Yours truly hates to have to be the voice of sobriety. Yes, it was really really outrageous that the US (and the EU and UK) stole all those assets from Russia and Russian companies and has no intention of giving them back. Yes, a whole bunch of countries sat up and took notice and are working on ways to be less exposed to dollar and Euro financial institutions and payment systems. One way to do that is avoid those currencies unless you really can’t escape dealing in them.

We got a lot of people very unhappy with us in 2015 during the Greek bailout negotiations when we explained, repeatedly and long form, why Greece could not escape from the tender ministrations of the Troika by leaving the Eurozone and issuing its own currency. Aside from the fact that most of Greece’s debt was subject to UK law and therefore could not be redenominated in local currency, the big spanner in the works was the huge time required: over a year to design, print, and distribute a new physical currency (that includes changing ATM hardware; the new notes can’t be the same form factor as other currencies), and years to get the new coding done, not just in Greece but in foreign banks and processing networks that will trade with Greece.

In other words, this “move away from the dollar” project has a ton of moving parts. Right now, key countries are starting to do large bi-lateral transactions involving non-dollar currencies. That’s a start but a long way from a new system. Remember it took two world wars and a Great Depression for the dollar to dethrone sterling, and that was merely replacing one dominant trade currency with another, and not potentially devising a new system that does not depend on the control and backing of a single central bank.

Observers are so keen to see progress that stories that have no bearing on the displacement of King Dollar are nevertheless presented as meaningful. For instance, consider this story from Thai Examiner, Thailand teams up with other Southeast Asian nations to create a new cross-border QR code payment system:

On Monday at the G20 Summit in Bali, Indonesia, Thailand’s central bank joined with those of Indonesia, Malaysia, the Philippines and Singapore in a memorandum of understanding to facilitate cross-border electronic payments between the 5 countries without converting to the US dollar using a quick response QR code system.

In Thailand’s internal commercial payments sphere, the movement away from the use of business cheques has already begun with a 16% reduction seen in 2021 and a corresponding transfer value decrease of 12%.

The Bank of Thailand estimates that an accelerated pace in the takeup of digital payments will increase overall economic activity.

It is targeting 800 transactions per person per year by the end of 2024.

Payments system expert Clive had to rouse himself to say that the dollar should never have been part of these transactions, hence eliminating them was not meaningful from a “role of the dollar” perspective:

These “everyone is moving away from the US$“ stories are becoming a little tedious in their repetitive misunderstandings of the subject.

Cross-border payments only involve the dollar if one side (or both sides) of the transaction are denominated in dollars. In my TBTF, we settle £ to €, ¥ or other major currencies such as the Swiss franc etc. without any round-tripping in US$s. I can’t think why banks in Southeast Asia would be bringing dollars into the equation. They’ll simply maintain correspondent accounts in the various national currencies they handle.

It sounds like, for some transactions, some recipients prefer dollars (maybe because they price in dollars or perhaps with volatile currencies if their input costs are dollar-driven, they’d prefer to avoid currency risks and denominating in dollars is a cheap hedge against them). Well, if one party is selling and wants paying in dollars (and/or the counterparty is buying in dollars) then, duh, you’re using dollars.

Trying to wean commercial settlement off dollars is laudable, but you have to fix the issue which leads B2B transactions being denominated in dollars in the first place. A new payment system brings nothing to that particular question.

As for setting up a new payment system, that’s easy. Software vendors are falling over themselves to sell you a “payment system in a box” solution. I could run one from my garage, if I felt so inclined.

Implementing the software isn’t the difficult part. The difficult part is, who puts up the capital? All payments systems need to be capitalised to a degree. If there’s no currency risk, the float can be very (very) thin because you only have to contend with technical issues affecting payments — although once you scale up, even teeny tiny reserve requirements get to be fairly meaty monetary amounts because of the volume and cumulative value of transactions gets big. But bring in currency risks and someone has to put up real money.

So what is the cost of your capital and who covers this? And what are your operating costs (manufacturing and distribution of physical tokens, ongoing system maintenance, process design, legal bills, regulatory filings and compliance)? These drive your fee structure and buy/sell spreads. As it takes a while to get economies of scale, who covers the startup costs and subsidies needed while you acquire customers? How do you integrate with existing payments systems? Many are walled gardens and are under no obligation to let you play there. If you go it alone with a ring-fenced merchant or end user infrastructure, how do you persuade users to run two systems side by side?

And how are disputes arbitrated? In what jurisdiction? If you’re potentially engaging in a transaction worth the equivalent of hundreds of millions of dollars, you can’t afford to run any possibility of legal uncertainty around the payment settlement. EU, US and U.K. domiciled payment systems fall under courts which are, for the most part, unbiased and fair. No commercial concern wants to end up having a payment dispute governed by legal systems which are subject to and, alas, all-too-often succumb to, political influence.

There’s lots more, which is probably why coverage of this subject gets treated in such silly ways, but that’s the gist of it.

Again, your humble blogger is not disputing that there is a lot of thought and effort being put into reducing dollar dependence, but it’s a far bigger and more complex task than most imagine.

This entry was posted in Currencies, Economic fundamentals, Free markets and their discontents, Globalization, Legal, Payment system, Regulations and regulators on by Yves Smith.