Can CIPS Replace SWIFT? Insights from Bank of China's Former Vice President

Former Bank of China VP Wang Yongli: CIPS Should Separate Fund Account and Messaging Systems

Below is the translation of the op-ed published by Wang Yongli regarding the international payment system. The piece is named “Can CIPS Replace SWIFT?“ and was published on his WeChat public account on May 29.

Wang is the General Manager of China International Futures Co(CIFCO). He also served as the Vice President of the Bank of China and SWIFT's First Mainland China Director. That experience added credibility to his analysis.

In general, SWIFT is simply a messaging and communication system within the broader international payment and settlement framework. Any attempt to replace SWIFT with CIPS would require other countries to accept Chinese oversight of the messaging system—a requirement that would likely deter widespread international participation. Therefore, CIPS should focus on building its fund account infrastructure while maintaining a separate messaging system.

Wang Yongli

Below is the translation I made; it’s a bit long for professionals, but I’ve found it very informative for outsiders like me.

Following the outbreak of the Russia-Ukraine conflict in February 2022, Western nations swiftly imposed coordinated sanctions on Russia, including the freezing of more than $300 billion in Russian official reserve assets and the exclusion of seven major Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication). This unprecedented action raised significant concerns among many nations, including China. In response, there were growing calls to accelerate the development of China's Cross-border Interbank Payment System (CIPS) as a potential alternative to SWIFT. Similarly, Russia and several other countries began actively developing their own cross-border interbank payment systems with the aim of reducing their dependence on SWIFT.

However, the notion of replacing SWIFT with individual national cross-border payment systems is both impractical and unlikely to succeed.

To understand why, it's essential to have a clear grasp of how the international payment and settlement system operates.

The Structure of International Payment and Settlement Systems

When countries or regions with different currencies engage in trade, investment, and other economic exchanges, several key elements must be established. First, the settlement currency must be specified in the economic contract. Second, the payment and receiving accounts must be clearly identified, along with the corresponding banking relationships for transfers. Due to high costs, low efficiency, and regulatory challenges, direct cash payments have been largely replaced by clearing institution transfers and book-entry settlements. Third, accurate payment messages and a secure, efficient transmission system are required to complete cross-border payments and settlements. The accounting system and payment messaging system are two indispensable components of international payment and settlement.

Beyond the basic requirement for parties to maintain bank accounts for payment and settlement, banks must establish interconnected settlement channels. While banks could theoretically maintain bilateral settlement accounts ("correspondent accounts") with each other, this approach becomes impractical due to the large number of accounts required, complexity in managing minimum balance requirements, overdraft limit settings, and interest rate calculations and methodologies. Instead, a "centralized account" system is typically employed, where a central institution (usually the central bank) serves as a clearing hub. All banks maintain settlement accounts with this clearing center, enabling settlements between all participating institutions through a single point.

Theoretically, a global international clearing center, perhaps operated by the Bank for International Settlements (BIS), would be ideal. However, this remains impractical because countries maintain sovereign control over their currencies, cross-border transfers must comply with regulations set by currency-issuing nations, and BIS currently serves primarily as a coordination body for about 60 central banks. As a result, individual countries have established their own cross-border payment and settlement centers. Given the complexities of multiple currencies, integration with international payment messaging systems, and distinct operational risks from domestic settlements, capable countries typically establish separate cross-border payment clearing systems that connect to domestic clearing centers while maintaining risk isolation. For example, the US uses Fedwire for domestic clearing and CHIPS for cross-border transactions, while China employs CNAPS domestically and CIPS for cross-border settlements.

In a system of sovereign currencies, global currency flows ultimately originate from issuing countries, which maintain primary jurisdiction over their currencies, with offshore management remaining secondary or supplementary. Therefore, only CHIPS can serve as the global clearing center for USD, and only CIPS can serve as the global clearing center for RMB, and these systems cannot readily replace each other. Even the US cannot claim ultimate jurisdiction over other countries' currencies. Due to monetary sovereignty, cross-border payment systems typically limit direct membership to domestic institutions (including foreign institutions operating domestically), while foreign institutions must participate indirectly through member institutions acting as intermediaries.

Payment Messaging Systems

For clearing institutions to transfer funds from a payer's account to a payee's account, accurate payment messages are essential as the basis for ensuring timely and secure fund transfers.

Cross-border payment messaging is considerably more complex than the account system structure. It encompasses multiple elements: different currencies, languages, and legal systems; the names, addresses, and account numbers of both paying and receiving parties; contract names and reference numbers; bank names, addresses, and system codes; as well as message formats, standards, and encryption rules. Moreover, the transmission and processing of payment messages require specialized networks, equipment, and systems. If there were no uniformity, standardization, or sharing mechanisms – if each clearing institution or country had to establish separate payment messaging rules and operating systems with every other institution or country – the result would be extremely complex, inefficient, and prohibitively expensive. Therefore, the most logical solution has been to separate the payment messaging system from the accounting system, establishing a globally unified, professional, neutral, and shared payment messaging infrastructure that operates independently while maintaining connections with each country's account systems.

This necessity led to the creation of SWIFT (Society for Worldwide Interbank Financial Telecommunication), which focused specifically on developing a specialized cross-border payment messaging system. SWIFT has since evolved into a global organization for payment message management and processing that spans the entire world.

SWIFT is Only a Payment Messaging System

SWIFT was established in May 1973 in Brussels, Belgium, initially by banks from six European and North American countries actively engaged in international payment settlements. This development came at a time when countries lacked standardized payment messaging systems and dedicated message transmission networks, and postal services were inadequate for the growing needs of international trade and financial transactions. The organization began with 239 banks from 15 countries. Its mission was to provide the world with "centralized, professional, neutral, and shared" payment message management and processing services. SWIFT established an independent corporate governance system and management rules: the Board of Directors serves as its primary decision-making body with three-year terms; directors must be representatives of commercial institutions rather than government officials (including treasury and central bank officials) to avoid political conflicts; board seats are allocated based on business volume rather than equity investment; and while founding member countries can have up to two director seats, other countries are limited to one, with the total board not exceeding 25 directors.

Following its establishment, SWIFT's professional and efficient services attracted an increasing number of institutions from various countries. As membership grew and operations expanded, its cost advantages became more apparent. SWIFT quickly evolved into the world's most important organization for cross-border payment message standardization, management, transmission, and processing. It has become a crucial infrastructure within the international payment and settlement system, playing a unique and vital role.

It's important to understand that SWIFT is not the entirety of the international payment and settlement system but rather just its messaging management and communication component. SWIFT members don't maintain settlement accounts with SWIFT itself; the system merely connects with various countries' account systems to facilitate cross-border fund transfers and settlements. While SWIFT significantly enhances the efficiency of international payments and settlements, international transactions can still occur without SWIFT – albeit with significantly higher costs and lower efficiency.

SWIFT is not an American company, and the United States holds only two board seats, precluding exclusive control. While the chairman is typically American (with a European usually serving as CEO) due to U.S. international influence and the dollar's dominant transaction volume, SWIFT's Belgian registration and predominantly European board composition make it more subject to EU oversight. Unilateral U.S. control is impossible without EU cooperation - only joint US-EU action can exercise decisive influence.

Prior to 911, SWIFT maintained strict business neutrality and data confidentiality, adhering only to UN and EU requirements on matters such as anti-money laundering. It remained apolitical and avoided unilateral sanctions, even serving Soviet bloc countries during Cold War tensions. However, post-9/11 U.S. counter-terrorism pressure led SWIFT to grant access to dollar-related data, which subsequently facilitated financial sanctions against countries like North Korea and Iran. Following the 2022 Russia-Ukraine conflict, SWIFT swiftly disconnected seven Russian banks (later expanded to nine). This evolution of SWIFT into a US-EU policy instrument has marked a significant departure from its founding principles of neutrality, triggering widespread international concern.

The complete SWIFT exclusion of a country essentially signals the intention of the US-EU to sever economic ties, explaining why only select Russian banks were removed rather than implementing a comprehensive ban. Such actions tend to unite excluded countries, potentially catalyzing new economic alliances and alternative payment systems. This fragmentation risks global stability and could ultimately diminish both US-EU influence and SWIFT's operational scope. While excluded countries can technically establish alternative messaging systems based on SWIFT protocols and modern technology, these face significant challenges: high fixed costs, limited participants, and reduced transaction volumes make matching SWIFT's efficiency and cost-effectiveness nearly impossible. Consequently, voluntary SWIFT alternatives remain economically unfeasible - they become viable only when countries face complete exclusion and severed US-EU economic ties.

As a critical global financial infrastructure, SWIFT should be subject to fair United Nations oversight that transcends national interests, ensuring genuine impartiality and preventing its use as a tool for selective national sanctions. Furthermore, the global financial system would benefit from having two or more similar organizations competing and complementing each other, avoiding excessive concentration and monopoly.

Replacing SWIFT with CIPS is Not a Rational Choice

CIPS (Cross-border Interbank Payment System) is fundamentally an RMB-based settlement account system subject to strict Chinese sovereign control, where foreign institutions generally cannot become direct clearing members. Any attempt to position CIPS as a SWIFT replacement would require integrating both account settlement and messaging systems, effectively placing global payment messaging under Chinese sovereign control - a scenario unlikely to attract broad international participation. If every country were to establish its own controlled account and messaging system, the efficiency of international payments and settlements would significantly deteriorate. This fundamental challenge explains why similar attempts by various countries have struggled to succeed.

Therefore, rather than attempting to integrate account settlement and messaging systems, CIPS should focus exclusively on account system development while establishing an independent messaging component. Following SWIFT's initial model, a new strategic approach should be developed. This should adhere to principles of consolidation, professionalism, neutrality, and shared access, creating a more equitable governance structure (with China taking the lead in relinquishing state control). Offering efficient, convenient, and secure services with innovative features could attract broad participation from institutions across many countries and regions, including Western nations. Leveraging the collective strength of its member institutions, it could rapidly develop into a new global payment messaging system capable of competing with and complementing SWIFT. This represents a promising path forward!