Yao Qian: International currency is the ideal application scenario for blockchain.

In recent times, the release of the Libra whitepaper by Facebook has garnered global attention. There are three main reasons for this: Firstly, Facebook boasts a large user base, representing nearly one-third of the global population, which allows Libra to quickly expand on a global scale through its ecosystem. Secondly, Libra actively integrates with the existing banking system, adopting a model similar to stablecoins by pegging to a basket of currencies and low-risk assets, aiming to solve the issue of cryptocurrency price volatility. Thirdly, Libra addresses the pain points of current cross-border payments by proposing a new international payment solution, offering a fresh option for reforming the international payment system.

Original Title: "Reform of the International Payment System and Blockchain Technology"
Author: Yao Qian, working at the Technology Supervision Bureau of the China Securities Regulatory Commission
Source: "Contemporary Financier" Magazine, Issue 1, 2020

This article focuses on the third aspect, analyzing the pain points of the current international payment system and improvement strategies, as well as providing suggestions for further advancing global financial infrastructure interoperability.

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The global cross-border payment and remittance settlement of funds currently rely mainly on the SWIFT system (Society for Worldwide Interbank Financial Telecommunications) operated by the global interbank financial telecommunications association. From a business logic perspective, banks providing cross-border services need to connect to the SWIFT system before conducting business. If a bank does not have the qualifications to connect, it must rely on another bank with SWIFT access to act as its agent bank to conduct cross-border business. For example, if a parent in China wants to send money to their child studying in the United States, the parent's bank or its agent bank in China must be connected to the SWIFT system, so that the funds can be transferred to the bank in the United States through the SWIFT system; at the same time, the child's bank in the United States must also be connected to the SWIFT system. Otherwise, they would also need to rely on an agent bank in the U.S. to receive the funds from the SWIFT system and then transfer them to the child's bank in the U.S.

The entire SWIFT system has long been criticized for its many links in the business process. The problems it causes include: low efficiency, high "toll fees," difficulty in effectively troubleshooting problems that may arise during payments, inherent risks, and low transparency. The completion process and time of cross-border payments are like being in a "black box." Admittedly, SWIFT is making improvements to its entire payment settlement system. For example, in early 2017, it launched the Global Payment Innovation (GPI) initiative, intending to work with banks participating in SWIFT to establish new cross-border payment standards, aiming to increase the speed, transparency, and predictability of SWIFT's cross-border payments. However, the continuous emergence and evolution of new technologies leave room for greater improvements in the international payment system.

This improvement idea aims to transition the traditional multi-layer account-based clearing and settlement method between commercial banks to a blockchain system to minimize intermediate links and even achieve point-to-point payments. The highly discussed Libra project is a representative of this improvement idea.

In fact, the industry has long been exploring this idea, such as Ripple Labs' operation of Ripple coin. Ripple provides a cross-border payment solution based on blockchain technology, offering customers interoperability between different currency payment systems. Customers first convert their local currency into Ripple coins, then exchange these coins into another country's currency, completing the cross-border payment process through Ripple's native asset on the blockchain. In contrast to Libra's assertion of establishing a "simple, borderless currency" and actively embracing regulation, Ripple prefers to call Ripple coins "Digital Bridge Assets" (DBA) rather than "tokens." Ripple's relatively low-key positioning is intriguing.

This improvement idea believes that, in a sense, the difficulty of cross-border payments does not lie in technology. If central banks from all countries unite and connect their payment systems, the issue can naturally be resolved. For example, connecting the U.S. Federal Reserve's Fedwire, the New York Clearing House's Chips, the U.K.'s Chaps, the EU's Target, with China's HVPS (High-Value Payment System) would create a globally interconnected financial infrastructure.

This approach continues the existing account system, intending to achieve lower layers' interconnection through upper-layer connectivity. However, this method not only complicates cross-border fund flows involving more complex international legal jurisdiction and financial cross-border regulatory issues but also requires further analysis and arguments to determine if it is more efficient than the current SWIFT model.

This improvement idea emphasizes that commercial banks should collectively participate in building payment infrastructure, allowing for the establishment of new cross-border payment alliance systems among commercial banks in various countries. For example, the EU's "Pan-European Payment System Initiative" (Pepsi), currently supported by around 20 major European banks including BNP Paribas and Deutsche Bank, aims to establish a new cross-border digital payment system based on the jointly constructed payment infrastructure, providing participating banks with cross-border and interbank payment capabilities similar to U.S. ApplePay and China's Alipay, enabling real-time cashless payments. Compared to the difficulty of coordinating with central banks and large-value payment systems at the upper level, the difficulty of coordinating within the system is lower, and the progress is faster. Clearly, this emerging new cross-border payment alliance system is naturally suitable for blockchain technology applications.

In recent years, the most significant impact on traditional account systems has been the emergence of cryptocurrencies and the development of blockchain technology behind them, prompting more people to question the traditional payment methods based on transferring funds layer by layer from one institution account to another: Can we completely surpass the existing payment system and send funds directly from one end to the other, facilitating point-to-point transactions without the need for multiple intermediaries or layer-by-layer transfers?

This is the concept of "digital cash." The origin of this idea dates back quite early. Cryptographers have long had the idea that since emails can be encrypted, signed, and sent, could cash be treated the same way, encrypted and signed in a "digital envelope," and sent from one end to the other. The development of modern cryptography and computer communication technologies has gradually made this idea a reality. What Mark Zuckerberg repeatedly emphasized at the U.S. Congress hearing about "anyone being able to transfer Libra as easily as sending a text message" is precisely this goal, and JPMCoin, the cryptocurrency J.P. Morgan is about to launch, follows a similar concept.

Undoubtedly, under the impact of cryptocurrencies, the improvement ideas for the global currency payment system are very clear. Current central bank digital currency experiments conducted by various countries, such as the Bank of Canada's Jasper project, the Monetary Authority of Singapore's Ubin project, the European Central Bank and the Bank of Japan's Stella project, mostly involve trials of encrypted digital currencies based on blockchain technology, but are still in the wholesale (institutional end) application stage. Central banks have always been considered not adept at retail business, and there are concerns that when digital currencies are issued to the public, central banks may face high cost pressures and market demands, possibly impacting commercial bank credit operations, leading to the emergence of "narrow banks." Therefore, many central banks around the world are cautious about issuing central bank digital currencies, leaning more towards using stablecoin models. However, wholesale central bank digital currencies can completely replace existing large-value payment systems.

Furthermore, there is still much controversy in the industry regarding whether cryptocurrencies must be issued based on blockchain. Many believe the answer is yes, but others, including the author, disagree. Looking at the 40-year development of cryptocurrencies, there are both blockchain-based and non-blockchain-based cryptocurrencies. For instance, cryptographer David Chaum's E-Cash, from an academic perspective, was a successful experiment - E-Cash was not a blockchain-based cryptocurrency. Therefore, whether adopting a centralized or decentralized model, whether based on blockchain or not, whether based on accounts or value/token, as long as it can reduce the cost of cross-border payments and improve efficiency, it is worth studying and paying attention to.

However, the development direction of cryptocurrencies and blockchain technology remains the most crucial frontier hotspot, requiring in-depth research. For example, the aforementioned global interconnection of large-value payment systems can also be considered within a blockchain framework.

Criticisms of the SWIFT system are not limited to the technical level. While the SWIFT system has played an essential and positive role in global cross-border payments, clearing, and settlement, some believe that SWIFT is a monopolistic institution in the international currency payment system and often becomes a tool for sanctions and extraterritorial jurisdiction, especially in USD accounts. Therefore, many people hope to improve or even "de-SWIFT" the system. While completely de-SWIFTing is extreme and not easy, improving the existing international payment system is entirely feasible. Criticisms and dissatisfaction with the current international payment system reflect the sentiment that society does not want public infrastructure or areas with public attributes to be monopolized or controlled by certain parties. The inherent risks, high costs, and damage to social welfare from the existing international payment system's criticism and discontent are increasingly alerting the public.

Some innovative technologies may offer solutions to achieve the goal of improving the existing international payment system, such as the aforementioned cryptocurrencies and blockchain technology. It is essential to note that distinctions must still be made regarding blockchain itself. In theory, public chains are decentralized and intermediary-free, with no single party controlling the entire system; private chains are not much different from traditional information systems in essence; consortium chains are jointly controlled by recognized alliances.

On the operational front, resolving issues will not only face technical challenges but also require balancing interests from all parties. A typical case is Facebook's announcement of launching Libra, with the initial intention of building a borderless, stable-value world currency and creating a genuinely inclusive financial infrastructure. Once the news was released, various criticisms emerged, questioning the alignment of corporate interests with national interests, whether the private sector possesses public spirit, how the public can prevent Facebook from covert manipulation, and how countries can implement cross-border financial regulations for Libra.

It is evident that the situation is far more complex than imagined. The public sector possesses public spirit but lacks innovation, while the private sector has innovation but is often criticized for lacking public spirit. The "unlocking" approach is to create a "partnership" between the public and private sectors, allowing qualified and capable commercial institutions under public sector guidance to explore and construct a system that is both inclusive for the public and not controlled by any single entity. While this may sound like a dream, making dreams come true is not easy but should be encouraged.

In the international payment field, we have two levels of expectations: one is to see the emergence of a credible, globally inclusive payment platform that is not controlled by any single entity; the other is the desire for a global digital currency. Achieving the second goal is more challenging than the first. With large-scale experiments of virtual currencies like Bitcoin and Ethereum sweeping the globe, many institutions are clamoring to issue their own coins, which is clearly not a serious approach. When it comes to currency, we must still have a sense of reverence.

While these two expectations vary in difficulty, if the first goal is achieved, the second goal can also be considered. If we can connect the financial infrastructure of various countries, creating a global financial infrastructure, the next step could involve issuing E-SDR, an account-based electronic SDR, or D-SDR, a value (token)-based digital SDR on the foundation of the global financial infrastructure. The challenge lies in converting SDR into a global currency, involving complex international political coordination and bargaining, and the composition of the SDR basket currency may change with the bargaining, not necessarily remaining the same as it is now.

To achieve the first goal of constructing a globally unified, non-monopolized payment platform, it will depend on healthy competition. While the interconnectedness of infrastructure can be collectively planned, access and operation of a unified payment platform should not be monopolized. Users must have choices, and competition is beneficial for all. Only in this way can various countries and institutions effectively compete on different tracks, each showcasing their strengths, benefiting all in the process.

The current international monetary system is composed of the "Bretton Woods system - Jamaica Agreement," forming a U.S. dollar-based system. However, from an international political perspective, the essence of the international order is a system without a government, and the essence of the international community is a self-help system, with no predetermined "authority."

General Secretary Xi Jinping pointed out at the 60th-anniversary commemoration of the Five Principles of Peaceful Coexistence in 2014, "We should jointly promote the democratization of international relations. The fate of the world must be jointly controlled by the people of all countries, and international affairs should be discussed and managed by the governments and people of all countries. The idea of monopolizing international affairs is outdated, and actions to monopolize international affairs are bound to fail."

Fundamentally, the decentralized design and egalitarian philosophy of blockchain technology, with features like distributed ledger and collective verification, naturally align with the spontaneous characteristics of the international currency system. Therefore, the field of international currencies is an excellent application scenario for applying blockchain technology, whether for optimizing existing systems or exploring entirely new avenues. The key lies in coordinating various parties and building consensus.

This article is reproduced with the authorization of ChainNews. Source: ChainNews (ID: chainnewscom)

Further Reading

• Nearly Universal! China's Central Bank Digital Currency has Completed "Top-Level Design," Will Not Allow Exchange with Virtual Currencies

• Reviving the Attraction of USD! Former CFTC Chairman, Accenture Advocate Central Bank Digital Dollar

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