When Russian banks were banned from using the US dollar-based SWIFT in response to the Ukraine invasion, Chinese media said the CIPS could work with Russia’s SPFS to counter the restrictions.
The move by the US, the UK and the EU to cut some Russian banks' access to SWIFT is giving other rivals like China the opportunity to promote its own payments systems in global trade and finance to reduce the international clout of the dollar.
What are SWIFT and CHIPS
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a global messaging system that relays instructions from one bank to another. Based in Belgium and overseen by the central banks of a Group of 10 countries, SWIFT was established in 1973 and connects about 11,000 financial institutions around the world. It is not a payment system as such, but a secure platform to communicate cross-border payment instructions among banks. At present, SWIFT is used by 200 countries and territories.
On the other hand, CHIPS or the Clearing House Interbank Payments System, is a 43-member private club of financial institutions. Members of CHIPS settle $1.8 trillion in claims every day with the help of a pre-funded account at the Federal Reserve. CHIPS is subject to US law.
In order to shrug off the power of CHIPS and SWIFT, China had established the Cross-Border Interbank Payment System, or CIPS, in 2015. CIPS settles international claims through the independent international yuan payment and clearing system. It has the potential to run its own messaging network, although it has been using the SWIFT as its communication channel since 2016.
After its launch in 2015, 19 banks, including Standard Chartered, Deutsche Bank, HSBC and Citibank, had signed up for phase one of CIPS. In January 2022, CIPS had 1,280 users across 103 countries, the South China Morning Post reported.
Russia has its own system
In 2014, after the invasion of Crimea, the Central Bank of Russia established its own messaging system called the System for Transfer of Financial Messages (SPFS). As of 2020, SPFS had over 400 registered financial institutions. Unlike the SWIFT which works 24/7, SPFS operations are conducted during working hours. The system also limits the size of messages to 20 kilobytes.
Can CIPS help Russia?
When Russian banks were banned from using the US dollar-based SWIFT in response to the Ukraine invasion, Chinese media said the CIPS could work with SPFS to counter the restrictions.
Xinhua and the Communist Youth League Central Committee’s website quoted Chinese researchers as saying that the two systems together would continue to grow and become an important global interbank payment system.
The SWIFT ban does not prevent Russia from continuing international trade and clearance, but makes SPFS or CIPS more viable as a new choice, Dong Xiaopeng, deputy editor-in-chief of China’s Securities Daily, said.
“Of course, CIPS and SPFS systems are still smaller than SWIFT in terms of the number of participants and users, but over the long run, it is not impossible that the duo or one of them will grow into an important regional or even global infrastructure with considerable influence,” Xiaopeng said.
Long way to go
As 40 percent of the world’s international claims are settled in dollars, CIPS, whose share is 3 percent, will not yet be able to topple CHIPS.
According to SWIFT’s own data, the platform moves 50 million messages a day. CIPS does only 15,000. SWIFT’s messages enable transactions worth $5 trillion across the world each day. CIPS has 1,205 indirect participants and 75 direct participants, while SWIFT has 11,000 members.