments. They allow central banks to settle directly with each other, eliminating the risk and inefficiency associated with middle parties. Eight diverse central banks have launched a CBDC: the Central Bank of the Bahamas (sand dollar), the Central Bank of Brazil (drex), the Eastern Caribbean Central Bank (DCash), the Central Bank of Nigeria (e-naira), the Bank of Jamaica (JamDex), the People’s Bank of China (digital renminbi), the Reserve Bank of India (digital rupee) and the Bank of Russia (digital ruble). Most G20 members have either launched or are in the pilot stage of using CBDCs.
Given the current, continuing geopolitical instability in the world, including the ongoing war between Ukraine and Russia and the turmoil in the Middle East, the G20 leaders in Rio should encourage the continued and increasing use of CBDCs in national economies around the world, to help provide safe, secure and efficient payment systems that – along with sound economic and financial policies – can contribute to global financial stability.
At the same time, the G20 members need to consider some degree of interoperability between CBDCs based on access and settlement arrangements to facilitate their cross-border use, as set out in Central Bank Digital Currencies for Cross-border Payments, a report delivered by the Bank for International Settlements to the G20 in 2021. They should also encourage the alignment of regulatory, supervisory and oversight frameworks, including consistent anti-money laundering and combating terrorist financing measures. Finally, the widespread or even universal adoption of a ‘payment versus payment’ transfer mechanism, which ensures that the final transfer of a payment in one currency occurs only if the final transfer of a payment in another currency takes place, will also be critical for cross-border CBDC payments.
