The crisis in Ukraine has been a stark and stirring reminder of the need for a united Western world. For too long, the West had neglected its role as a bulwark against Chinese expansionism and Russian revanchism — and forgotten that unity between Europe and America helps hold the global order together.
That idea — that the West has a unique and indispensable role in promoting global stability — has been reinvigorated. European nations are arming up; even Germany is doing what was once thought unthinkable and is rebuilding its military.
Which is why it is so puzzling that, in another area where global order matters a great deal, the United States neglected the need for leadership and urgency. Consider President Biden’s executive order on digital finance. For investors, builders and thinkers in this space, the directive was mostly a “meh” moment.
It simply encouraged various executive agencies to conduct research and write reports. Notably, it didn’t unite the West around the future of finance — one that could be moved in the direction of openness, fairness and transparency.
The half-hearted executive order comes amid a clear demonstration of how private finance and global security are linked. As part of the international community’s actions against Russia, seven Russian financial institutions were removed from the Belgian-based Society for Worldwide Interbank Financial Telecommunication (SWIFT.)
SWIFT’s primary product is a messaging service that allows international banks to make wire transfers. But while these Russian banks will have more trouble making such transfers, they aren’t prevented from moving money internationally; it simply makes doing so more cumbersome and expensive.
But SWIFT’s actions still speak volumes. The SWIFT decision affects what is known as the “interoperability” of the sanctioned Russian banks. The Belgian cooperative didn’t seize assets or raise rates; it simply made it harder for Russian banks (and their customers) to communicate and work with other financial institutions around the world.
The U.S. government can take a lesson from this: Financial systems accrue power to the degree they can work well with others in a stable way. This isn’t a new idea: The dollar’s status as a reserve currency is based in part on trust, stability and the rule of law. But just because the U.S. dollar is the reserve currency does not mean that the United States will, by default, own the reserve platform of the crypto future.
Who will? The entity (or group) that owns and creates a trusted set of payment rails. Just as SWIFT became the “Good Housekeeping seal of approval” for banks, so a future entity will connote trust, safety and stability for crypto transactions. The same values that vaulted the dollar to its reserve status can guide the United States in shaping the reserve platform of the future.
China understands this dynamic. It has been developing and promoting its digital yuan, a central bank digital currency, since 2014. The digital currency push is driven by the same expansive ambitions behind China’s multi-country Belt & Road development initiative. But so far, the digital yuan hasn’t caught on. One key reason: Mistrust about China, and a skepticism that the government would safeguard personal financial information.
Compare this with SWIFT. In 1979, more than 200 banks from 15 countries united to create a private-sector utility to smooth the friction in global finance. There are two crucial lessons to be learned from this history: First, SWIFT wasn’t a country’s solo endeavor. And second, privately held banks created a private-sector utility based in Belgium.
In other words, no one government owns SWIFT, nor could one institution bend SWIFT to its whims. And yet, today, SWIFT member banks can take coordinated action in the face of a crisis, while China can’t force its currency upon the world even when the world drops by for an Olympic visit.
The United States must exert its influence and effort on defining the norms, values and operations of the future’s reserve platform, and indeed, the future of the financial system in general. Such an effort isn’t just about arcane matters like cryptography and payment mechanics. As the crisis in Ukraine has revealed, payments are a crucial tool in the maintenance of global order — one that the United States and its allies must imbue with Western values.
