Alternative Payment Systems Pose ‘Long-Term Threat’ to US Dollar Supremacy, Experts Warn

A $1 U.S. banknote is seen in this illustration taken on May 26, 2020. Dado Ruvic/Illustration/Reuters

A potential long-term threat to the U.S. dollar as the chief global reserve currency is the expansion of alternative cross-border payment systems, including the ones developed by China and Russia, according to a panel of experts.

Countries worldwide, especially adversaries to the U.S. government, have been developing a wide range of cross-border payment systems. While many of these efforts have yet to mirror the size of Western structures, they could pose a serious challenge in the long run.

“I think that this is a long-term threat, and it really requires for the countries that are pushing alternative payment systems to build economic relationships, to build commercial relationships, and to start trading in the one outside of established bilateral relationships,” Carla Norrlof, a senior fellow at The Atlantic Council, said at a hearing of the House Subcommittee on National Security, Illicit Finance, and International Financial Institutions on June 7.

SPFS and CIPS

After annexing Crimea, Russia endured a barrage of economic and financial restrictions and sanctions. Realizing it would need to diminish its dependence on the greenback, Moscow established a substitute for the Society of Worldwide Interbank Financial Telecommunication (SWIFT): the Financial Messaging System of the Bank of Russia, also known as the SPFS.

Moscow has been attempting to bolster this financial transfer system since it invaded Ukraine, which resulted in the Eastern European country’s SWIFT ban.

Iran, cut off from SWIFT in 2018 because of U.S. sanctions, connected its SEPAM national financial messaging service to the SPFS in February. The two countries have accelerated bilateral trade over the past 18 months, totaling more than $4 billion in 2022.

In April, India established a landmark agreement to adopt the SPFS when executing banking payments to Russia. With both sides boosting trade over the past year, leaders realized this arrangement would be advantageous, particularly as it supports many payment systems and protocols in each nation.

For some experts, China’s Cross Border Interbank Payment System (CIPS) could be the biggest threat.

CIPS, a payment system that provides clearing and settlement services for users in cross-border yuan payments and trade backed by the People’s Bank of China, was introduced in 2015 as part of a broader campaign to internationalize the Chinese yuan.

Despite having a smaller number of participants than SWIFT—about 1,400 financial institutions compared with roughly 11,000—CIPS processed more than $14 trillion in transactions.

Chinese 100 yuan notes and U.S. dollar notes in Beijing on Jan. 6, 2017. Fred Dufour/AFP via Getty Images

In March, when Brazil and China announced an agreement to use the yuan and real to settle bilateral trade, Brazilian authorities confirmed they would connect to CIPS.

Dr. Daniel McDowell, an associate professor at the Maxwell School of Citizenship & Public Affairs at Syracuse University, said he thinks the short-term objective for Beijing is to cushion the blow of a possible sanctioning package from the United States in the event of a military conflict with Taiwan.

“Their focus is on trade settlement, in cross-border payments. That’s where I think we’re seeing most of the developments right now,” he told lawmakers, adding that these types of mechanisms are being viewed as “sort of a rainy-day option in the event of a future targeting.”

Today, the yuan’s share of global payments is less than 3 percent. By comparison, the dollar accounts for roughly 40 percent of international payments, followed by the euro’s 35 percent.

However, from a long-term perspective, enhancing the yuan’s prevalence through an apparatus such as CIPS “will eliminate their reliance 100 percent on using the dollar and the dollar system.”

Norrlof said she agrees that these efforts are “very limited now” but are still “something to track.”

Local experts have warned that the government needs to be ready for all scenarios.

“China should prepare for the worst-case scenario of being excluded from SWIFT, and actively promote cross-border use of the yuan,” Harbin Bank executives Wang Jiehua and Qiao Liqun wrote in a publication associated with the People’s Bank of China.

Days after Russia’s removal from SWIFT, Goldman Sachs warned that repeatedly weaponizing the dollar and employing financial sanctions to achieve foreign policy objectives “could compel other actors to try to replace dollar transactions.”

Throwing Sanctions on the BRICS Wall

Subcommittee Chairman Blaine Luetkemeyer (R-Mo.) noted in his opening statement that “carrying out sanctions too broadly” can result in negative effects and undermine dollar supremacy.

“Because of the formidable impact that even U.S. unilateral sanctions can have, adversaries—and even some friends—have sought alternative payment methods and systems,” he said, citing BRICS (Brazil, Russia, India, China, and South Africa) and their basket-reserve currency proposal as an example.

“While I don’t think this idea is practical at the moment, something like it could materialize in the not-so-distant future,” Luetkemeyer said.

Marshall Billingslea, a senior fellow at the Hudson Institute, explained to lawmakers that SWIFT is essentially “the only game in town” because of the dollar hegemony. The BRICS countries don’t like the de-SWIFT-ing of Russia because “they can see it being done to their banks in a crisis,” he noted. But with very few dependable alternatives, it will be difficult for the bloc of nations to emulate the power and volume of SWIFT.

This summer, the BRICS bloc will convene in Johannesburg. The summit is expected to feature a discussion about the creation of a common currency mechanism for multilateral trade that abandons the U.S. dollar.

Following a meeting of BRICS foreign ministers in Cape Town last month, it was revealed that the coalition of countries is looking to devise a shield to protect themselves from the possible impact of sanctions similar to those slapped on Russia.

Naledi Pandor, South Africa’s minister of international relations, informed reporters that the group of emerging economies seeks to ensure that they “do not become victims to sanctions that have secondary effects on countries that have no involvement in issues that have led to those unilateral sanctions.”

The meeting also assessed several other priorities, including the odds of more countries joining the coalition and the expansion of the New Development Bank (a World Bank alternative).

A key drawback in a payment system developed by the likes of Brazil or Russia is confidence. Because most of the BRICS members operate autocratic governments and are prone to currency manipulation, enhancing worldwide adoption of these currencies or payment apparatuses would take a lot of work.

Still, according to MacDowell, the only two markets that could construct appealing cross-border payments networks would be China and Europe.