Following Russia’s attack on Ukraine last week, the NATO allies have decided to impose sanctions cutting down Russia from the global SWIFT financial ecosystem. However, this could give rise to central bank digital currencies (CBDCs), especially the one developed by U.S’s economic rival China aka the Digital Yuan.

Bloomberg analyst Andy Mukherjee writes that the key pillars of the U.S. economic stronghold are the SWIFT, CHIPS, and Dollar. Thus, weaponizing them against Russia will further convince China of building an alternative to escape American dominance.

As per reports, China has already started working to build an effective alternative to CHIPS – the Clearing House Interbank Payments System. China is building its own Cross Border Interbank Payments System (CIPS).

Just as America’s CHIPS settles international payments in the USD, China’s CIPS can settle claims in the Yuan while running over its own messaging network. But while CHIPs holds a 40% global market share, CIPS processes only 3% of global transactions.

The Bloomberg analyst writes that with the Digital Yuan which is the e-CNY, China can redefine its position in the global financial market. As per China’s central bank PBoC, the token is “technically ready” for cross-border use.

The analyst writes that China can easily persuade countries like Russia to use the e-CNY after being banned from SWIFT and CHIPS. The blockchain-based settlements done using Digital Yuan can challenge the traditional payment systems.

Why Sanctions Could Be Counterproductive?

John Hopkins economist Steve Hanke writes that putting sanctions on Russia could prove to be counterproductive to the West. In a tweet on Sunday, February 27, Hanke wrote:

Weaponizing the SWIFT international payments system might cut Russia off, but risks eroding the dollar-dominated global financial system. Indeed, it will give rise to alternative systems developed by China & Russia. Just another example of why sanctions are counterproductive.

Of course, the American economic dominance won’t be shrinking overnight. But alternative payment systems gaining strength could challenge the SWIFT and CHIPS over the next decade or two.

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