Regulation Asia, October 13, 2015
Breaking Away From a US Dollar Dominated World
CIPS translates into geopolitical, transnational banking power by obviating American oversight.
A historical monetary, economic and geopolitical landmark was achieved last week, which will form the basis for a major shift away from a US dominated, international monetary system to a multipolar balance of world financial power.
China International Payments System (“CIPS”) was launched last week. As a cross-border renminbi payments system it represents a major step in China’s ambition to increase and streamline the international use of the Chinese currency. It is also a way to protect itself and its users from US spy agencies with access to the Swift system. But more importantly, CIPS prevents the US from blocking access to Swift for reasons such as political sanctions.
Beijing wants the yuan to rival and provide an equally credible alternative to the US dollar as a global currency for trade and investment. They visualise that world trade and investment will be equally supported by the US dollar, yuan and Euro. The renminbi is now the fourth most popular currency for global payments.
The current system for clearing and settling renminbi payments is complicated. It requires the use of a global network of correspondent banks and offshore yuan centres as offshore and onshore yuan are two separate jurisdictions. A streamlined and direct platform, it will promote greater use of the Chinese currency. While CIPS is only used for settling yuan transactions, the expansion of the yuan around the world and the opening of China’s capital account and economy mean that Swift – and US meddling in payment processing systems can be circumvented.
Swift has become so important to global finance and capital movements that it has been used as a tool by the US to influence foreign policy and disputes. When Russian Prime Minister Dmitry Medvedev warned in January that an EU proposal to ban Russia from Swift due to the conflict in Ukraine would elicit an “unlimited” response from Russia he underscored the high stakes involved.
That simple action would have effectively and completely froze the movement of Russian trade and investment funds, thus paralysing the entire economy. Thus, international payment systems have become a strategically important industry, if not an influential weapon in its own right.
According to NSA documents leaked by Edward Snowden, the U.S. National Security Agency has used Swift as a means to track the movement of international payments and remittances. The hacking and spying of Swift has now been revealed as another concern.
It is not surprising to see that China and Russia are trading commodities like oil and gold using yuan. Escaping the orbit of the US dollar, US clearing banks and ultimately the oversight and intrusion of the US Treasury and government is the first step towards diminishing American influence.
CIPS will also make it more difficult for the US government to take the kind of unilateral action that was thrown against the Macau bank, Banco Delta Asia in 2005 that instigated a bank run. Participants in global correspondent banking were astonished to see the US Treasury wielding powerful anti-terrorism laws for the first time. The U.S. Department of the Treasury designated Banco Delta Asia SARL as a "primary money laundering concern" under Section 311 of the USA PATRIOT Act because it represents an unacceptable risk of money laundering and other financial crimes.
In conjunction with that finding, the Treasury's Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that, if adopted as final, will prohibit U.S. financial institutions from directly or indirectly establishing, maintaining, administering or managing any correspondent account in the United States for or on behalf of Banco Delta Asia.
Just the rumours concerning the mere issue of a letter stating an intention to take punitive action in Section 311 was enough to cause a bank run, which was stemmed by the Macau government.
A brief look at the Patriot Act shows the kind of arbitrary power that China and Russia are trying to blunt and purge from their own financial systems. CIPS is an important and powerful weapon towards achieving independence.
Title III of the USA PATRIOT Act amends the anti-money laundering provisions of the Bank Secrecy Act (BSA) to promote the prevention, detection and prosecution of international money laundering and the financing of terrorism.
Section 311 authorises the Secretary of the Treasury – in consultation with the Departments of Justice and State and appropriate Federal financial regulators – to find that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transactions or type of account is of "primary money laundering concern" and to require U.S. financial institutions to take certain "special measures" against those jurisdictions, institutions, accounts or transactions. These special measures range from enhanced recordkeeping or reporting obligations to a requirement to terminate correspondent banking relationships with the designated entity.
Such unilateral action is detrimental, if not crippling to any country’s banking system. The only recourse is to form your own correspondent banking regime. So CIPS is more than a payment processing regime, it is a foreign policy fortification.