US-Led Sanctions May SWIFT-ly

Accelerate CBDC Adoption

by Millicent co-founder, Kene Ezeji-Okoye, as featured in Yahoo! Finance

The Financial Nuclear Option

After being teased for some time, SWIFT sanctions were finally levied against Russia earlier this week, in retaliation for its invasion of Ukraine.

For the West, blocking key Russian banks from accessing the SWIFT messaging system is a highly-effective short term tactic for several reasons: 

1- It makes it far more difficult for the Kremlin to spend its $600bn war chest; 

2 - It allows Western governments to intervene in a way that is: not (directly) violent; popular with voters; relatively unlikely to lead to military retaliation; 

3 - It negatively affects everyday Russian citizens, making the war more unpalatable to the Russian populace than it may have otherwise been.

With the ruble trading at an all-time low this week, it appears that the ‘financial nuclear option’, is working well; however, nuclear bombs entail fallout, and this situation is no different—these sanctions may well result in unintended consequences for the West, including increased de-dollarization via the acceleration of CBDC issuance.

The monetary hegemony of the United States is already in decline—the share of global US dollar reserves recently hit a 25 year low, and the US share of global GDP has fallen from 40% to 24% over the same period that China’s share has grown from 4% to 16%—but despite the creation of challengers from Russia and China, SWIFT has had no problems retaining its global dominance.

Contrary to popular belief, The Society for Worldwide Interbank Financial Telecommunication (SWIFT) does not move money, rather it serves as a standardized messaging network, created to facilitate settlements between its 11,000 member banks in virtually every country across the globe.  

Headquartered in Belgium, SWIFT is theoretically a politically neutral institution, owned by its member banks and overseen by a consortium of central banks including those of Belgium, Canada, France, Germany, the United Kingdom, the United States, Switzerland, and the European Central Bank.

Neutrality aside, SWIFT sanctions were first used against Iran in 2012, at the behest of the United States, the European Union, and their allies.  Although trade can still continue outside of the SWIFT network (banks and trade partners willing to engage with a sanctioned party can message directly, as was the case before SWIFT, via phone, fax, or—now—email), being de-SWIFTed makes it much more difficult and costly to do so.  

For example, Iran’s Iran’s oil exports dropped from around 2.5 million barrels per day (bpd) in 2011 to just one million bpd in 2014, and the SWIFT ban is largely regarded as being the key bargaining chip that led to the 2015 Iran-nuclear agreement.  

However, an unintended effect of these original SWIFT sanctions was the opening of the world’s eyes to the economic sword of Damocles hovering above their heads, which caused both China and Russia to create their own SWIFT alternatives—the Cross Border Inter-Bank Payments System (CIPS) and Sistema Peredachi Finansovykh Soobscheniy (SPFS), respectively.

With structures very similar to the market-leading SWIFT, these alternative messaging systems are largely relegated in domestic transactions.  Although their international presence is growing, the fact that the vast majority of global payment clearance is done in dollars and euros, limits their ultimate utility, and has meant their growth has been truncated.  SPFS, for example, is only connected to 400 banks, 360 of them domestic.

The Rise of Digital Currencies

Unlike SWIFT alternatives, digital currencies that can be directly exchanged without the need for clearance, settlement or third-party assistance are another matter entirely.

It didn’t make many headlines at the time, but Russia has been calling for the issuance of cross-border digital currencies that aren’t subject to Western scrutiny for BRICS countries (Brazil, Russia, India, China, and South Africa) since 2019.  It seems, for Putin, the writing has been on the wall for some time.

Unlike Western powers, which are still firmly entrenched in the research phase, Russia has already broken ground on the development of their digital ruble, which recently entered its testing phase and could, potentially, be sped into production and released in a matter of months.  

China’s digital yuan, which made its wide scale debut at the Olympics, is currently restricted to domestic use, but a 2021 whitepaper from the People’s Bank of China makes clear that it is “technically ready” for cross-border use. 

Unlike SWIFT, CIPS, and SPFS, that add a messaging layer onto an outdated, slow banking infrastructure, CBDCs will decentralize cross-border payment flows, making them cheaper, easier and faster by eliminating unnecessary (and potentially hostile) intermediaries, and allowing for immediate clearance and settlement—in effect, rendering structures like SWIFT obsolete, and decreasing one major aspect of the dollar’s overall utility.

This new volley of SWIFT sanctions only serves to remind the nations of the world that finance is now firmly in the domain of modern warfare, and that having an alternative to the SWIFT system is now a matter of national security.

Those of us living in Western countries may be shielded from the viewpoints of the rest of the world, but for many diminishing the power of the dollar is an overt goal—the central bank of Cambodia listed de-dollarization as one of the principle factors that led it to release a CBDC.  This latest round of SWIFT sanctions is likely to have other central banks and governments thinking along the same lines.

Of course, CBDCs aren’t inherently designed to be adversarial but, much like SWIFT, they can be used as such, and will soon become increasingly important pieces in the geostrategic game of chess.  

The world has witnessed East vs West races for power in the past, but in this case, the East is years ahead of the West.  If Western nations want to retain their position on the geopolitical stage, launching well designed CBDCs should be near the top of their agenda.