Latin America - The Global Financial System Is Splitting in Two. Governments in Latin America Might Be Forced To Choose Sides.
Belgium-based SWIFT is rolling out a CBDC architecture. Sanctioned Russia is targeting 2023 for a Digital Rouble for cross-border payments with China.
On 5 October, Belgium-based SWIFT reported that it now has a blueprint for a network that will coordinate Central Bank Digital Currencies (CBDCs) in the West. The announcement comes just after news of CBDC development in Russia and China.
Russia is targeting early 2023 for piloting a CBDC with China for cross border payments. The People’s Bank of China said on 19 September that a new app will expand use of the Digital Yuan across more cities. Both Russia and China are looking for ways to perform inter-bank settlements nationallly and perform cross-border payments with friendly nations after SWIFT’s unprecedented sanctioning of Russian banks earlier this year. Here is a solid look at Russian and Chinese efforts to decouple from the US system in Foreign Affairs - check it out.
The CBDCs of Russia, China and The West will likely have significant consequences for Latin American governments and their financial systems. Governments here will need to choose between one of three scenarios. The first scenario is continuity. Governments would join together and shun Russian and Chinese financial networks and settle primarily on SWIFT’s new CBDC architecture. This would mean continuity for Central Bank coordination with the existing Dollar-based financial system.
A second scenario is breaking it off. Some Latin American governments would decide to hook up their banking systems to Russian and Chinese financial networks out of preemptive sanctions protection (e.g. Venezuela, Nicaragua, Cuba, etc.) and others will adopt the SWIFT CBDC architecture. Under this scenario, efforts at Latin American economic integration would stall. If a trade bloc like Mercosur or the Pacific Alliance were to see disagreement over CBDC networks, there would be trouble.
The third scenario is a hybrid outcome. Latin American governments could find a way to gear their own CBDCs for operation with both the Western SWIFT network and the Russian and Chinese networks. Venezuela’s situation will be important to watch, since its Central Bank has already built a CBDC bridge through Russian Evrofinance while simultaneously allowing informal dollarization and transactions to continue through SWIFT. No doubt, oil companies like Chevron will be pinned to the SWIFT system and Maduro’s Central Bank will feel pressure to accommodate them.
SWIFT is still the dominant system for international and cross-border settlements. The Russian-Chinese system does not appear robust enough yet to operate with immunity from the Dollar just yet. That means Washington and its European allies will probably still find a way to sanction or constrain Russian and Chinese entities that Washington views as adversarial.
Like state-guided energy policy of the 20th century, Latin American governments will be under pressure to mold their digital financial systems to survive a turbulent geopolitical landscape in the 21st. Blockchain companies will be called in to engineer the networks on Bitcoin, Ethereum or other protocols according to Latin American interests.