Discussion of cryptographic digital currencies and international payment and settlement systems
Borderless currency is a newly proposed form of currency in recent years, which is a purer carrier of value than internationalized currency. The current inter-bank transnational settlement system uses “SWIFT”. However, SWIFT has shortcomings: there are uncertainties of value transfer of globalization and serious centralization problems, thus CBDC was born to adapt to the new era.
Definition of borderless currency
Money without borders is, by definition, money that can circulate throughout the world. However, in the traditional financial field, due to political considerations, there is no such thing as borderless currency.
Based on the development of international trade and the development of international trade cooperation over the past century, international currency settlement systems such as SWIFT were born and used for cross-border value transfer and settlement. The current international settlement system is deeply influenced by the political and contemporary background during the establishment of the system, which has high settlement costs and is easily manipulated by politics.
The background of the birth of borderless currencies has two main needs.
- Create a distributed value vehicle that protects the value of assets from being controlled by specific entities.
- Create a value carrier that can be circulated among different users at a low cost.
Based on these needs, this paper defines a borderless currency as a low-cost vehicle of value that is widely available for circulation. Throughout history, precious metals such as gold and silver, as well as commodities of high value such as porcelain and Marshmallow have been identified as borderless currencies at certain specific times, traded and existing as a medium of value in real economic life.
Changes in the characterization of bitcoin assets
When Bitcoin was first created, Satoshi Nakamoto characterized it as a cryptographic digital currency used for everyday payments. In other words, bitcoin is a currency that can be used on a daily basis in terms of its asset properties.
In the early days, before a consensus on the value of bitcoin was established, its value fluctuated greatly, so bitcoin could not yet be used as a currency for everyday use. The reason for this is that an everyday currency must have a relatively stable value, otherwise, there is a huge risk for both parties using the currency.
Since then, bitcoin has gradually been recognized as a safe-haven asset, also known as “digital gold”, and the correlation between bitcoin and gold is even as high as 0.7. Since then, bitcoin has gradually transformed its asset properties into “digital gold”. “. At this stage, changes in the price of bitcoin show a high correlation with various safe-haven assets such as gold and U.S. stocks in different cycles.
At this stage, Bitcoin may become an important component of the next generation of the international settlement payment system. With the intensifying conflict between China and the United States, the international value settlement payment system will face great uncertainty. Along with the rapid development and application of CBDC, the possibility of Bitcoin becoming an important part of the next generation of international payment settlement system is rising.
The Borderless Currency Properties of Bitcoin
As a cryptographic digital asset, Bitcoin is created and circulated based on a consensus mechanism of value and is not influenced by a single individual.
Bitcoin is portable as well as divisible. As long as there is electricity and a computing device (e.g., computer, smartphone, etc.), the bitcoin network can operate. From an application point of view, a single bitcoin can be split up to the 8th finer unit of 10, which makes bitcoin compatible for payments.
Bitcoin is circulated worldwide, thus presenting a seemingly contradictory pattern of applications in which it is simultaneously used as a tool for daily payments and for storing and transferring asset value. Bitcoin is currently widely used as an everyday payment tool by the general public in countries that lack financial services capacity or where the sovereign currency is in credit crisis and subject to external economic sanctions. In contrast, bitcoin is also used by high net worth individuals in Europe, America and Asia to store asset value and transfer assets across borders.
As far as applications are concerned, bitcoin is not subject to the laws of any particular political entity, and its transactions are confirmed by mining and consensus mechanisms. Bitcoin holders display only their address, not their identity, on the Bitcoin network, thus constituting anonymity and resistance to censorship of personal assets.
Above all, from these qualities, bitcoin has acquired the actual attributes of a borderless currency.
Three major settlement systems
Currently, letters of credit issued by the Society for Worldwide Interbank Financial Telecommunications (“SWIFT”) are mainly used for cross-border bank settlements. Previously, more efficient and less costly DIANCHUAN and DIANBAO systems were used.
Headquartered in Brussels, Belgium, SWIFT is a non-profit international cooperative organization of international banks with clearinghouses in Amsterdam, the Netherlands, New York, Singapore and Hong Kong, China, as well as hubs in each participating country, providing fast, accurate and high-quality services for international financial operations.
SWIFT operates a world-class network of financial messages through which banks and other financial institutions exchange messages with their peers to complete financial transactions. In addition, SWIFT sells software and services to financial institutions, most of whom use the SWIFT network.
SWIFT is characterized by the following.
- SWIFT requires membership. Most of our specialist banks are members.
- SWIFT has lower fees and high speeds. For the same amount of content, SWIFT costs only about 18% of a telex and only about 2.5% of a telegram.
- SWIFT is more secure.SWIFT’s encryption is more reliable, more confidential and has a higher degree of automation than that of telex.
- The SWIFT format has standardization. For SWIFT messages, the SWIFT organization has uniform requirements and formats.
SWIFT is a private joint stock company with shareholders from its members and an executive shareholders’ meeting headed by a 25-member chairman as the highest authority. shareholders of SWIFT come from all over the world and their practical experience in financial communications has a great influence on the management of the company. The Executive consists of a group of full-time personnel, led by the CEO and under the supervision of the Board of Directors. It includes six committees, of which decision-making authority is delegated by the Board of Directors.
In order to effectively manage and supervise SWIFT, the G10 central banks have specific arrangements for supervisory and regulatory oversight of SWIFT, with the National Bank of Belgium taking the lead role in SWIFT supervision, assisted by the G10 central banks.
SWIFT’s members are divided into shareholders and non-holders. Holders (members) include banks, qualifying securities dealers (as well as qualifying investment managers), which can hold shares in SWIFT. Members have the right to elect directors and have the right to be elected as directors when their shares reach a certain shareholding.
There are 3 main categories of non-shareholders: non-participating members, affiliated members and participants.
- Non-Participating Members are those who are eligible to become Participants but have not chosen or are not willing to become Participants.
- Affiliate members are shareholding members who have a 50% direct controlling interest or a 100% indirect controlling interest in the institutional organization. In addition, the institutional organization is required to meet the requirements of Section 1 of Paragraph 8 of the Affiliate Member Regulations. That is, it must be identical to the business in which the member is involved, but must be managed under the complete control of the participant.
- The participants are various institutions primarily from the securities industry, such as securities brokers and dealers, investment managers, fund managers, and money market brokers.
The standard format of SWIFT messages has become the standard language for data exchange between international banks. The code that distinguishes each bank is “SWIFT Code”, relying on SWIFT Code, the corresponding amount of money will be accurately remitted to the designated bank.
Background on the establishment and development of SWIFT
In May 1973, 239 banks from 15 countries in the United States, Canada and Europe announced the formal establishment of SWIFT, with its headquarters in Brussels, Belgium. It was established as a non-profit organization to address the inability of national financial communications to keep pace with the rapid growth in the volume of international payment clearing operations, and was responsible for designing, building, and managing the SWIFT international network for the transmission and routing of international financial information among the organization’s members. The design of the computer network system began in 1974, and by the summer of 1977, the construction and development of the SWIFT Network system was completed and the network was officially put into operation.
After its creation, the number of its member banks increased rapidly each year. Beginning in 1987, non-bank financial institutions, including brokers, investment firms, securities firms and stock exchanges, began to use SWIFT, and the network has spread to more than 8,000 financial institutions in 206 countries and territories around the world, providing secure messaging services and related interface software for the financial industry and supporting real-time payment clearing systems in more than 80 countries and territories.
The Bank of China joined SWIFT in 1983, as the 1034th member bank of SWIFT, and officially opened in May 1985, which became an important milestone for China to connect with international financial standards. After that, all commercial banks in China and the stock exchanges in Shanghai and Shenzhen also joined SWIFT successively.
In the 1990s, except the state-owned commercial banks, all foreign and overseas-funded banks and local banks in China that can conduct international banking business have joined SWIFT, and the use of SWIFT has been gradually extended from the head office to branches, and in 1995, SWIFT set up SWIFT access points in Beijing Telegraph Building and Shanghai Long-Distance Communication Building, which are connected with SWIFT in Singapore and Hong Kong respectively. Regional processing center master node connection, providing users with automatic routing options.
Since its commissioning, SWIFT has played an active role in promoting the development of world trade, accelerating the worldwide circulation of currency and international financial settlement, and promoting the modernization and standardization of international financial business with its efficient, reliable, inexpensive and complete services. China’s Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, CITIC Bank of Industry and so on have become members of the Global Banking and Finance Communication Association. This is why PP supports only wire transfers to these domestic banks.
Limitations on the transfer of value
The current configuration of the world has its origins mainly in the great voyages of the eighteenth century. In a way, it was the era of the great voyages that gave impetus to European colonization abroad, which in turn provided the basis for European capitalism.
The current development of global trade stems from the globalized division of labor resulting from the foreign investment of European capital and the plundering of cheap labor. The global trade system was also established to facilitate the rapid transfer of European capital’s assets around the world and to preserve its value. Under this global scenario, the world’s major economies have gradually decentralized their industrial systems. As of today, only four countries (US, EU, China and Russia) have retained an intact industrial system, which has led to a fragile resilience of the world’s major developed economies and a collapse of the entire system if a single link in the supply chain goes wrong.
To address this potential risk, at the beginning of the twenty-first century the world’s developed countries used anti-tax avoidance, restrictions on cross-border investment, and attracting foreign investment to encourage companies to reduce the transfer of domestic assets or even to prohibit certain asset transfers outright.
Since 2008, the world’s financial system has become increasingly fragile, and in order to counter the political risks associated with this fragility, major developed economies have opted to supplement economic liquidity by over-issuing currencies and diluting asset values. At the same time, countries around the world have begun to limit domestic capital outflows.
From 2015 onwards, populism and trade protectionism have successively become the dominant political view in developed countries, creating uncertainties about the system of value transfer under the globalized system.
Severe centralization of development
As we can see from past developments, economic development has a clear Ether effect. The top 20 percent of the population occupy at least 80 percent of the resources, and the higher up the pyramid, the more resources a single individual or household occupies, showing an even more pronounced Ether effect. Based on the desire for resources and the desire to maintain their dominant position, those in a dominant position will try to use every advantage to maintain their position, which has led to the rise of anti-globalization trends such as populism as well as trade protectionism here in the wake of economic problems.
In 2019 a serious trade conflict erupted between the US and China, and even in 2020 the US took political repressive measures against Chinese internet companies and made a number of gains in curbing China’s international expansion. The essential reason for this phenomenon is that the United States, as the world’s leading nation, has taken defensive measures to avoid being challenged at a time when China is growing and rising rapidly.
From the point of view of the international payment and settlement system, SWIFT is nominally a neutral international organization, but in essence it is controlled by the United States, for the following main reasons.
- The United States is the initiator of SWIFT and has the largest number of members and participants in SWIFT in the world.
- The core servers of SWIFT are located in the United States.
- Nominally, the national bank of Belgium plays the leading role in the supervision of SWIFT, assisted by the central bank of the G10, and since the G10 is largely dominated by the US, the supervision as well as the development of SWIFT is also largely dominated by the US alone.
Thus the US-China conflict so far in 2018 has shown that the US as the dominant party is continuously using its advantage to squeeze the lagging catch-up party, further consolidating and expanding its advantage, which in turn leads to further concentration of resources, which makes the already serious centralization problem even more severe.
Decentralization of the settlement payment system
In 2008, in response to the hyperinflation caused by the financial crisis, Satoshi Nakamoto proposed a new inflation-resistant payment currency, Bitcoin. The value of this asset has evolved over 11 years from unrecognized to a broad consensus of value today. Perhaps even the founder himself did not expect that Bitcoin would transform from a payment currency into digital gold, and then further evolve into a value carrier and lead the trend of decentralizing the world’s economic development.
Decentralization, in essence, enables the system to get rid of the control of a single entity, and enables the system to operate in a more balanced state through a balance of power, responsibility and obligation. Under this system, participants are stakeholders who can take responsibility and reap benefits according to their own abilities. Along with the dispersion of resources and decision-making power, the overall decision-making efficiency will inevitably be reduced due to various interest games, but since common interests always exist, the multiple parties involved in the game will eventually reach an agreement and make a decision anyway.
Therefore, from some perspectives, the decentralized governance model offers a higher fairness of market participation through limited efficiency sacrifice.
As far as the current international value transfer payment system is concerned, it mainly relies on SWIFT as a centralized system. In such an environment, in order to avoid the monopolization of resources by a single national entity, countries around the world are inevitably looking for a new settlement payment system to break the current constrained situation.
The impact of CBDC developments on the settlement system
CBDC (Center Band Digital Currency) is a sovereign digital currency issued by the central bank, CBDC has the same validity as traditional fiat currency, its value is endorsed by the central bank, and it is subject to inflation.
CBDC is a newcomer, and its birth is rooted in the fact that the development of digital currency has threatened the traditional monetary system. At the same time, countries around the world have found that electronic payment (Electric Payment) has great potential in daily application and capital circulation supervision, which can effectively improve the shortcomings of the current monetary system.
In the traditional international monetary settlement system, in order to carry out foreign exchange and domestic cash management, countries around the world often have strict restrictions on bringing in and taking out fiat currency, and if you need to make a large amount of settlement, you must go through SWIFT, which is a serious obstacle to the cross-border asset value transfer and will greatly reduce the efficiency of cross-border circulation of assets.
CBDC fundamentally solves the problem of cross-border asset value transfer. As a blockchain-based digital currency, only a smartphone is needed to transfer funds across borders, which means that the physical barriers in the original cross-border transfer of assets no longer exist, which will also pose a serious challenge to the existing international payment and settlement system as well as national sovereign currency management.
On the other hand, if there is only a need to consume and pay, the act of converting into local currency through fiat currency gradually exposes the shortcomings that exist in the current monetary system. As exchange rates between countries change all the time, it is difficult to pay and consume in a country or region simply by bringing in a third country’s sovereign currency. To pay and consume, it is necessary to convert third country CBDC holdings into the legal tender of the host country or region through other instruments or currency conversion tools.
In response to this new change in trend, there is an urgent need for a new cross-border asset settlement or asset transfer system.
Changes and compromises in the settlement system
Since a change in the transnational asset settlement system is inevitable, the option left behind must be to embrace the change: a new transnational asset settlement system with encrypted digital assets at its core and blockchain technology at its base.
In the new transnational asset settlement system, blockchain technology will be introduced more often to minimize credit costs. In this system, a single national CBDC will anchor a package of cryptographic digital assets such as Bitcoin, Ethereum, etc. and other national CBDCs that have established a consensus on value and thereby establish a stable benchmark for value conversion.
To improve operational efficiency, decentralized automated market makers as well as smart contract technology should be introduced in the new system. The former ensures asset liquidity and automatically matches counterparties so that assets can be traded in real time. The latter ensures the security of the transaction, so that each party involved in the transaction can obtain the corresponding profit protection.
Now that the digital blockchain system has been applied, why can’t the two CBDCs be directly exchanged and have to go through a currency basket similar to the World Bank’s SDR? This is mainly due to the fact that it is difficult to adequately support the stability of its price as a result of direct exchange, which would lead to the collapse of the price chain as a whole if this were to happen.
In terms of future developments, digital borderless currencies will play a far greater role in the world economic system in the future than they do in the present.