This game is big, really big. It is all about getting rid of dependency on the SWIFT system backed by US dollars. Iran wants to sell oil to China and buy military equipment from them. Russia wants to sell gas to China. Right now USA can block all of this quite effectively (barter between countries can be used, or gold, which is happening now to some extent, but is very impractical).
More. EU wants to trade with Iran as well, the reason for introduction sanctions against Iran after the deal was made and was honored by Iran is hard to understand from the European perspective. But no bank will violate US sanctions and risk to be excluded from SWIFT.
Digital Yuan and some other solutions like this (EU is working on a similar solution) might change all of this.
SWIFT is a messaging system, the US (and everybody else) can inspect SWIFT transactions to see what's going on . But as far as actual enforcement, once the US sees something they really don't like in the SWIFT messaging platform they can only prevent the target bank that operated the transaction from accessing USD by cutting off that bank US branch from ACH/Fedwire, or if the bank doesn't have a branch by forcing the Correspondent US bank to drop their bank client.
Theoretically if the EU wanted to trade with Iran or if China wanted to sell gas to China...they can do it
The US will notice it and would block that bank access to USD and close that bank US branch if they have any.. but they can subsequently continue in RUB, EUR, CNY..
For a bank losing the ability to loan to US customers or do retail business in the US is not a big deal....the very huge problem is that you won't be able to access the US bond markets and the US equity markets. The ability to buy and sell the world's best debt: the mighty US treasuries goes away.
No bank survives that.
SWIFT is not special, it just saves time to the FBI and the NSA...but if SWIFT were to lose its relevance due to Central Banks Digital Currencies, then the US will still know that you violated sanctions and you'd still be immediately blacklisted and sanctioned yourself
Digital currencies such as the digital yuan or the digital euro will have 6-12 months of free reign before those same countries which make up SWIFT come together again to agree on the same principles behind SWIFT (the ability to inspect etc). The
Central bank of an other country can be too big to sanction (opposed to a commercial bank) but the new framework will require that the identity of those who made the transaction are targeted.
So with the new Central Bank Digital Currency regime the sanction and blacklist doesn't hit the whole commercial bank (because the transaction won't be facilitated by the commercial bank but by a Central Bank) but directly the person or the company violating the US sanctions.
In the end the ability that the US has to sanction and be the world police comes from the strenght of the US economy and the might of the US military as well as the power of US intelligence. The balance of power with regards to that hasn't changed
The EU (more precisely France-UK-Germany, parties to the Iran nuclear deal) tried to set up a payment system to keep the deal alive, but European banks and companies like Airbus declined to participate because of the threat of US sanctions. Chinese banks are much less likely to view such sanctions as an existential risk, and many are already under sanctions anyway.
The centrality of the US also stems from its connectivity. There used to be a time when intra-European Internet traffic would be routed through the US, even though the EU economy was larger than the US’ pre Brexit.
Chinese banks are even more thirsty for US Treasuries. They can't risk being denied access to USD because that's how the only way you have to buy Treasuries and receive interest and principal back if you are already invested (they all are)
Hmm. I see the actual event that showed the world that Britain's time was up, as the sinking of the Prince of Wales and Repulse warships in December 1941.
After that point, the British Empire was dead, but it took another 15 years for it to be self-evident to the British themselves.
1. State/progress information provides more trust as more progress information becomes available, and therefore less trust is needed from financial instruments such as escrow. Much of the new information is provided via 5G and the internet.
2. The US has derived enormous benefit from these financial instruments, since they often provided the US with an interest-free loan as a side effect. As these instruments are less needed, less money will be lent to the US on these terms, so the US needs to either borrow less or pay for interest-bearing loans like the rest of us.
3. The US federal government doesn't understand what's coming.
(I disagree with one of the points. The above is a summary, not my opinion.)
The solution is to not allow the digital yuan app into the swift system. As soon as people figure out they can't convert their Yuan back into dollars they will use the app less. But if it gets approved for Swift then it would make sense to pay for items from China with the app and that would circumvent having to be converting dollars all of the time. Once people get used to not using Dollars and that will certainly hurt the US monetary system most.
Certainly China will also be able hide more money printing behind the app. They can give out Digital Yuan as stimulus unlimited and no one would know any better.
Kyle Bass is a cold war warrior that assumes that China is like the US and is caught in terrible one dimensional thinking.
What if it is actually true that China doesn't want to be a reserve currency and own seniorage from the rest of the world? (As Chinese leaders repeatably have said.)
What if they instead want better credit mechanisms, risk controls and logistics? So credit creation can be backed by future oil produced by Iran, future jet planes produced by Russia, future phones produced by China. And trade can be settled with very little actual central bank currency moving around.
> What if it is actually true that China doesn't want to be a reserve currency and own seniorage from the rest of the world? (As Chinese leaders repeatably have said.)
What if it is actually true that China won't militarize reefs in the South China Sea or encroach on Hong Kong's autonomy, as Chinese leaders repeatedly said?
This is the least head on method... give the app ten years. China makes everything and eventually if you want to buy from China you will be made to use the app. China uses the Microsoft method. Embrace, extend, extinguish.
You realise it's not a single app? Rather, it's universal connectivity dressed up in buzzwords.
Today, people ship little things in their containers that report e.g. temperature aberrations, so when you take delivery of something you can see whether it's been cooled continuously. The article is saying that these things will instead report temperature (and other things) online, so you can monitor the temperature in each container of your mango/yoghurt/fish/… shipment in real time.
If you as buyer don't want to, why would the seller care? But if you want to sell to a buyer who's used to that from many other sellers, you might have a problem. So Chinese technology replaces dollar escrow.
That solves the problem in the sense that it replaces the problem with another, functionally identical problem.
If the need for escrow diminishes because trust is provided in other ways, then it doesn't really matter to the escrow agency which currency the former customers now use to settle their purchases.
I think the point is about the need to buy money to upfront it, and have to pay to make it secure. Imagine a factory saying: you can pay on delivery if you use this currency, or you have to upfront 50% to the escrow (which you'll have to pay for it's service, and the interest if you used credit).
This second scenario you won't have your money stalled for months while paying for it.
If those offshore dollars come home, or maybe even if new dollars stop leaving, there is nothing that can prevent financial collapse. The government will try absolutely everything to get that money from citizens, and it will only push more money out. The other option is extreme domestic austerity, tax friendliness, and digital modernization.
Suppose you were involved in a financial war. Could there have been a better setup for the adversary’s victory than the domestic spending plans of 2020/21? The people who vote for these measures can’t possibly be ignorant of the situation.
Regarding financial crime enforcement, I believe that it can be done in a way that strengthens the currency. Generally that means eliminating activity which is net negative for the economy (the other holders of dollar-denominated assets), including the cost of compliance and lost opportunity for commerce. Right now, a common view is that it is overreaching, although this view may be ignorant of all the terrible things it is preventing. Regardless, we are now in competition on this aspect of our monetary system as well.
One thing is what is happening internally in China's yuan economy. That really doesn't threathen the status of the USD.
Another thing is whether better logistics, credit extension backed by assets (such as a partially manufactured product from a factory) would do the demand for holding cash (which would be mostly dollars) in international trade.
More. EU wants to trade with Iran as well, the reason for introduction sanctions against Iran after the deal was made and was honored by Iran is hard to understand from the European perspective. But no bank will violate US sanctions and risk to be excluded from SWIFT. Digital Yuan and some other solutions like this (EU is working on a similar solution) might change all of this.