Illustration: Xia Qing/GT

US media reported on June 24 that three Chinese banks may be cut off from the US dollar transaction processing channel by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). This possibility has led to consequences that are more complicated than adding tariffs. The addition of tariffs impacts the amount of exports but it doesn't completely stop them, whereas the clearance and settlement channels are either on or off. Large and medium-sized commercial banks are the core assets of the Chinese stock market. Once international service is interrupted, the impact on the market will be considerable.

SWIFT is the interbank, nonprofit cooperative organization providing transaction clearance services for its member banks. It has significantly sped up banks' clearance processes. The Clearing House Interbank Payment System (CHIPS) is an important component of SWIFT, and also the key method for transferring payments to the US dollar, processing transactions, electronic payment transfers and clearance. CHIPS deals with cash flow while SWIFT is for information communication.

SWIFT takes strictly neutral positions. However, the US has great influence on the organization, to the point that it is capable of controlling SWIFT. 

The US and its allies have taken the majority of its board seats, therefore leading the organization's decision-making. 

Additionally, the US monitors and retrieves information related to terrorism, and has done so since the September 11 attacks, citing the International Emergency Economic Power Act. The definition of "terrorism" is for the US to decide. They may have taken the chance to spy on institutions and personal transaction details of other countries, coercing countries and organizations that have conflicts of interest with the US.

Moreover, the US' controlling position is inseparable from the US dollar's global currency status. Though the US dollar is playing a diminishing role in international clearance, it still maintains the leading position. If a country is cut off from the US dollar clearance system, it cannot engage in overseas transaction clearance activities in dollars. It will influence every aspect of international trade, particularly for countries trading large commodities such as crude oil and natural gas in US dollars. 

There have been many cases of sanctions applied through SWIFT. Foreign financial institutions that have financial transactions with Iranian central banks and other Iranian financial institutions are banned from opening or maintaining accounts through agents. If the institutions continue to purchase oil from Iranian financial institutions, the US will cut the country's connections to the US banking system. Such harsh measures are aimed at isolating Iran's financial institutions. Iran's economy is highly dependent on crude oil. The country frequently uses SWIFT, trading crude oil for foreign exchange. Sanctions make it difficult for Iran to trade oil, and constrain other trade activities due to the lack of a payment channel. Other sanctions, on China's Bank of Kunlun and North Korean financial institutions, have interrupted China's normal business and trade ties with Iran and North Korea. 

Digital currency is a potential path to bypass SWIFT. 

Though European countries have seized many seats on SWIFT's board, and the euro is a major currency after the US dollar, their voices are much weaker than the US' within SWIFT. Otherwise, the EU wouldn't create a new, special purpose vehicle to bypass the US and its currency. China has even less say within SWIFT, compared to European countries. Which strategy can be adopted to counter risks within the international clearance system, against the backdrop of unstable China-US economic and trade relations, is an important question. 

It would be meaningless for China to depend on improving the yuan's role in the international clearance system, or to attempt to gain more say and cooperate with more parties within SWIFT. This would be similar to adding quotas within the International Monetary Fund, which does not change the US' veto power in international financial organizations. 

China has developed its own yuan-denominated Cross-border Interbank Payment System (CIPS). From the viewpoint of business processing procedures, CIPS still relies on SWIFT for cross-border messaging. Once Chinese banks split from their SWIFT arm, the yuan cross-border clearance will inevitably be influenced. It is difficult for the US-dollar flow to avoid CHIPS.

SWIFT is a product of the telegraph era. The internet era must have a corresponding international payment clearance  system. Japan has made plans to push forward an international network for cryptocurrency payments. There is a decentralized payment clearance system, Ripple, in practice. Ripple has achieved fast and convenient, multi-currency exchange services worldwide. 

It is worth noting the predicament that Libra, Facebook's new cryptocurrency, has been facing. For China, any cryptocurrency payment system is acceptable, as long as the yuan takes up more shares within the basket of currencies than the current international monetary system, and as long as it will not impair the positions of WeChat and Alipay. It is still uncertain what the cryptocurrency issued by the People's Bank of China, China's central bank, will be like. 

One thing is clear - it will be a cryptocurrency clearance system backed by blockchain technology that will overturn SWIFT. Technology will always provide new possibilities.

The author is chief economist at China Securities. bizopinion@globaltimes.com.cn