What is CIPS?

People often argue there is not enough innovation in the financial world, and to some extent, they are absolutely right. However,  there are some developments, well worth taking note of, including the CIPS network. This Cross-Border Inter-Bank Payments System can have major consequences for SWIFT in the Western world.

What Does CIPS Do Differently?

One has to first understand the CIPS initiative before looking into how it works. The Cross-border Inter-bank Payments system is designed to facilitate financial transactions between different countries. To be more specific, the entire network settles cross-border RMB payments and trade for all partners.This means China is taking center-stage as far as this payments platform is concerned.

The development of CIPS dates back all the way to several years ago. After a few years of development, the first phase of CIPS was introduced to the rest of the world. The project gained immediate support from 19 Chinese and foreign banks, as well as 176 indirect participants across 6 different countries. At that time, some people saw it as a way for Russia and China to develop a payment system that could rival with SWIFT.

However, it appears that is not necessarily the goal, as CIPS signed a Memorandum of Understanding with SWIFT in 2016. To be more specific, SWIFT would be used as a secure and efficient communication tool for CIPS’s connection with established members. In a way, this is meant to allow cross-platform compatibility between different payment networks, as there is no reason to think CIPS wants to directly compete with SWIFT in the West.

It is also worth mentioning CIPS is not designed to facilitate funds transfer, as it is designed to send payment orders to be settled by correspondent accounts. This means partners of CIPS must have a banking relationship by either being a bank themselves or affiliating with an existing financial institution. It is not open to just anyone by any means, yet it aims to speed up cross-border payments by quite a margin. Or that is how it was supposed to go until things came to a change back in 2015.

To put this latter part into perspective, the CIPS protocol would only serve as a cross-border yuan trade deal tool instead of a network designed to facilitate capital-related transfers. Providing a unified network for settling deals in yuan sounds great on paper, yet the idea has suffered some setbacks in the past few years. The 2015 Chinese stock market crash has not helped matters either.

One thing to keep in mind is how CIPS is still a project that is very much alive to this day, even though it seems unlikely it will transform the financial sector as a whole. That does not mean the payment network should be dismissed, as it still lays a foundation for cross-border trade settlements relying on the yuan currency. An interesting project that is unable to live up to expectations right now, yet one never knows what will happen in the future.

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