China’s Digital Yuan May Aid Russia Bypass SWIFT Ban, But Will It?

Key Insights

• Following Russia’s attack on Ukraine, NATO allies imposed sanctions cutting down Russia from the global SWIFT financial ecosystem
• Reports, however, highlight that this could give rise to central bank digital currencies (CBDCs), like the Digital Yuan
• Notably, China has already started building an effective alternative to CHIPS – the Clearing House Interbank Payments System

Last week, Russia’s attack on Ukraine was followed by retaliation, disagreement, and disputation from various nations worldwide.

The NATO allies decided to impose sanctions cutting down Russia from the global SWIFT financial ecosystem, which by many was considered an apt ‘punishment for President Vladimir Putin’s invasion of Ukraine.’

The SWIFT Controversy

The US and European Union (EU) have partially cut off several Russian banks from the leading international payment gateway, SWIFT. In addition, Russia’s central bank assets are expected to be frozen, constraining Moscow’s ability to access its overseas reserves.

According to a joint statement, the intention behind this move is to further ‘isolate Russia from the international financial system.’

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. The system is a secure platform for financial institutions to exchange global monetary transactions such as money transfers.

Experts expect that excluding Russian banks from the SWIFT platform could hit the country’s economy hard. The White House has also stated that cutting out SWIFT access will make the country rely on ‘the telephone or a fax machine’ to make payments.

However, many experts believe that the move may give central bank digital currencies (CBDCs), especially CBDCs like China’s Digital Yuan, an edge in the global market.

A Bloomberg analyst anticipated that this move could provide other ‘geopolitical rivals, such as China, the excuse to promote the digital versions of their own central banks’ money in global trade and finance.’ As a result, this move, if materialized, could further weaken the dollar’s international clout.

Meanwhile, as international tensions spur, cryptocurrencies have had a significant role in the larger narrative. As per reports, more than $19 million in BTC, ETH, and USDT has been donated to the Ukrainian government.

China Could Play its Cards

Analyst Andy Mukherjee further stated that the key pillars of the US economic hegemony are platforms like SWIFT, CHIPS, and Dollar. Therefore weaponizing these instruments against Russia could further convince China of building an alternative to escape American dominance.

Reportedly, China has already started building an effective alternative to CHIPS – the Clearing House Interbank Payments System. In addition, the nation is rumored to be making its own Cross Border Interbank Payments System (CIPS).

Much like CHIPS settles international payments in the USD, China’s CIPS aims to pay claims in the Yuan while running over its messaging network. That said, while CHIPs holds a 40% global market share, CIPS processes only 3% of the international transactions.

Furthermore, the analyst says that the Digital Yuan, the e-CNY, can help China redefine its position in the global financial market. As per China’s central bank PBoC, the token is currently undergoing extensive pilot runs and is ‘technically ready’ for cross-border use.

Notably, the digital Yuan is off to a good start which could be seen as means of transaction around the Olympic games, saw a shift with China’s CBDC taking the lead. As highlighted in previous articles, the country has been pushing its central bank digital currency towards its citizens to expand its reach.

Furthermore, economist John Hopkins believes that putting sanctions on Russia could be counterproductive to the West. He said in a Tweet that while weaponizing the SWIFT international payments system might cut Russia off, it ‘risks eroding the dollar-dominated global financial system. It will give rise to alternative systems developed by China & Russia.’

Weaponizing the SWIFT international payments system might cut Russia off, but risks eroding the dollar-dominated global financial system. Indeed, it will give rise to alternative systems developed by China & Russia. Just another example of why sanctions are counterproductive.

— Steve Hanke (@steve_hanke) February 27, 2022

Thus, while some people believe the SWIFT sanctions to be counterproductive, others find the move strategic in eliminating Russia from the larger economic narrative. That said, while the dollar domination wouldn’t subside in a day, with more alternatives in view, the market share of top players could be affected in the years to come.