The value of a currency is based on trust. The Russian sanctions have not helped the status of Western currencies. Yet crypto currencies also have difficulty escaping Western sanctions. The digital currency issued by China’s central bank, also known as the e-yuan, is succeeding. It may gradually gain market share from the dollar.
SWIFT
Part of the Western sanctions against Russia is that most Russians no longer have access to the international payment system SWIFT. This organisation was founded in 1973 and has its headquarters in the Belgian town of La Hulpe, in the vicinity of Brussels. La Hulpe is close to the Flemish-Walloon regional border and had two famous inhabitants in the past: Toots Thielemans and Ernest Solvay. Solvay industrialised the production of soda salt and made a fortune doing so. He built a castle in La Hulpe, where, among other things, beautiful operas are held in the open summer air. But we digress.
SWIFT’s data centres are in the United States, Switzerland and Zoeterwoude. By denying Russians access to SWIFT, the country is financially cut off from the outside world. In addition to the Russian Central Bank, this measure affects business people, administrators and members of parliament. Assets have been frozen and transactions blocked.
The currency as a weapon
Currencies like the dollar and euro have been used as a weapon in the fight against Russia. It is not new, in the past the same happened to Iran, Sudan and Venezuela. Yet the use against the Russians is different. Until recently, Russian oligarchs could move reasonably freely around the globe. They chose places where they could find something they did not have at home, namely the protection of a constitutional state.
In practice, this protection has turned out to be a sham, which means that Russians will be careful with the dollar and the euro from now on. Before you know it, accounts are blocked and houses and boats are confiscated. Even in Switzerland, Russian money is no longer safe. That country did not stand in the way of the Nazis’ millions until well after the Second World War, but joined in the sanctions against Russia remarkably quickly.
The consequences in the long run are great, because besides the Russians, more globetrotters will be scratching their heads. Rich Arabs, like Russians, can also be sanctioned if the battle in the Middle East goes slightly differently than expected. Chinese billionaires prefer Vancouver, not because of the weather, but because of the protection of the rule of law. They can now rely less on that.
Crypto currency as an alternative
A simple alternative to send money around the world is through crypto-currencies. Unlike the centralised payment system SWIFT, crypto-currencies work in a decentralised manner. In theory, this makes them ideal for circumventing sanctions. Where western currencies like the dollar and the euro in theory have no value for Russians, Arabs and Chinese, the average crypto currency suddenly looks much more attractive.
Yet crypto-currencies cannot escape the law entirely. Earlier this month, the US Treasury Office of Foreign Assets Control imposed sanctions on the crypto-mixer Tornado Cash, because the company was said to be laundering money from cybercriminals. Americans are no longer allowed to use the service. This was also because Tornado Cash was used by hackers who carried out attacks against crypto exchanges on behalf of North Korea. Tornado’s source code was removed from Microsoft ‘s Github and that is new evidence that crypto currencies are not immune to sanctions, no matter how decentralised they are organised.
Crypto-currencies are also suffering from the new economic cold war. The US government is introducing more and more measures to restrict crypto-currency financial networks. In doing so, they are frustrating the policies of countries such as Russia and Iran that want to become less dependent on Western currencies.
In theory, these countries can use crypto-currencies to get around the rules, but at the same time, this allows for capital flight and creates more instability and volatility. Moscow hesitates between banning or embracing crypto-currencies. Tehran recently paid for an import with an unknown crypto currency as a test, but it is not yet in daily use.
The e-yuan is preferred
Sanctions against crypto currencies will allow the dollar to retain its status as a reserve currency for longer. But there is an alternative, and that is digital coins from central banks (CDBC: Central Bank Digital Currency), including the e-yuan (yuan and renminbi can both be used). This digital currency is linked to the Chinese infrastructure and therefore not dependent on the dollar. China can use it to facilitate transactions that are not allowed on the SWIFT system. This can help Russia and North Korea.
The Iranians want to set up their own CDBC. Now the Americans and the Europeans can also try to set up their own digital currency, but it could be that Russians, Arabs and Chinese prefer the e-yuan, because they can then park money in the Chinese financial markets. With an e-yuan, China has more control over capital flows with foreign countries. A digital currency in international payments is much easier to settle than, for example, the US dollar. Many shops outside China already accept Alipay or WeChat Pay, otherwise Chinese tourists cannot pay.
The price they have to pay for this is that China can follow these money flows. The control that the Chinese can exercise over the e-yuan outside China could eliminate capital controls at the border. That would be the next step in making the renminbi a globally accepted reserve currency. This development is also relevant for investors. At the moment, the world is dominated by the US dollar. If China succeeds in positioning the renminbi as an alternative reserve currency through the e-yuan, there will be more opportunities for investors to diversify. Perhaps in the next crisis the renminbi will be the safe haven.