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World Financial Networks
Zillion Research Labs
Los Angeles,CA USA
I. HOW MANY FINANCIAL NETWORKS ARE THERE IN THE
WORLD? (SWIFT, RTP, ACH, ETC)
A financial network is a chain of banks, traders,
organizations, and financial exchanges to undergo financial
transactions. There are millions of financial networks
running in this world who are working for the betterment of
people . Most common financial network are as follow.
SWIFT stands for “Society for Worldwide Interbank
Financial Telecommunication”. The purpose of SWIFT is to
make global financial transactions easier. The code is
universal and is governed by ISO 9362 standards. Created in
1973, the institution connects at least 11,000 financial
institutions in 200 countries and territories.
SWIFT is a system whose main function allows the
exchange of banking information and financial transfers
between financial institutions. The World Society for
Interbank Financial Telecommunications is a cooperative
body between financial institutions. Therefore, SWIFT is a
type of service often used for transfers between institutions
in two or more different countries or even for those who
operate investments abroad .
B. The importance of SWIFT in the global financial system
Since 1973, when it was created, the institution has
worked as a platform for financial communication. That is, it
allows financial information to be exchanged. In other
words, the institution does not act in the transfer of money,
as banks and brokers, but in the transfer of data.
It is based in Belgium, Brussels, at the same time
Amsterdam, the Netherlands, and New York, the United
States, set up exchange centers respectively, and set up
National Concentration centers for participating countries to
provide fast, accurate, and excellent services for international
In 1977, SWIFT had more than 150 member countries
and more than 5,000 member banks in the world. The
SWIFT system handled 3 million SWIFT
telecommunications transactions daily, with a peak of 3.3
million transactions. As of June 2007, SWIFT's services have
spread to 207 countries and more than 8,100 financial
institutions have been connected. The only one in Taiwan
with business strategy and service provider qualifications is
SWIFT Code (Bank International Code) is generally used
for power transmission, letter of credit telegram, every bank
has it, and is used to quickly process inter-bank telegrams.
Large banks like Industrial and Commercial Bank of China
and China Construction Bank also assign different Swift
codes to their internal branches.
239 banks from 15 countries in the United States,
Canada, and Europe announced the formal establishment
SWIFT, headquartered in Brussels, Belgium, is a non-profit
organization established to solve the problem that financial
communications in various countries cannot adapt to the
rapid growth of international payment and settlement. It is
responsible for the design, establishment, and management
of the SWIFT international network to communicate among
its members. Carry out the transmission and routing of
international financial information. International Interbank
Communication Association Swift was established in 1977
by commercial banks in Europe and the United States for
cross-border money transactions.
More than 11,000 financial institutions in over 200
countries pay money and pay for trade through the Swift
network every day. It is a necessary service for international
financial transactions in payments in dollars and euros. It is a
system that transacts funds through special encrypted
financial messages. A representative example of the
international community's use of this Swift for sanctions was
in 2012. The United States and the EU have forced Iran's
central bank and more than 30 financial institutions and
businesses out of Swift due to economic sanctions against
Iran. The organization, which started as 239 banks in 15
countries in 1973, has 9,000 financial institutions from 209
countries as of September 2010, and 15 million Interbank
messages are exchanged a day through SWIFT's network.
SWIFT has data centers in the United States and the
Netherlands and opened its third data center in Switzerland
in 2009. In the event of a problem in any of the three regions,
the remaining centers will be able to process interbank
Meanwhile, most of the existing financial-related systems
can process information messages written in the SWIFT
standard after receiving them regardless of whether they are
via the SWIFT network. Business identifier codes
established by SWIFT have been designated as international
standards (ISO 9362) since 1994 and are generally called
SWIFT codes. The code has a total of 11 or 8 digits and
consists of institutional/bank code, country code, area code,
and branch code. The branch code is optional, and the head
office is marked with XXXX' in place of the area code or not
C. Automated Clearing House (ACH)
It is an electronic clearing system between American
financial institutions and the most stable and efficient batch
exchange center in the United States. It provides interbank
payment, electronic payment, and clearing services to
participate in depository institutions.
ACH is highly practical and can meet high-efficiency
requirements. ACH transaction settlement generally only
takes 1 working day, which can effectively meet the general
timeliness requirements. Also, ACH charges are low,
compared to other payment methods such as wire transfers.
For example, the handling fee of a wire transfer is usually
$10-$25 per transaction, while ACH is usually only $1-$2.
Due to the simple processing process, the service providers
in each link of the value chain charge low fees and are
economical. It simplifies processing, improves efficiency,
and makes the entire payment network simple and fast.
Therefore, for inter-bank payments in the United States, the
preferred method is ACH payment.
Bank of America has strict requirements for the
management of ACH. Because it is a batch operation, the
"recipient financial institution" does not need to check the
deduction balance in real-time and then return it to the
"initiator financial institution". Under this model, banks need
to bear risks such as insufficient customer balances. The U.S.
banking industry has extremely strict compliance
requirements and technical specifications for partners,
especially for financial technology companies (Fintech) that
only accept the top and best partners.
At present, all wealth management products that are
connected through Maxim Financial already support the
ACH payment method, that is, if your customer has a U.S.
bank account, the customer can choose to use ACH payment
when paying for investment orders. Although checks are
widely used in daily life, as a paper payment method, in this
era of popular mobile/electronic payment, it is still not very
convenient. This article mainly introduces the ACH
(Automated Clearing House) transfer method in the United
States, which is an electronic payment method for
transferring funds between banks and the mainstream
payment method currently used by everyone. In 2018, the
ACH payment network processed 23 billion transfers,
including direct deposit to pay various wages and
government benefits, direct payment to pay various bills,
person-to-person (P2P) payment, business-to-business (B2B)
Paid. In 18 years, the transaction value of ACH online
payment exceeded $51.2 trillion. At present, the transaction
volume of the ACH network continues to grow. Nacha
(National Automated Clearing House Association)
announced that the payment volume in the fourth quarter of
2019 increased by 8.1% year-on-year.
D. The history of ACH
The history of ACH starts with the use of checks. In the
19th century, banks received a large number of checks from
other banks every day. Banks need to sort these checks, send
a postman, and go to other banks to exchange the checks for
cash. This method is very inefficient. Both banks have to
send personnel to withdraw cash from each other. With the
increase in the number of banks, this transaction method
requires more time to complete.
Based on this situation, Clearing House was established
to process checks between various banks. Banks hand over
the checks to Clearing House for unified processing, and
exchange checks from other banks for their bank checks.
This method greatly improves the efficiency of processing
and makes American people use checks more and more
frequently. Around the 1950s, Americans paid more than 28
million checks every day. This means that one in six
Americans uses a check every day. With the surge in the use
of checks, processing efficiency is once again facing the test.
Although there is a clearinghouse, the sorting and cashing of
checks are still done manually. The efficiency of manual
processing can no longer meet the surge in the number of
checks, and electronic payment needs to be introduced to
solve the problem.
In this business, the collecting bank will deduct the
money from the recipient’s bank account to the sender, and
the sender or the paying bank will transfer the sender’s
money to the recipient’s bank account. All transactions are in
the sender’s and recipient’s bank accounts. Transfer money
is convenient, safe, fast, and reliable.
E. Real-time Payment (RTP)
In 2017, 25 large banks in the United States started to use
the real-time payment system (RTP) launched by the
financial market utility company TCH (The Clearing House),
which changed the outdated financial infrastructure in the
United States. It is understood that TCH has been operating
payment infrastructure in the United States since the Civil
War. This shows that American banks and other financial
institutions have begun to pay attention to the importance of
real-time payment systems. Compared with other countries,
the United Kingdom has launched the RTP system as early
as 2008, and China has completed the national promotion of
real-time payment systems as early as 2005. The use of
TCH's RTP system by major US banks is also a key step for
the US to catch up with the development of RTP systems in
When small banks in the U.S. face the real-time launch
of direct competitors The payment system has refused to join
and expects the Federal Reserve to launch similar services.
Last year, the Federal Reserve (Federal Reserve) announced
that it was considering providing its real-time payment
network system and began to solicit public opinions, which
also brought the TCH RTP promotion to a standstill. In the
summer of this year, the Federal Reserve confirmed that it
will begin to establish the FedNow real-time payment
The biggest problem after the Fed’s entry into the market
is that the Fed’s FedNow and the RTP system jointly
promoted by 25 large banks cannot interoperate. This means
that the system run by the Fed will produce a branch
payment system, which may allow individuals and
businesses, individuals and Individuals, enterprises and
enterprises cannot complete instant payments in time.
II. WHO STARTED THOSE NETWORKS AND WHO MAINTAINS
Swift works under Belgian law, and it is governed by the
stakeholders that include 3500 organizations in the world. It
is maintained by a team of 25 directors.
ACH is governed by NACHA, Automate Clearing
House, which is an independent institution.
RTP is established by the Clearing House (TCH) and
other 25 banks and it is managed by the collaboration of its
III. WHAT ARE THE TRANSACTION FORMATTING RULES (ISO
ISO 20022 "Financial Services Financial Industry
General Message Program" is a sequential international
standard developed and released by the International
Organization for Standardization since 2004. It aims to
realize the straight-through processing (STP) of financial
messages and improve Market efficiency reduces transaction
costs. This standard has greatly improved the
interoperability, openness, and scalability of financial
industry messages. It is an advanced general message
scheme developed by using the network and extensible
mark-up language (XML) technology.
The standard splits the message into two parts: business
elements and technical representations, that is, a unified
modeling method (UML) independent of grammar is used to
extract, analyze and describe business fields, business
processes, business transactions, message processes, etc., and
finally The XML language describes the message definition.
The above methods provide a prerequisite for maintaining
the relative stability of messages, improving cross-domain
sharing of messages, promoting information integration, and
using other more advanced grammatical forms to describe
message definitions in the future.
As an organic whole, the ISO 20022 standard is
composed of 6 parts. The main content includes an overview
of the contents of the ISO 20022 library and input and output
methods, the role and responsibilities of the registration and
maintenance organization, service levels and processes,
modeling guidelines for building business models and
message sets that conform to the ISO 20022 standard, and
converting the model to XML grammar representation
Design rules, conversion from existing standards to conform
to ISO 20022 standard message rules, and selection of
message transmission characteristic parameters.
The ISO 20022 standard is one of the widely used
international standards. According to the information
provided by the TC68 annual conferences and ISO 20022
registration and maintenance organizations, many countries,
regions, and standardization organizations have adopted or
are planning to adopt the standard. For example, TC68 SC7
(Bank Core Business Sub-Technical Committee) has planned
to unify financial transaction card-related transaction
messages under the ISO 20022 standard, and unify the
contents of the ISO 8583 and ISO 20022 libraries; SWIFT
has formulated a plan to standardize its MT message
Gradually transition to ISO 20022, its newly developed
standards have all been based on ISO 20022 standards;
SEPA in Europe and MEPS+ systems in Singapore have
adopted ISO 20022 standards; Fedwire in the United States,
Zengin in Japan, and HKMA in Hong Kong have also
adopted the real-time settlement system ISO 20022 standard.
The People's Bank of China organized the adoption of this
standard in 2005 and submitted it to the National Standards
Committee for approval in June 2009. The securities industry
has formulated two standards under the framework of this
standard, and the bond registration and settlement field are
also using this standard for system message development.
The second-generation payment system of the People's Bank
of China and the RMB cross-border receipt and payment
information management system will adopt the ISO 20022
message standard and use this as an opportunity to realize the
standardization of interconnected messages in the People's
Bank of China system in a gradual expansion method.
A. Prospects for the application of ISO 20022 standard
The ISO 20022 "Financial Services and Financial
Industry General Messaging Scheme" standard is an
advanced universal message scheme formulated by using the
Internet and XML technology for the information exchange
problem of the financial industry. At present, the message
specification conforming to the ISO 20022 standard has been
widely used worldwide. ISO attaches great importance to the
promotion and use of standards. It has specially established
the ISO 20022 standard newspaper library for free use by the
global financial community and established the ISO 20022
registration management organization (RMG), standard
evaluation organization (SEG), and registration organization
(RA) to be responsible for this Maintenance and
management of the library. At present, following the ISO
20022 "Common Messaging Scheme for Financial Services
and Financial Industry" standards, four types of message
standards have been developed internationally. They are
Payment, Foreign Exchange and Derivatives (FX),
Securities, and Trade Services. (Trade services), a total of
265, these mature message standards have been reviewed
granted ISO 20022 Registry of standards, the ISO 20022 into
the library, as the global financial business message
standards. In many countries, the ISO 20022 standardized
development method has also been gradually applied to the
development process of some important financial industry
information systems, including the Central Bank Accounting
Data Centralized System (ACS), the second generation
payment system of the People’s Bank of China, and the
online payment interbank of the People’s Bank of China
Clearing System (EBPS), Electronic Commercial Draft
System of the People's Bank of China (ECDS) and RMB
cross-border receipt and payment information management
system (RCPMIS), etc. In the next step, the People's Bank of
China will use the practical application of the ISO 20022
standard as an opportunity to gradually establish the
"People's Bank of China System Interconnection News
Library", build the People's Bank of China infrastructure, and
promote the standardization of information system
The gradual implementation of the ISO 20022
standardization development method in the financial industry
will bring new ideas and vitality to the development of
general information systems in the country's financial
industry and lay a good foundation for information
interaction and standard unification between information
systems in the future.
IV. HOW DO THEY OPERATE? (BANK TO BANK/ BANK TO THE
Swift sends money rather than transferring funds by
using the Swift codes. SWIFT (The Society for Work
Interbank Financial Telecommunication) is a Belgian System
created to be a tool for the transmission of secure messages
on international financial transactions, through this system
interbank transactions are exchanged (orders of payment,
remittances, documentary credits, messages in free format).
It is a System that facilitates interbank transfers Provides an
encrypted messaging service to enable international fund
B. How does SWIFT work?
This is carried out when a client makes an international
transfer in favor of another, the issuing bank issues a code
that indicates how it will send the funds to the client,
indicating dates, currencies, and expenses. It can also be used
in all operations abroad, with all countries in the world, and
is mainly used to identify the bank account in international
C. SWIFT system security focuses on four main objectives:
1) Confidentiality: The information is only disclosed to
2) Integrity: Information can be trusted to be complete,
accurate, and valid.
3) Availability: Information and associated services can
be accessed when needed.
4) Trust: Every individual authorized to use the system
As a result, it has the following benefits:
• Standardization of processes
• Speed in the transmission of information
• Elimination of errors due to interpretations
• Increase in security levels (encrypted messages and
The ACH collection and payment service are to process
large inter-bank transfer transactions in a timed, batch, and
net clearing manner. First, the financial institution transmits
the transfer content to the Exchange via the Internet for
classification and settlement according to the initiator’s
application. Then the relevant bank transfers the account.
The ACH collection and payment operations of this
Exchange are handled regularly every day, that is, the system
starts every morning and accepts the ACH collection and
payment materials submitted by the proposing banks .
The establishment of the new network RTP allows users
to view and immediately use the payments received, or to
obtain credits for payments received. The RTP network
established by TCH now covers more than 50% of the users
of U.S. deposit accounts and is expected to achieve coverage
of almost every account before the end of 2020.
V. HOW DO BANK CHARTERING WORKS, HOW MUCH DOES IT
COST, HOW MANY ARE ISSUED IN THE USA?
Given the particularity of the banking industry’s high
risks, the overall nature of the crisis, and the importance of
its functions, all countries have implemented franchise
systems for them. Licensed operators have the right to carry
out banking business, and can not only obtain competition
restrictions, interest rate control, Financial control policies
such as government implicit guarantees create operating
conditions for them and can rely on the industrial attributes
and functional characteristics of the banking industry to form
operating advantages in economies of scale, information
resources, and market reputation .
A bank charter is an official document permitting a
banking company to commence business as a bank. It
authorizes banking operations. A bank charter includes the
articles of incorporation and the certificate of incorporation.
The charter specifies the rights of a banking institution. The
cost of a bank charter varies from different aspects like size,
monetary value, and other conditions. About 5177 charters
have been issued in the US till 2019.
VI. HOW ARE THESE NETWORKS MONITORING TRANSACTIONS,
WHAT TOOLS, AND WHAT METHODS?
Bank chartering is a set of laws and limitations
implemented on the bank. The banks are monitored through
the implementation of the rules mentioned in the charter. On
the other hand, the national charter provides leniency to the
VII. WHO ARE THE FINANCIAL WATCHDOGS AND HOW DO
THEY ENFORCE SUSPECT TRANSACTIONS?
Anti-Money Laundering (AML), Asian Pacific Group on
Money Laundering (APG), Caribbean Financial Action Task
Force (CFAT), Countering the Finances of Terrorism (CFT),
etc. these are some of the well-known global financial
watchdogs. Financial Action Task Force which is also
known as FATF is considered the most important money
laundering and terrorist financing watchdog. The main
purpose of this organization is to help prevent the illegal
transfer of money which may be used for unlawful purposes.
The 9/11 attacks followed by attacks in Pakistan, Turkey,
Saudi Arabia, etc. which were carried out by the Al Qaida
network, these events brought into focus the changing nature
of terrorism. The world is relying on FATF since 2001.
United Nations Security Council passed resolution number
1617 which appreciated the role of FATF in curbing the evil
of illegal money transfer.
FATF was established in July 1989 after the Summit in
Paris. Group G-7 countries decided to establish this
organization so that they can track and trace the illegal
financial transfer taking place in different countries. In the
first year of its formation, FATF gave forty
recommendations. Its recommendations were approved late
on after the event of 9/11. It is a 39 members organization
having 37 jurisdictions and two regional organizations
including the GCC and European Commission. All the
members share a common goal of diminishing illegal
A. Strategies to suspect and combat illegal money transfer:
The forty recommendations given by FATF turned out to
a cornerstone in the fight against illicit money transfer. The
policy adopted by FATF was ‘’ Know your customer’’.
Under the policy guideline, it was recommended to omit all
the anonymous bank accounts, proper identification of all
customers should be made compulsory and all the records
should be maintained for 5 years further addition was made
in the pact by allowing all the legal organizations to check
the details of customers if they are suspect. FATF also
recommended the governments to track and trace all the
laundered money because it was believed that the black
money acquired through illegal sources was used in drug
trafficking and other illicit means. If the states comply with
the FATF recommendations, then it would be quite helpful
for each country. For that, the state must give authorities a
free hand in tracking and tracing them. Another most
important point was the sharing of money laundering details
between the countries .
Financial institutions are under obligation to report
dubious transactions to the government’s Financial
Intelligence Units (FIUs). The main purpose of Suspicious
Transaction Reporting (STR) is in line with the Anti Money
Laundering (AML) and Countering the Finances of
Terrorism (CFT). AML was enacted to pinpoint the money
launderers and their supporters. It was believed that this
would help the world to get rid of the menace of money
laundering. FATF recommendations from R.13-16 are about
suspicious transactions reporting. More precisely R.13 states
that if a financial institution suspects some sort of irregularity
or malicious attempt, it must report promptly to Financial
Intelligence Units (FIU). The financial institution can cater
the case in two categories referred to as subjective case and
objective case. All the countries are required to criminalize
money laundering following the Vienna Convention and
Palermo Convention. R.13 clearly states that financial
institutions have the authority to report a suspected
transaction in the following mentioned cases which include
environmental crimes, drug trafficking, extortion, or forgery.
Once the complaint is filed by a financial institution then
criminal investigation proceeds, but all this is kept
confidentially from the customer as well as a third party. For
more efficient working of STR, it was suggested under R.15
to develop AML and CFT programs for financial institutions
.So in this way transactions are processed, and suspects
are put under investigation for a criminal offense.
VIII. WHERE DOES THE CENTRAL BANK FIT INTO THE PICTURE?
Suspected transactions are an important globalized
phenomenon in recent financial society. The country’s
financial controls are sabotaged, and dirty money is
transferred from one area to another. It is also an important
case study for tax evasion. Most of the money launderers try
to transfer money to avoid taxation and in doing so they save
millions of dollars. No doubt it is a global phenomenon, but
it is the major obstacle for the efficient working of global
financial institutions. The suspected transactions which after
investigation turn out to be illicit, have a direct impact on
central banks because it halts the efficient working of
national economies, and drives the country towards pathetic
economic policies. It has a direct impact on global financial
institutions by eroding public trust in institutions. The
launderers avoid attention by using specific techniques like
smurfing (by conducting transactions in the minimum
amount possible), invoicing, or through shell companies, etc.
These activities are conducted to mainstreaming their cash
into the financial system. It is also known as whitening black
money. 500 billion to 1 trillion dollars are laundered each
year through banking channels. A range of research has
shown that more the suspected transaction in a country more
will be de stability in that region. It threatens the integrity of
a country. Criminal underworlds are present in every
country. The conversion of illegal funds into legal can be
stopped by adopting certain standard operating procedures.
Commercial banks are preferable in case of money transfer
because they offer a variety of new ways in which money
can be transferred. foreign exchange services, bank drafts,
etc are used. The commercial banking sector has branches
throughout the world and they never hesitate to transfer small
amounts which are quite difficult to trace. Under the new
restrictions imposed by FATF customers of Commercial as
well as Central banks are quite dissatisfied under close
supervision. Governments have enacted new laws throughout
the world, and they have also taken help from technology.
The process of documentation is being introduced in banks.
For every transaction worth greater than 10 thousand dollars,
it is traced, and the customer is asked to provide the source.
In recent times the United States of America has formulated
strict laws to control the flow of illegal money (Musonda,
The central bank of Ireland has put forward a proposal
that banks need to administer programs that follow the
recommendations of FATF so that a fast and efficient
method of curbing suspected transactions could be reached.
 This can be achieved by keeping records of the
transaction and boosting the internal system of banks. If a
suspected transaction has been made, then the specific bank
should use all the necessary means to get to know customers'
source of income. Cooperation between the banks and the
transfer of information must also be maintained. Off and on-
site surveillance of financial institutions must be carried out.
Issues faced by financial institutions should also be
addressed. Capacity building process in all the institutions
should be the top priority. The central bank is that platform
that provides necessary guidelines and SOPs to all the
financial institutions, it is the responsibility of financial
institutions to devise their policy according to the Central
bank. It will help formulate centralized policy throughout a
region. FATF gave a policy statement regarding central
banks. The central bank must verify the details of the
customers. In case someone is trying to create a new account,
it should be made compulsory that all his credentials are
thoroughly verified and checked by the manager of that
concerned bank. After verification of personal details, the
customer should be asked to provide his source of income
certificate. His place of employment and his address should
be cross-checked .
IX. HOW DOES THE WORLD BANK FIT IN THIS PICTURE
World Bank is playing a pivotal role in assisting
developing countries to meet their fiscal demand. World
Bank provides financial assistance to those countries which
are facing extreme poverty. World Bank is also contributing
to stopping the transfer of illicit money by launching the
Stolen Asset Recovery unit (StAR) and Financial Market
Integrity teams (FMI). The drainage of money from
developing countries to developed countries has
impoverished the former. It has crippled the economy of
developing countries. It has been estimated that 20billion
dollars to 40 billion dollars are stolen from developing
countries each year. Due to the enormous drainage of money,
it undermines economic growth and halts the public services
to those in need. The World Bank has taken one step further
in the war against corruption by helping countries to
establish a robust system that will trace and track the
information related to the suspected transaction and it will
also trace the ultimate beneficiary of illicit flows. G8 leaders
in 2011 came out in support of the Asset Recover plan of the
World Bank. Repatriation of money is also in process. In
2013, 37 cases were solved on a priority basis. The StAR
initiative is a collaboration between the World Bank and the
United Nations Office on drug control. This group works
trans-nationally by providing all the necessary help needed to
fellow countries by providing training and infrastructural
In 2001, another organization was established under the
heading of the Financial Market Integrity Unit which is
linked closely with the World Bank. It helps to provide
transparency and a systematic approach in going after
Financial criminals are always in search of new ways to
evade justice. It is not easy to comprehend financial
irregularity. Anti-Money Laundering organizations are
always in search of money trails. Aiding and abetting
criminals is a crime therefore these watchdogs target those
specific criminals who have a certain record, or they have
done some illicit money transfer. These efforts have been
more synchronized with the advent of an intergovernmental
organization named FATF or Financial Action Task Force.
World Bank has also issued guidelines which are completely
in line with the forty recommendation of FATF.
World Bank launched its Anti Money Laundering and
Combating the Finance of Terrorism in 2001. This initiative
demonstrates that WB believes in combating corruption and
money laundering through creating an environment of trust
between countries so that they can share information. The
StAR and FMI along with WB's anti-money laundering
agenda have turned out to be a successful strategy to root out
corruption prevailing in the society. Those governments who
are willing to end these corrupt practices have joined hands
with the World Banks' reform agenda in which proper funds
and infrastructure is provided by the organization to bring
out structural changes in the legislature of a country.
Technical assistance is provided to the recipient country. It
has proven to be a very effective program because it not only
inhibits money drain but also provides capacity building
features to broaden the tax base .
Many countries have taken advantage of these capacity-
building features. In the case of Bolivia StAR has helped this
country to establish its asset-recovery unit. Many developing
countries are now demanding that the developed countries
should formulate laws that will halt the cash drain. In the
case of Pakistan, Its premier has demanded that the money
drainage should be brought back and WB and IMF should
help speed up the process. These efforts made by WB will
have positive results in near future because with the help of
technology further transparency can be achieved .
X. COUNCIL ON FOREIGN RELATIONS – WHAT IS IT, WHAT
DOES IT DO, WHO RUNS IT?
Council on Foreign Relations is a think tank organization
and works independently. It is a non-profit organization
formed in 1992 whose task is to critically analyze the current
geopolitical atmosphere especially U.S foreign relations and
also about International affairs. It is headquartered in New
York City. It comprises five thousand plus members
including senior politicians, journalists, students, lawyers,
etc. CFR conducts meetings regarding the current issues
prevailing in the world and offers a clear and transparent
understanding of issues. Since 1922 it has been publishing a
bi-monthly magazine named Foreign Policy which is highly
reputed throughout the world. They influence the foreign
policy of the United States by offering recommendations.
The members of this Council interact with diplomats and
When Germany got defeated after WWI, President
Woodrow Wilson was briefed by a group of 150 scholars
named ‘’The Inquiry’’. They met to strategize the postwar
world. The whole world knew that America is going to
expand its horizons. This team worked efficiently to
formulate almost 2000 documents that were related to
political, economic, and social changes after the War.
Woodrow’s famous 14 points on strategy for peace were the
outcome of these research scholars. In 1919 they decided to
form an organization under the banner of ‘’ The Institute of
International Affairs’’. Edwin F. Gay in 1922 decided to
publish the magazine on foreign relations for the first time.
He collected money from the wealthy people of America.
The CFR has been influencing Americans since 1922
practically. In WWII, the American foreign office adopted
the recommendation given by CFR.
CFR has two forms of membership; term membership
lasts for 5 years only while life membership is lifelong. It is
for those citizens having age between 30-36. Only US
citizens or those residing there and who have applied for its
members can apply. It also offers internship programs and
fellowships. once this fellowship is completed you can apply
for membership. Currently, Richard Hass is the president of
this organization. The council on foreign relations has
expanded itself now. It has become a global platform that
studies changes taking place throughout the world. It is not
limited to USA international affairs only rather it has
broadened its horizon to the East. It gives recommendations
related to health, economy, any form of pandemics like
Covid-19. Last year this organization gathered a fund of
almost a 76million dollars. It is not involved in some form of
lobbying or political maneuvering rather it is a think tank
organization involved in suggesting things. It is not a part of
the US government. It is a non-governmental organization
The critics of CFR believe that this organization is eating
into the vitals of American democratic society. The main
issue related to CFR is that they are highly influential people,
but they are unelected so most of the American citizens
believe that unelected members should not interfere in state
affairs. It is often termed as a school of a statesman. Those
who are moderate in their views are also not in favor of
CFR's role in politics. When Hitler invaded Poland, CFR
devised a foreign policy which turned out to be a miracle and
America won the War. These events further prove that CFR
is ingrained in US foreign policy although it is not a proper
part of the government it is somehow believed to be. It has
also worked a lot on forming a soft image of America
through the power of the press and the social media
XI. WHAT IS MONETARY POLICY?
Monetary Policy can be defined as those actions taken by
a country’s central bank to achieve sustainable economic
goals through controlling the money supply chain. Monetary
policies can be two types of expansionary or contractionary
monetary policies. The central bank controls directly or
indirectly the flow and quantity of money coming in and out
of the country so by drafting, announcing, and implementing
the new set of laws come under the jurisdiction of a state
bank. To meet macroeconomic goals interest rates are
adjusted and money supply is influenced. When there is a
meeting of monetary policy decision-makers, then the
investor's stockbrokers wait eagerly for the decisions being
made because it directly affects their businesses. Monetary
policy aims to reduce poverty by adopting socioeconomic
goals like reducing the interest rate, selling of bonds, etc. The
policy formulation is not an easy task because inputs from
various departments are collected beforehand so that a
comprehensive policy should be adopted. Gross Domestic
Product and poverty index is also under consideration before
finalizing the policy. Business-friendly policy renders more
cash inflow and which in turn proves to be a cause of the
reduction in the poverty index. The authorities are given free
hand to formulate such a policy in which the rate of
unemployment is reduced further. the foreign exchange rate
is also maintained. It can also be formulated following fiscal
policy in which the government collects taxes and manages
to borrow and selling to control economic indicators. For
example, the Federal Reserve Bank oversees the monetary
policies of America. It has a dual task to keep poverty at
minimum and employment at maximum. So, it becomes the
Fed's responsibility to attain sustainability goals while
keeping poverty at a minimum level .
Expansionary policies are brought up in a time of
catastrophes like Covid-19 when the whole world’s global
markets are in a recession so in these hard times this policy is
adopted. Interest rates are lowered down. This lowering of
interest rate favors spending and diminishes savings. Due to
the increase in spending it makes cash flow in markets and
boost in the industrial sector appear. A good example of
expansionary policy is that after the global financial crisis of
2008 many countries are maintaining zero to low-interest
rates to catalyze spending .
When the money supply chain is exceeding the targets, it
raises the cost of living and the cost of business. Here
contractionary monetary policy comes into play by
increasing the interest rates so that the cash drainage can be
controlled which in turn brings down the level of inflation.
But it has one serious disadvantage that it can slow down
economic growth which will have a direct impact on
employment. In the USA in 1980 when the inflation level
peaked at 15%, the Feds decided to increase the interest rate
to almost 20% which contributed to the recession in the
economy. But this policy brought down inflation to a rate of
3-4% in just a few months .
There are certain tools used by central banks to control
the market and cash flow. One of the tools is known as open
market operation in which bonds are bought and sold to keep
the level of cash under control. Another tool used by the
central bank is that it causes fluctuations in its rates so that
cash remains at the prescribed level. Reserve requirement is
another tool successfully used by the central banks. Apart
from contractionary and expansionary policies,
unconventional policies have also taken place and have
proved to be very functional to achieve a sustainable growth
rate. These monetary policies are used as an indicator to
predict GDP, employment, poverty of a country.
XII. WHAT IS THE CENTRAL BANK AND WHAT DOES IT DO FOR
The central bank is also known as the reserve bank or
monetary authority. It has the authority to regulate the
exchange rates of a country as well as the interest rate. It also
manages the currency. It acts as a watchdog over all the
commercial banks in that area. It has a contrasting feature as
compared to commercial banks because it can increase and
decrease the monetary base, so it has an innate monopoly.
The central bank in addition to this is also given a
supervisory role in which maintains check and balance on its
member commercial banks to keep them in the loop. In
developed countries, central banks are given full autonomy
and there exists no political intervention.
The task of the central bank is to formulate an official
interest rate keeping in view the poverty index as well as the
level of unemployment. It manages inflation and exchange
rate at the same time. It has a monopoly on currency flow, so
it controls the money supply. It acts as a government bank,
manages country foreign exchange reserves, and tries to keep
a balance between fiscal and monetary policy. It also
manages the means of payment.
FATF has also developed certain standard operating
procedures which all banks of the world have to follow. In
case of noncompliance, countries and their banks are
blacklisted, and they cannot carry out any further
One of the major works carried out by the Central bank is
that of currency issuance. The major role of the central bank
is to keep the currency of a country stable because stability in
the currency, as well as the political and economic sphere,
brings money and economic growth. Inflation happens if the
currency is devalued or prices of eatables have gone high as
compared to currency. All the central banks have an inflation
target of around 2% but it can vary considerably.
The goal of economic stability can be achieved with the
help of a large investment. If the central bank lowers the rate
of interest, then the companies take out money from banks
and they start megaprojects with that money. So spending is
favored as compared to savings. The opposite happens if
interest rates are increased. But one thing is kept in mind
while changing the interest rate that it should remain for
some time so that stability is reached. Central banks are also
moving towards environmentally-friendly goals. A European
bank has announced that it will take into consideration the
environmental aspect before giving out the monetary policy.
They have under control open market operations as well as
credit policy. Through open markets when it buys securities
it is in effect trying to control currency. Its role is to increase
the money supply to the open market. The open market
operates differently by buying or selling securities or by
adjusting foreign exchange reserves to control currency.
All banks should have some of their assets as capital. To
affect the money supply, central banks should exchange
foreign reserves in their currency. Some countries use
Central banks as a supervisor for other commercial banks
while in other countries there is a separate supervisory
council that acts as a watchdog. It is generally believed that
governments have some sort of influence over the central
bank but in principle, this should not happen. Central banks
should be separated from political interference so that it can
work independently to bring about changes in monetary
policy which will have a positive effect on the people of that
XIII. WHAT IS THE GLOBAL ROLE OF THE US DOLLAR?
The recent report published by IMF states that almost
62% of the global reserves are present in form of dollars. No
doubt the US dollar has been one of the most renowned
currency for many decades now. In the past when America
was developing economically, it prompted world investors to
use dollars as their currency. But now the situation has
turned out to be more complicated. Due to trade imbalance,
dollars have been accumulated overseas. After world war II,
the currencies of war-torn countries were so deeply affected
that the dollar came in limelight. The dollar's role in the
global economy benefitted the US economy too which in
turn became the reason why the US became a superpower
Due to trade imbalance, it causes developing countries'
currency to move upward which will make their exports
more expensive. To save their money, they reinvest in dollar-
dominated markets which in turn boosts dollar stability.
Globalization turned out to be a prime factor for the rise of
the dollar centered economy around the globe. Emerging
markets are turning out to be the best consumers of dollars. It
is the dominant invoicing currency. Because it is used
worldwide it means changes in the currency would have a
deep impact throughout the world. The major use of this
currency occurs in form of reserves. It is used excessively as
an invoicing as well as a funding currency .
A. Impact on the global economy
When the value of the dollar fluctuates so does the export
and imports change worldwide. If the rate of dollar increases,
then the price of the US exported article also goes up which
is not good for those countries which have imported those
items. This in turn decreases demand in the local market
because it does not cost-efficient nor economic. This also
affects the invoicing sector and funding currency. The use of
US dollars as the reserved currency has also a significant
impact worldwide. Non-US savers use the dollar as a reserve
currency, the non-US borrower uses it as a funding currency,
non-US countries use invoicing for transactions between
them. Due to which fluctuation in the rate of dollars has a
worldwide impact. empirical data suggests that if the value
of the dollar appreciates then all the developing countries
will have below the average growth rate and it will have a
direct impact on the GDP of these countries. This in turn is
against global sustainable economic goals. If the rate of
dollar increases continuously then strain occurs on global
banks and institutions. If a country is battering an economic
crisis accompanied by political instability, in this case, if the
rate of the dollar goes up, then it will devalue the currency of
that unstable country. As a result of currency devaluation,
Inflation will rise, and people will have to purchase materials
at a considerable high price which will also trigger
unemployment. The system might also get damaged, with
public trust in its representatives eroding it will further add
fuel to fire. The strength of the US dollar conversion scale is
frequently seen as a proportion of the strength of the US
economy, in any event on a relative premise. Nonetheless,
the US dollar assumes an exceptional part in the worldwide
economy that reflects key qualities of the US economy and
political framework. These qualities are for the freest of the
monetary cycle, homegrown legislative issues, and the high
points and low points of trade rates — even though the
United States is not safe to worry about the drawn-out
supportability of its public accounts and the condition of its
homegrown governmental issues .
The US dollar commonly fortifies on worldwide
monetary and political pressure, featuring the general
strength of US political and financial establishments. This
remaining part the case, even as President Trump has
released a tumultuous exchange battle against the remainder
of the world. While there is some proof that homegrown
political partisanship subverts the place of refuge allure of
the US dollar,52 the US dollar's worldwide job is probably
not going to be altogether lessened by the Trump
organization and could be strengthened, regardless of
whether for unreasonable reasons. The strategy vulnerability
related to President Trump's exchange war has prompted a
12 percent thankfulness in the US dollar in genuine terms,
worsening exchange strains .
XIV. UNDERSTANDING CURRENCY AND EXCHANGE RATES
A. Exchange rates and Currency
Also known as "foreign exchange market or exchange
rate." The ratio of one country's currency to another country's
currency is the price of one currency in another currency.
Due to the different names and values of currencies in
different countries in the world, a country’s currency must be
exchanged against the currencies of other countries, that is,
the exchange rate. Exchange rate refers to the exchange rate
between two different currencies. If foreign exchange is also
regarded as a commodity, then the exchange rate is the price
at which one currency is used to purchase another currency
in the foreign exchange market. For example, 1 US dollar =
110 yen, which means that 1 US dollar can be exchanged for
110 yen. Exchange rate expression methods include the
direct price method and indirect price method.
B. Pricing method
1) Direct pricing: The direct pricing method refers to a
pricing method that uses a certain unit of foreign currency as
a benchmark and converts it into a certain amount of
domestic currency. At present, most countries use this
pricing method. Ri dollars, Swiss francs, Canadian dollars,
Hong Kong dollars, Singapore dollars are using a direct
quotation, such as 25 yen to $ 1 = 115; USD 1 = 1.47
Canadian dollars, and so on.
2) Indirect pricing: The indirect pricing method refers
to a method of pricing a certain unit of currency into a
certain amount of foreign currency. Euro, British pound, and
Australian dollar use the indirect pricing method, such as 1
pound = 1.6025 US dollars; 1 Euro = 1.5680 Canadian
dollars; 1 Euro = 1.0562 US dollars; 1 Australian dollar =
0.5922 US dollars, etc. For example, 1 US dollar = 105 yen,
that is, 1 US dollar can be exchanged for 105 yen.
Selling exchange rate. Also known as the selling price,
that is, the exchange rate used by banks when selling foreign
exchange to peers or customers. When the direct pricing
method is adopted, the exchange rate at which the foreign
currency is converted into the domestic currency is the
selling price, while the indirect pricing method is the
There is a price difference between buying and selling,
this difference is the income of the bank's foreign exchange
trading, generally 1% to 5%. The buying and selling
exchange rates used when buying and selling foreign
exchange between banks are also called interbank buying
and selling rates, which are the buying and selling prices in
the foreign exchange market.
Intermediate exchange rate. It is the average of the
buying price and selling price. Western publications often
use the intermediate exchange rate when reporting exchange
rate news, and the calculated exchange rate is also calculated
using the intermediate exchange rate of the relevant
1) Currency exchange rate: Generally, countries
stipulate that foreign currencies are not allowed to circulate
in their own countries. Only when foreign currencies are
exchanged for national currencies can they purchase
domestic goods and services. Therefore, the exchange rate
for buying and selling foreign currency, that is, the currency
exchange rate, is created. It is reasonable that the currency
exchange rate should be the same as the foreign exchange
rate, but because foreign currency notes need to be shipped
to the issuing countries because the transportation of foreign
currency notes costs a certain amount of freight and
insurance, the exchange rate of the bank when receiving
foreign currency notes Usually lower than the foreign
exchange buying rate. The foreign exchange rate is the
exchange rate of a country’s currency to a foreign currency.
It depends on the balance of payments between the two
countries, or the purchasing power of the currencies of the
two countries. Inexperience, the foreign exchange rate is
determined by the long-term economic factors between the
two countries. The expected performance of investors.
2) Foreign exchange market: In a broad sense, the
foreign exchange market refers to foreign exchange trading
venues, including personal foreign exchange trading venues,
foreign currency futures exchanges, etc.; in a narrow sense,
it refers to foreign exchange professional banks, foreign
exchange brokers, central banks, etc. Modern
communication means such as transmission and trading
machines realize the trading market; the foreign exchange
market is both a tangible market and an invisible market.
Tangible means that the foreign exchange market has its
geographic location, such as the Tokyo foreign exchange
market and the New York foreign exchange market; and
Intangible means that the market does not have a specific
scope. Currency conversion between individuals,
institutions, and banks can also form a foreign exchange
market invisibly. The main international foreign exchange
markets are Sydney, Tokyo, Singapore, Hong Kong,
Frankfurt, Zurich, London, and New York. Since the above
cities span multiple time zones, working hours are basically
from 9 a.m. to 4 p.m. local time. So basically, it can cover
24 hours a day. Base currency refers to the currency written
in the front of a currency pair; non-base currency refers to
the currency written in the back of a currency pair. For
example, in USD/JPY, the US dollar is the base currency,
and the Japanese yen is a non-base currency; in EUR/GBP,
the euro is the base currency, and the British pound is the
non-base currency. ICBC’s basic and non-basic currency
performance methods follow international common
3) Buying price (BID) and selling price (OFFER or
ASK): In the international market, the meaning of buying
price and selling price refers to the buying (bid) price and
selling (OFFER) price that the bank is prepared to obtain
from the counterparty (usually referred to as the customer).
The buying price (BID) is on the left. The selling price
(OFFER) price is on the right. The explanation for the actual
application of the buying price and selling price: the buying
price marked by the bank is the buying price for the base
currency, and the selling price marked by the bank is the
selling for the base currency price. For example, ICBC’s
buying and selling prices for USD/JPY are 109.30/109.60
respectively; it means that ICBC buys USD and sells
Japanese yen from the customer at the quoted price of
109.30, then the customer sells USD to buy Japanese yen
the list price of 109.30 will be used, and vice versa. The
selling price of the bank is higher than the buying price of
the bank, that is, when the customer is trading with the bank,
the buying price of the customer is higher than the selling
price of the customer; there are two reasons: (1) The
customer whenever Both can conduct transactions with
banks, and banks must buy or sell unconditionally, which
requires banks to use such spreads to guarantee their
interests. (2) For investors, profit is only possible when the
market changes. If there is no change in the market,
investors will lose money if they buy and sell when the
exchange rate is static. The purpose of investors' investment
is to make a profit. The element of profit is to require us to
see the direction of exchange rate trends. Only when the
foreign exchange market changes, will there be profitability.
The exchange rate of the foreign exchange market is static,
and customers will not be able to make a profit.
4) Major currencies and symbols in the international
foreign exchange market:
• U.S. Dollar: USD, British Pound: GBP, Euro: EUR,
Japanese Yen: JPY
• Australian Dollar: AUD, Hong Kong Dollar: HKD,
Canadian Dollar: CAD, Swiss Franc: CHF, Swedish
• Singapore Dollar: SGD, Norwegian Krone: NOK,
Danish Krone: DKK.
At each moment there is an exchange rate that is
determined by the supply and demand of each currency, that
is, through the foreign exchange market. However, as we
will see below, in some exchange rate systems, the central
banks of a country intervene in the market to establish an
exchange rate that favors its economy.
The currency converter is used to calculate the value of
one currency concerning another. The market where the
exchange rate is traded in the foreign exchange market or
FOREX (Foreign Exchange) one of the most popular among
Fixed exchange rate. Within the fixed exchange rates
several exchange regimes are depending on the actions of the
central bank. The regimes are as follows, ordered from the
strictest to the most flexible:
Convertibility regime or currency board: It is the strictest
category of the fixed exchange rate; an exchange rate is
established by law. Its rules work the same way as the gold
standard, the central bank is obliged to immediately convert
the currency linked whenever a citizen this cash. To do this,
it must have 100% of its monetary mass backed by dollars
stored in its reserves.
Conventional fixed-rate regime: A country fixes its
currency with margins of +/- 1% over another currency or
basket of currencies. You can use direct intervention policies
(buying or selling the currency), or indirect intervention
policies (lowering or raising interest rates, for example).
Exchange rate within horizontal bands: The allowed
fluctuations of the currency are somewhat more flexible, for
example, +/- 2%. also known as a target zone exchange rate.
Moving exchange rate: the exchange rate is adjusted
periodically, usually adjusting for higher inflation relative to
the pegged currency. It can be done passively or actively,
announced in advance, and implementing the announced
The exchange rate with moving bands: It is like the
exchange rate with horizontal bands, but the width of the
bands increases little by little. It is usually used as an
intermediate step to a floating exchange rate.
D. Floating exchange rate
The exchange rate is determined by the supply and
demand for foreign exchange in the market. There are two
floating exchange rates, one completely free and the other
1) Clean floating: That situation in which the currencies
are found whose exchange rate is the one obtained from the
game of supply and demand, without the central bank
intervening at any time. Also known as independent float
2) Dirty float: That situation in which currencies are
found whose exchange rate is the one obtained from the
game of supply and demand, but in this case, the central
bank is forced to intervene by buying or selling to stabilize
the currency and achieve financial objectives. It is also
known as a managed floating exchange rate, as it has a
directed float but is not previously announced.
XV. THE GLOBAL CONSEQUENCES OF FINANCIAL CONTAGION
Financial Contagion can be defined as the disturbance of
markets around the globe with fluctuations in stock markets,
exchange rates, and capital flows. Monetary
contagion/infection can be an expected danger for nations
who are attempting to coordinate their monetary framework
with worldwide monetary business sectors and
establishments . It clarifies a financial emergency
stretching out across neighboring nations or even districts.
Monetary infection occurs at both the global level and the
homegrown level. At the domestic level, ordinarily, the
disappointment of a domestic bank or monetary middle
person triggers transmission when it defaults on interbank
liabilities and sells resources in a fire deal, accordingly
subverting trust in comparable banks. An illustration of this
marvel is the ensuing unrest in the United States monetary
business sectors. Worldwide monetary virus, which occurs in
both progressed economies and creating economies, is the
transmission of monetary emergency across monetary
business sectors for immediate or roundabout economies. Be
that as it may, under the present monetary framework, with
the enormous volume of income, for example, speculative
stock investments and cross-territorial activity of huge banks,
monetary infection normally happens at the same time both
among homegrown foundations and across nations. The
reason for monetary disease ordinarily is past the
clarification of a genuine economy, for example, the two-
sided exchange volume. . The four specialists that impact
monetary globalization are governments, monetary
establishments, speculators, and borrowers. The monetary
disturbance that hit numerous East Asian nations in 1997 and
afterward spread to different pieces of the world proceeded
unabated in 1998. Russia defaulted on its obligation as trust
in worldwide monetary business sectors debilitated. The
disturbance annoyed capital business sectors in modern
nations, significantly adjusting the (relative) evaluating of
numerous monetary instruments and gushed out over into
theoretical speculative stock investments wagers, leaving
Long term Capital Management, an enormous U.S. flexible
investment, looking close to insolvency. The emergency
hence hit Brazil, making vulnerability about the nation's
capacity to roll over its public area obligation, and spread to
other developing business sectors in Latin America .
Financial contagion is best characterized as a huge
expansion in cross-market linkages after a crisis to an
individual nation (or gathering of nations), as estimated by
the degree to which resource costs or monetary streams
move together across business sectors comparative with this
movement in peaceful occasions. At the point when one
nation is hit by a crisis, liquidity limitations can compel
speculators to pull out assets from different nations. Since
numerous monetary exchanges are led by specialists instead
of by directors, impetus issues likewise assume a part in
setting off unpredictability. A choice to pull assets from a
few nations can likewise reflect coordination issues among
speculators and deficient systems at the global level for
managing nations' liquidity issues. Recognizing among these
different types of financial specialist conduct is exceptionally
troublesome in practice .
Financial analysts do not know accurately what variables
make nations powerless against contagion or the specific
components through which it is communicated at any
given—regardless of whether hypothetical or
observational—on the job of worldwide monetary specialists
and the global monetary framework may shed light on these
perspectives. Such exploration could help recognize
attributes that make nations defenseless against disease and
could add to the improvement of explicit arrangement
solutions to decrease the dangers of infection, deal with its
effect, and assist economies with recuperating effectively as
could be expected under the circumstances. Meanwhile, it
will be troublesome to decide if any measures past fortifying
the worldwide monetary engineering can diminish the
dangers of contagion explicitly.
XVI. LOOSE FISCAL POLICY AND TIGHT MONETARY POLICY
When inflation and economic depression coexist, tax cuts
and other expansionary fiscal policy measures are used to
stimulate demand and increase supply; tighten monetary
policy to control inflation.
All investments are subject to risks, including a possible
loss of the investment amount. The value of investments can
go down as well as up and investors may not get back the full
amount invested. In the case of bonds, prices and interest
rates generally move in opposite directions. Since the prices
of the bonds held in an investment portfolio are adjusted
when interest rates rise, the value of the portfolio can fall.
Share prices fluctuate fundamentally, sometimes quickly and
violently. This can be due to factors that affect individual
companies, specific industries or sectors, or general market
conditions. Such investments can be subject to significant
price volatility each year.
Foreign securities are associated with special risks such
as exchange rate fluctuations and economic and political
uncertainty. Investing in emerging markets, of which frontier
markets are a subset, involves increased risks due to the same
factors, as well as risks related to a smaller size, lower
liquidity, and the lack of established legal, political,
economic, and social systems to support the securities
markets. Because these systems tend to be weaker in frontier
markets and due to various factors, such as the increased
potential for extreme price volatility, illiquidity, trade
barriers, and exchange controls, the risks associated with
emerging markets are much greater in frontier markets .
The low-interest rates we see in many markets around the
world are now putting normal deposit customers of banks
and retirees at a disadvantage, while stockholders have
generally benefited as the surviving banks have grown - now
perhaps even systemically important. In the longer term,
however, savers suffering from low-interest rates could face
new hardships from high inflation. Although inflation has
generally remained low in the markets on which central
banks have eased monetary policy, many, including myself,
expect it to rise once banks regain confidence enough to
aggressively lend. This is of course a double-edged sword.
Countries struggling with deflationary pressures, such as
Japan and the eurozone, would welcome inflation.
The financial industry is facing enormous change. Many
of the changes are intentional and positive. But far from all.
To be able to better understand the individual aspects and
their interrelationships, I am going into more detail today
about the causes of our monetary policy measures and their
effects. The policy of the European Central Bank (ECB) is
often cited as the cause of the current problems in the
banking and financial sector. It quickly becomes clear that
such a conclusion falls short. Getting to the root of our
actions will make it easier to understand how we can return
to the normalization of monetary policy.
A. Effects of Monetary Policy and Currencies
The growth trend in many developed economies has been
declining not just since the crisis, but for several decades.
There are many reasons for this, which I do not want to go
into in detail here. The fact is slower growth has led to lower
long-term interest rates.
In this environment, there is a risk of a self-reinforcing
downward spiral. Because of course these developments do
not go unnoticed by the economic players; their expectations
are clouding over. When a company expects less demand, it
will be less willing to make large investments .
Also, aging societies, as we find them in numerous
developed economies, not only have to make do with a
reduced labor supply but also increasingly save. In the
meantime, this has meant that we have excess savings and
the need for safe investment opportunities is becoming
scarce. So less is invested and more savings are made. This
investment strike is intensified if the public sector - where
there is room for maneuverer and demand - invests less than
is necessary to maintain the economy.
This dynamic has led to a decline in the natural interest
rate - that is, the real interest rate at which saving and
investing are in balance, in a normally busy economy in
which there is no upward or downward pressure on inflation.
The natural interest rate plays an important role in our
monetary policy. If the key interest rate is below the natural
interest rate, monetary policy has a stimulating effect on the
economy by creating an incentive for consumption and
investment. Conversely, if the key interest rate is higher than
the natural rate, demand is dampened, and thus the price
increase as well .
In the current environment, the ECB has brought the
market interest rate below the level of the natural interest
rate. Accordingly, the key interest rate has been zero since
March this year, and the interest rate for the deposit facility
at -0.4%. Had we not done this, constant nominal interest
rates would have led to higher real interest rates as inflation
rates fell and further weakened the growth. This would have
increased the risk of deflation. However, we cannot lower
our interest rates indefinitely. At a certain level, for example,
it becomes more attractive for market participants to hold
cash - despite the associated costs - than to pay negative
While we have not yet reached this point, we should keep
in mind that further rate cuts in the negative territory may not
be linear. The reactions of people in extreme situations
cannot be planned on the drawing board.
But we can also influence market rates in other ways.
With our securities purchases, for example, we shifted the
yield curve downwards. And by offering long-term loans on
favorable terms that reward additional lending, we have
succeeded in allowing banks to lower their lending rates,
which has led to greater lending .
All our measures in recent years have contributed to the
economic recovery in the euro area making headway - albeit
more slowly than expected and desired. As mentioned
earlier, lending is increasing, as is demand. The
unemployment rate in the euro area fell to 10.0% in the third
quarter and the risks of deflation have decreased
significantly. We expect the inflation rate to reach 1.6% in
2018, which is already very close to our target level.
However, to bring about a sustainable recovery, additional
political support is required through structural reforms in
various areas. Only in this way can we reverse the growth
trend in the long term and increase the growth potential.
Some institutes have failed since the financial and
economic crisis. In Europe, we reacted to this, including a
comprehensive assessment of the banks for which the ECB
took over supervision in 2014. The directive on the
restructuring and resolution of credit institutions (BRRD)
creates a uniform approach to failed banks in the EU, in
which the owners and creditors must primarily bear the
losses - and not the taxpayers.
Banks that are in liquidation no longer benefit the real
economy, they no longer grant new loans, no longer accept
deposits, and are only active to a limited extent in the money
market. These institutions can no longer pass our monetary
policy impulses on to companies and households.
I. HOW THE BLOCKCHAIN AFFECTS CROSS BORDER
Blockchain, a new technology, has brought a revolution
in the field of cross-border payments. It is ready to disturb
the way organizations and people undergo financial
transactions on a worldwide scale. Although it's inexorably
regular for organizations to sell products and enterprises
universally, the cross-border installment framework hasn't
changed in many years. It is a fast and reliable alternative to
the current system prevailing. It has been estimated that by
the year 2025 that the business of blockchain will expand up
to $170 billion as predicted by various sources .
The transfer of money internationally through a proper
banking channel is quite an arduous task because it
comprises various multi-step processes and is quite time-
consuming. If company A headquartered in China wants to
transfer money and funds to Company X which is
headquartered in Turkey. Company A will request the
Central Bank of China to do this transaction. This bank will
contact the associated bank in Turkey and will send money
overseas to that respective bank which receives money and
will transfer it to Company X. All these steps are time-
consuming and require a huge sum of money too. These
practices are a significant hurdle for businesses as they are
overpriced measures. It has been reported, according to the
World Bank, that 7% of payments are sent through banking
All these problems about the use of banking channels
have been solved by the BlockChain method because it
involves no middleman and is also quite a fast and accurate
method. There appears no delay once the transaction has
entered the chain. Security protocols are exemplary as once
the transaction has been made it cannot be reversed .
Consumers and businesses are using the blockchain
method for cross-border payments because of their several
advantages. This method is secure and causes an immediate
transfer of money. One of the major advantages of using the
blockchain method for cross-border payment is that it
decreases the overpricing which happens if the transaction is
made through proper banking channels. Business to business
transactions reduces the cost by 40-80%. It is so the fact that
it only takes a few seconds to finalize the process of the
transaction while in case of banking channels it takes two to
three days. By paying a nominal amount the organization can
save a lot of money. The organization does not need to pay
huge sums of money to multiple fronts. Therefore, it is a
These payments through blockchain are so immediate
that it helps companies to start projects at a rapid rate
because the issue of funds is resolved. Within few seconds
transfer is completed. It helps businesses to become more
agile and responsive to customers.
The problem of keeping track of previous transactions is
resolved using a blockchain method. Transparency is
ensured because a record of transactions is made available
which can be viewed by all authorized customers. A
decentralized ledger is maintained which is verifiable. There
appears no central institution which holds the record. A
database is kept the same. Company A in China and
Company X in Turkey will have access to the respective
The process of Blockchain is secure because in the case
of using some bank it will be prone to interference. Further,
if the bank is offline or hacked then the data will be
compromised. With the help of blockchain payments,
cryptography is used to secure all the records of transactions.
The process is nearly impermeable. On a global scale,
government banks are testing the blockchain method. There
is no doubt that the blockchain method is the future of cross-
border payments and it will disrupt the entire status quo.
Public keys and private keys are used more exclusively
during the process of making transactions. Public key stands
for account numbers while private key for signatures. No
paperwork is needed during the process of the transaction.
Cryptographic procedures are followed to check the
authenticity of the source. These transactions are circulated
through a complex network of public and private keys.
Network members perform the task to insert the transaction
in a blockchain system. Transaction history is verified as
well as circulation of the transaction is made possible by
adopting an insurance mechanism in which the puzzle is
solved which is related to the previous history of
transactions. This process provides security that was not
present before in the system. The creation of fake identities is
practically impossible .
Blockchain, at first, was an algorithm for online
communication to trade bitcoin. The idea of digital money
was not a new one, but it took time to establish its presence.
The formulation and execution of bitcoin turned out to be the
birth ground for blockchain. The worldwide acceptability of
this process is because it involves a decentralized digital
system in which procedures are controlled by algorithms.
A division exists depending upon the different
application scenarios and user's demand in which there are
three major types, public blockchain, private blockchain,
consortium blockchain. It has been reported that in the future
alliance blockchain should be used because it will eliminate
all the discrepancies present in private and public blockchain
Blockchain technology gives us a new way to gather
statistics related to credits therefore it is responsible for
reconstructing the credit system. The basic advantage of
using blockchain is that it is based on an independent
algorithm that is entirely independent, and it collects all the
credit statistics on its own without any interference. The
entire system is agile. Identity cannot be faked. The process
of tracking the transaction is quite efficient. The real
information obtained about customers is not only helpful for
personal data record but also it helps to estimate future
developments and trends in the credit system. It has
attributes of a wide array, comprehensive data, reliable
content, minimal cost, and guaranteed process.
As of now, blockchain development is in its earliest
stages. Even though there are a few constraints but
blockchain has a very bright future in terms of cross border
payments. For the current specialized issues of a blockchain,
market members from varying backgrounds require to
investigate and tackle them together. Simultaneously, global
trades should be reinforced to investigate and advance the
progression of blockchain innovation, yet in addition to
envision blockchain hazards and improve the security of
A. Blockchain and inter-banking payment Systems
Blockchain technology can be applied in different
industries and business scenarios. To allow customers to
understand the blockchain from a business perspective, the
base platform has launched several blockchain solutions
based on specific business scenarios. The following is a
schematic diagram of tbaas's business structure to solve user
problems: Application scenario example Shared ledger
business scenario Inter-bank clearing and settlement, cross-
border clearing and settlement audit, fast underwriting,
insurance, and direct claims to solve business pain points,
slow inter-bank clearing, and settlement .
B. What is a blockchain acceptance payment system?
Blockchain payment is currently a new payment channel
tool. Blockchain digital assets are used as payment methods
to solve the problem of deposits and withdrawals in various
industries, which can be docked across the industry.
Blockchain digital asset payment has functions such as
decentralization, checkable records, large-value transfers,
and cross-border transactions.
C. What is the role of blockchain payment?
The purpose of the blockchain payment system is to
solve the problem of large payments; the second is to solve
the problems of cross-border payment, high handling fees,
and slow arrival; the third is to provide payment for some
"special industries" Function to solve the problems of
difficult to apply for channel and easy to seal card number.
D. What kind of currency does the blockchain payment
system generally use?
Blockchain currency payments generally use "stable
coins" (such as usdt 1:1 anchored to the US dollar, with high
recognition) as the payment method. This is a currency that
is constant and not volatile with the US dollar or other
currencies, or if investors have their circle, they can build it
by themselves. It is generally not recommended to make
payments in such currencies as BTC and ETH, as the
fluctuation range is too large .
E. What is an acceptor?
Acceptor: A team enterprise or individual that holds
coins or assets. It mainly plays the role of the acceptor in the
blockchain acceptance payment platform, that is, the receiver
resolves the deposit and withdrawal of funds, which is the
core role of the entire payment platform. Of course, many
platforms also act as platform acceptors themselves.
Blockchain technology can effectively solve the security
problem of mobile payment. Transactions supported by
blockchain technology are based on a blockchain technology
ledger, and it is very difficult to break into user accounts.
Therefore, many mobile phone deceptions, such as
deception, repeated payments, and price hikes, will not occur
after using blockchain technology.
Customers do not need to operate on other platforms and
have open API interfaces to access the deposit pages of
major platforms. The blockchain payment system can be
connected to any industry website system without
II. HOW TO DOUSE THE BLOCKCHAIN PAYMENT SYSTEM FOR
Blockchain subverts the six dimensions of the banking
industry: payment, clearing, and settlement, financing,
securities, loans and credit investigation, trade financing.
Blockchain is changing everything from payment
transactions to raising funds in the private equity market.
Blockchain technology has received a lot of attention in the
past few years, beyond the scope of Bitcoin fanatics, and has
become the main topic of discussion among banking experts
and investment institutions. JPMorgan Chase CEO Jamie
Dimon slammed Bitcoin: “It’s worse than the tulip bubble. It
won’t have a good ending. Some people will be unlucky
because of it. "The head of Goldman Sachs, Lloyd Blankfein,
responded to this statement, saying, "Something that
fluctuates 20% overnight is not like a currency. It is a fraud."
Despite doubts, it remains to be seen whether blockchain and
decentralized edge technology (DLT) will replace or
revolutionize the banking system .
A. The role of blockchain in the banking industry
Blockchain technology provides a way for untrusted
parties to agree on the state of the database without the
presence of an intermediary. By providing an unmanaged
ledger, blockchain can provide specific financial services
such as payment or securitization-without going through
intermediaries like banks. Also, blockchain allows the use of
tools such as "smart contracts," which can potentially
automate manual processes, from compliance and claims
processing to distribution of will content. For some
applications, a higher degree of decentralization is not
required-but it can benefit from better coordination-this is an
additional benefit brought by the blockchain, "Distributed
Ledger Technology (DLT)" can help companies Establish
better governance and standards for sharing and
collaboration. As the global banking industry is currently an
industry with a scale of 134 trillion U.S. dollars, blockchain
technology, and DLT can disintermediate certain key
services provided by banks, including:
1) Payment: By establishing a decentralized payment
ledger (such as Bitcoin), blockchain technology can
facilitate faster payments at lower fees than banks.
2) Clearing and settlement system: Distributed ledger
can reduce operating costs and promote closer real-time
transactions between financial institutions.
Financing: Initial Token Offering (ICO) is testing a new
financing model that can be a traditional financing model.
Continue to explore in-depth how blockchain technology can
realize new business models through technology, thereby
changing the development direction of the traditional
Blockchain technology provides high-security, low-cost
payment methods, reduces the need for third-party
verification, and saves the processing time of traditional bank
transfers. 90% of the members of the European Payments
Council believe that blockchain technology will
fundamentally change the industry by 2025. Today, trillions
of dollars are transferred around the world through an
obsolete and time-consuming payment system, while paying
a lot of fees. If you work in San Francisco and want to return
part of your salary to your family in London, you may have
to pay a fixed fee of $25 to receive wire transfers, with an
additional fee of up to 7%. Your bank charges a fee, the
receiving bank charges a fee, and you need to pay the
exchange fee. Your family’s bank account may not even
receive the transaction until a week later .
Facilitating payments is very profitable for banks, leaving
them with no incentive to reduce fees. During 2016, cross-
border transactions from payment to the letter of credit
generated 40% of global payment transaction revenue.
Cryptocurrencies like Bitcoin and Ethereum are built on
public Blockchain, and anyone can use them to send and
receive funds. In this way, public Blockchain reduces the
need for trusted third parties to verify transactions and enable
people all over the world to obtain fast, cheap, and cross-
Bitcoin transactions can take 30 minutes or up to 16
hours-in extreme cases-to complete settlement. This is still
not perfect, but it is a big improvement compared to the
average bank transfer time of 3 days. Due to its distributed
and complex nature, transactions based on encrypted digital
currencies make it difficult for governments and regulatory
agencies to monitor. In other words, they cannot close these
almost instant transactions .
B. Examples of improving payments through the blockchain
Although there is still a long way to go for encrypted
digital currencies to completely replace legal currencies
(such as the U.S. dollar) in terms of payment, the transaction
volume of encrypted digital currencies such as Bitcoin and
Ethereum has seen substantial growth in the past few years.
An important reason behind these disruptive changes in the
payment industry is that the infrastructure that supports the
payment business is also prone to be a disrupted-the field of
clearing and settlement.
C. Cleaning and settlement system
Distributed ledger technology can directly settle
transactions and can track transactions better than existing
protocols (such as SWIFT). Companies such as Ripple and
R3 are working with traditional banks to bring greater
efficiency to the industry. As mentioned above, the average
bank transfer takes 3 days to resolve, which has a lot to do
with our financial infrastructure construction method.
Moving funds around the world is a nightmare for banks.
Today, simple bank transfers from one account to another-
must bypass a complex intermediary system, from
correspondent banks to custodial services, to reach any
destination. The balances of these two banks must be
coordinated in the global financial system, which is
composed of a wide range of traders, funds, and asset
managers. If you want to send money from your UnicaCredit
Banca account in Italy to a Wells Fargo account in the
United States, the transfer will be performed through the
Association for Global Interbank Financial Communications
(SWIFT), which sends 24 million emails to 10,000 financial
institutions every day .
The Center of the SWIFT agreement does not send
money, it just sends a single payment. Then the actual funds
are processed through the intermediary system. Each
intermediary will increase the additional cost of the
transaction and present potential problems-60% of B2B
payments require manual intervention, which takes 15-20
minutes each time. Also, blockchain technology allows
"atomic" transactions or transactions that are cleared and
settled at the time of payment. This is in stark contrast to the
current banking system, which clears and settles transactions
a few days after payment.
This may help alleviate the high cost of maintaining a
global correspondent banking network. Banks estimate that
blockchain innovation can cut costs for the financial sector
by at least $20 billion by providing better infrastructure for
clearing and settlement.
III. BLOCKCHAIN IN FINANCIAL NETWORKS
The most considerable blockchain innovations are
associated with SWIFT:
SWIFT was established in the 1970s. At the beginning of
its establishment, the vision was to create a global financial
messaging service and a common language for international
financial messaging. After the messaging service was
launched in 1997, SWIFT replaced the Telex technology that
was widely used at that time. The original services provided
mainly included messaging platforms and computer systems
for verifying and routing messages. At the same time, the
establishment of message standards enables people to
understand the data across languages and system boundaries
together and enables the communication between users to be
seamlessly and automatically transmitted, received, and
In the thirty years since its establishment, SWIFT has
been widely accepted internationally. At present, including
the four state-owned banks of China Bank, Industrial and
Commercial Bank, Construction Bank, and Agricultural
Bank of China, most banks in the world have already used
the SWIFT system. Judging from the data disclosed on its
official website, in the 30 years from 1979 to 2009, the
number of international members joining SWIFT has
increased from 15 to 209, and the number of bank members
has increased from 239 to 9281.
As a revolutionary technology, blockchain is beginning
to be more and more sought after. why? Because the
blockchain is the underlying technology of many encrypted
digital currencies, such as Bitcoin (BTC), Ethereum (ETH),
and Litecoin (LTC). This tutorial will cover all blockchain-
related knowledge and will also teach you how to build a
Swift blockchain .
A. How the blockchain works
As the name implies, a blockchain is a chain composed
of different blocks connected. Each block contains three
pieces of information: data, hash, and the hash of the
• Data -Due to different application scenarios, the
data stored in the block is determined by the type of
blockchain. For example, in the Bitcoin blockchain,
the stored data is transaction information: the
transfer amount and the information of both parties
to the transaction.
• Hash -You can think of a hash as a digital
fingerprint to uniquely identify a block and its data.
The important thing about a hash is that it is a
unique alphanumeric code, usually 64 characters.
When a block is created, the hash is also created.
When a block is modified, the hash is also
modified. Therefore, when you want to see any
changes made on a block, the hash is very
• The hash of the preceding block -by storing the
hash of the preceding block, you can restore the
process of connecting each block to a blockchain!
This makes the blockchain particularly safe.
On July 19, SWIFT announced the global test results of
integrating SWIFT GPI Instant (cross-border instant payment
service) in Singapore's domestic instant payment service
FAST. Among them, it takes the shortest time to pay from
Australia to Singapore, only 13 seconds. But even if it
reaches 13 seconds, in the eyes of many blockchain
practitioners and bankers who are determined to reform,
SWIFT's interbank settlement system will eventually be
replaced by a blockchain platform. Since the emergence of
blockchain technology, its distributed, decentralized, point-
to-point, non-tamper able and other characteristics can
provide instant, safe, and transparent services for cross-
border payments, which greatly impacts the existing cross-
border payment system.
This is the first sentence written by "Bank Intermediary"
SWIFT in the latest white paper of GPI (Global Payment
Innovation Service). At the end of 2016, the first phase of the
SWIFT GPI project was completed; in April 2017,
DLTP(Distributed Ledger Technology Verification) was
officially launched as a component of GPI, and SWIFT GPI
launched blockchain technology; after that, SWIFT
continued to update the GPI system and DLT. PoC
technology integrates blockchain technology into cross-
border payment services. The instant test has achieved a
seamless connection between cross-border payments and
Singaporean domestic payments, and at the same time
confirmed the scalability of GPI services, laying the
foundation for the ultimate realization of global cross-border
instant payments. Judging from SWIFT's actions and
The use of blockchain technology to increase the speed
and establish global cross-border instantaneous payments is
regarded as the advancement of SWIFT services and the new
vitality of SWIFT. However, in recent years, due to the
emergence of blockchain technology and the turbulence of
the international trade situation, the momentum of SWIFT's
steady development has been hindered. At the same time,
SWIFT's long time to account has also been criticized.
Forbes analyst Joseph.
Young said in December 2018: The SWIFT system has a
history of 45 years and its efficiency is already very low. It
takes 3-5 working days for international wire transfers to be
settled, and if there is no receipt, it is impossible to send
Large remittances, but Bitcoin can handle large amounts of
transactions more efficiently. On July 18, Reuters quoted
anonymous sources as saying that the Japanese government
is trying to establish an international cryptocurrency payment
network similar to SWIFT, with the motivation to effectively
combat money laundering. On May 23, 2018,
Dakak, the main shareholder of Banco Masventas Bank
in Argentina, stated that the bank will withdraw from SWIFT
and begin to use Bitcoin blockchain technology to solve
international payment problems. In June 2018, the Russian
Enterprise Treasury Association announced that it will trial
run the government-run Masterchain blockchain platform
with the central bank of the country to try to replace SWIFT.
Also, even Europe where SWIFT is located intends to break
away from SWIFT's existing system .
Maas stated clearly and publicly on August 21, 2018, that
the European Union must establish a European payment
channel independent of the US SWIFT. At the opening
ceremony of the 2018 EU Foreign Ministers' Meeting in
Berlin, Maas revealed that he has started research on the
proposal to establish an independent European settlement
system. In this situation, SWIFT launched GPI. The GPI
white paper points out that the primary goal of adopting GPI
is to ensure that the international payment process meets the
requirements of the entire industry for speed, transparency,
and better end-user experience. The correspondent banking
ecosystem will also rebuild itself through GPI, and finally
promote the community to establish a frictionless
intermediary model that provides efficiency and added value.
Since the first phase of the GPI project was announced at
the end of 2016, SWIFT's GPI and blockchain applications
will enter a new phase every year. In 2017, SWIFT launched
the new system and officially launched the DLT PoC to
complete the infrastructure construction. In 2018, the SWIFT
GPI project entered the technical preparation stage.
On January 22, 2018, Swift signed a memorandum of
agreement with seven central securities depository
institutions to study how blockchain can be applied to post-
transaction processes, such as proxy voting. On November
13, 2018, the SWIFT Association) and Smart.
B. Worldwide Financial
Technology (SWFT Blockchain) signed a coexistence
agreement. In November 2018, it was reported that SWIFT
India has partnered with the financial technology company
MonetaGo to pilot a distributed ledger technology (DLT)
network to improve the efficiency and security of financial
products. In 2019, SWIFT GPI entered the landing stage.
On January 30, 2019, SWIFT officially announced the
Proof of Concept (POC) plan for cooperation with R3. After
that, GPI was launched on six Spanish banks in March; GPI
business was expanded to the European market in May; in
June, a report was released stating that following the
successful proof of concept of the R3Corda platform, it will
“soon be launched on a trading platform based on distributed
ledger technology. GPI payment is enabled on the Internet”;
In July, it cooperated with Singapore FAST to realize instant
cross-border payment, as long as 13 seconds
At the same time, SWIFT has accumulated strong
banking resources over the past 40 years, which is
unmatched by any other platform. As SWIFT said: “The
11,000 banks currently connected to the SWIFT network can
easily integrate GPI into their current infrastructure, unlike
other cross-border payment models that require extensive
integration with existing banking infrastructure". Not only is
facing severe external competition, but there are also huge
problems with the blockchain technology used within
Previously, Cai Weide, a columnist of Interlink Pulse and
a special professor of the National "Thousand Talents
Program", once pointed out that in the old financial market
represented by SWIFT, the blockchain uses new technology
and puts new wine in old bottles, which may cause the old
and new technologies to be incompatible. In the SWIFT
project, to protect privacy and scalability, the PoC adopts a
channel solution, but the actual result is contrary to the
vision. Because each bank does not want to share data with
other banks, each bank forms a channel with another bank
and SWIFT. If the original SWIFT system is online, 100,000
channels are required. This design is actually "soft isolation",
and compared with hard isolation, privacy is worse. At the
same time, this design also means that the system has a big
center-SWIFT, that is, SWIFT has all the data of all other
banks, which violates the design concept of decentralization,
and the reliability of the centralized system may be a
IV. CENTRAL BANKS & BLOCKCHAIN
Blockchain is a trusted technology that originated from
Bitcoin but surpassed Bitcoin. Blockchain technology
innovation has not only spawned various private digital
currencies but also aroused widespread interest and
exploration by central banks in various countries. It can be
said that the current Central Bank Digital Currency (CBDC)
experiments in most countries are based on blockchain
technology. But to this day, whether CBDC uses blockchain
technology is still controversial. A typical view is that the
decentralization of blockchain conflicts with the centralized
management of the central bank. Therefore, CBDC is not
recommended to adopt this technology. The author believes
that blockchain technology is developing at an
unprecedented speed and is deeply integrated with various
mainstream technologies. Therefore, whether from a
technical point of view or a business point of view, the actual
application of the blockchain is consistent with the
understanding of "fundamentalism". The difference. How to
use blockchain technology to better serve distributed
operations under centralized management may be the current
focus of CBDC. This article uses three typical scenarios as
examples to discuss possible applications and solutions of
blockchain in CBDC. It points out that although the technical
characteristics of blockchain are not dependent on central
institutions, it does not mean that they cannot be
incorporated into existing central institutions. In the system,
as long as through reasonable design, the central bank can
use the blockchain to effectively integrate distributed
operations and better realize the centralized control of
CBDC. There is no inevitable conflict between the two .
A. Scenario 1: Wholesale payment settlement
CBDC experiments currently being carried out in various
countries are mainly aimed at wholesale end scenarios, and
most of them are based on blockchain technology. For
example, the Jasper project in Canada is testing a large-value
payment system based on blockchain technology; the Ubin
project in Singapore is evaluating the effect of payment
settlement in the form of digital SGD tokens on distributed
ledgers; the European Central Bank and the Bank of Japan
The Stella project aims to study the application of distributed
ledger technology (DLT) in financial market infrastructure,
and to evaluate whether the specific functions of the existing
payment system can operate safely and efficiently in the
DLT environment. There is also the LionRock project in
Hong Kong, China, and the Inthanon project in Thailand,
which are all experimenting with CBDC based on blockchain
technology. The application of these blockchain technologies
is carried out under the centralized management and strict
control of the central bank.
Take the Ubin project in Singapore as an example, which
uses the same Digital Deposit Receipt (DDR) model as the
Jasper project in Canada. To support the issuance of DDR in
distributed ledgers, the existing Singapore Electronic
Payment System (MEPS+), which is Singapore’s RTGS
system, has established a DDR fund mortgage account. At
the beginning of each day, participating banks request the
central bank to transfer their RTGS account The funds in the
DDR are transferred to the DDR fund mortgage account as a
mortgage. The distributed ledger creates a corresponding
equivalent DDR and sends it to the DDR wallet of each bank
so that the participating banks can carry out transfers and
payments based on the distributed ledger. At the end of the
day, the distributed ledger system will send a network
settlement document to MEPS+, and MEPS+ will adjust the
balance of the DDR fund mortgage account accordingly to
match the participant's DDR balance in the DLT network.
It can be seen that the decentralized distributed ledger
and the existing mature central-led financial infrastructure
are not exclusive, and can be integrated and supplemented
with each other. On the one hand, the blockchain-based DDR
payment system provides a new payment method that does
not rely on traditional accounts for the existing RTGS system
and effectively supplements the existing payment and
settlement system. On the other hand, DDR, as an extension
of the digital form of electronic legal currency in RTGS, can
eventually be converted back to RTGS account value and
settled externally through the RTGS system. That is to say,
the RTGS system solves the problem of blockchain DDR to
traditional account funds. The issue of settlement finality
also shows that the settlement finality of the blockchain can
be organically integrated into the existing settlement system.
Also, because DDR is generated through a 100% fund
mortgage, it does not affect the money supply, so the
distributed ledger will not affect the central bank's total
Obviously, in terms of technical logic, a new blockchain-
based payment system led by the central bank is completely
feasible. In a sense, referring to the digital depository receipt
model of the Ubin project, there is no need to resort to
intermediate channels like the online payment platform.
Various payment institutions and commercial banks can
build peer-to-peer networks in the financial private network.
A unified blockchain network is connected to carry out
payment and settlement. Considering that the transaction
performance of blockchain technology is still evolving, the
above-mentioned clearing business should be carried out at
the wholesale level.
It should be said that the decentralization of the
blockchain refers to disintermediation, but no supervision. In
the environment of the alliance chain, the central bank and
other regulatory agencies can not only centrally control the
business and risks carried by the blockchain, but also achieve
penetrating off-site supervision.
B. Scenario 2: Digitalization of cash
It seems that there is no essential difference between the
digitization of cash and the digitization of reserves (i.e., the
aforementioned digital depository receipts), except that the
former is for the public, while the latter is limited to inter-
bank circulation, but the public is facing a problem. If
Allowing the public to open accounts at the central bank will
put the central bank under great service pressure and may
trigger deposits to move, leading to narrow banks .
One solution is the 100% reserve fund, model. The
agency operating agency deposits 100% of the reserve fund
with the central bank and then issues a corresponding
amount of digital currency on its books, which can be
regarded as the central bank's digital currency. IMF
economists call it the synthetic central bank digital currency
(SCBD). According to this, after my country's third-party
payment institutions deposit 100% of the reserve funds with
the central bank, the funds in their virtual accounts are the
central bank's digital currency. If so, China has long been the
world's first big country to realize the digitalization of legal
But after careful consideration, this idea has flaws: First,
technically, 100% reserve deposit means that the entire life
cycle of the issuance, circulation, and withdrawal of digital
currency must be attached to the traditional account system,
especially the cross-agency CBDC. Circulation, in addition
to the CBDC account book update, also has to deal with the
clearing and settlement between the corresponding reserve
accounts, which can only sacrifice system flexibility and
limit the way to deal with it, and also needs to set up a
special clearing agency to provide interconnection services.
This not only increases the pressure and complexity of the
central bank’s central system, that is to say, it still does not
solve the service pressure of the central bank, and it is
difficult to achieve the requirement of "loose account
coupling"; second, in terms of management, the central bank
and operating institutions are The issuance and circulation
process is tightly bound, and the central bank still bears
centralization pressure. How to ensure that the agency
operating agency does not have over-issued currency after
100% of the reserve, especially when the payment network
operated by the agency operating agency is not under
centralized control, it is more difficult for the central bank to
control the currency issuance of the operating agency. To a
certain extent, it also constitutes some reasons against the
application of blockchain technology to CBDC .
The perspective determines thinking. If you look at it
from another angle, you will get a completely different and
better solution. Now when it comes to CBDC, many people
understand the technical logic of CBDC from a top-down
perspective, from central bank issuance to commercial bank,
and from commercial bank issuance to personal perspective,
so there is always a worry of messy invoices. Physical
currency is subject to the link of banknote printing and
coinage, and it has to be so, but the "banknote printing and
coinage" of digital currency can be completed in an instant
without this restriction, and this is its advantage. If you look
at it from a bottom-up perspective, you can be surprised to
find that the end-user of digital currency does not have the
concept of "issuance", but the concept of "exchange", which
is how much cash and deposits they have to exchange for
CBDC. So from this perspective, the problem of chaotic
invoices is not so prominent. The CBDC exchanged by the
agency operating agency is not the currency issuance quota
given by the central bank, but the result of the user's actual
exchange of real gold and silver. The central bank only
counts relevant information from a global perspective and
supervises it. Whether it is private stable tokens or CBDCs
developed by various countries, they are based on the idea of
on-demand exchange, rather than expanding the issuance.
This is a very critical point. This is of great significance to
monetary policy, indicating that there is no fundamental
change; for the technical route, it means that the issuance
process of physical currency can be disregarded, and the
design of the system can be more concise, thus greatly
improving the situation.
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