Currency Usage for Cross Border Payments

CurrencyUsageforCross-BorderPayments HectorPerez-Saiz,LongmeiZhang,andRoshanIyer WP/23/72 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 MAR ©2023InternationalMonetaryFundWP/23/72 IMFWorkingPaper Strategy,Policy,andReviewDepartment CurrencyUsageforCrossBorderPayments PreparedbyHectorPerez-Saiz,LongmeiZhang,andRoshanIyer* AuthorizedfordistributionbyMartinČihák March2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:WhiletheglobalusageofcurrenciesotherthantheU.S.dollarandtheeuroforcross-borderpaymentsremainslimited,rapidtechnological(e.g.digitalmoney)orgeopoliticalchangescouldacceleratearegimeshiftintoamultipolarormorefragmentedinternationalmonetarysystem.UsingtherichSwiftdatabaseofcross-borderpayments,weempiricallyestimatetheimportanceoflegaltenderstatus,geopoliticaldistance,andothervariablesvis-à-visthelargeinertiaeffectsforcurrencyusage,andperformseveralforecastingsimulationstobetterunderstandtheroleofthesevariablesinshapingthefuturepaymentslandscape.Whileourresultssuggestasubstantiallymorefragmentedinternationalmonetarysystemwouldbeunlikelyintheshortandmediumterm,theimpactofnewtechnologiesremainshighlyuncertain,andmuchmorerapidgeopoliticaldevelopmentsthanexpectedcouldacceleratethetransformationoftheinternationalmonetarysystemtowardsmultipolarity. RECOMMENDEDCITATION:Perez-Saiz,ZhangandIyer(2023) JELClassificationNumbers: E42;F33 Keywords: Crossborderpayments;Swift;currencydominance;legaltender;internationalmonetarysystem(IMS) Author’sE-MailAddresses: HPerez-Saiz@imf.org;LZhang2@imf.org;RIyer@imf.org *DatarelatingtoSwiftmessagingflowsispublishedwithpermissionofS.W.I.F.T.SCRLSWIFT©2023undera‘BIPartnership’framework.Becausefinancialinstitutionshavemultiplemeanstoexchangeinformationabouttheirfinancialtransactions,Swiftstatisticsdonotrepresentcompletemarketorindustrystatistics.Swiftdisclaimsallliabilityforanydecisionbased,infullorinpart,onSwiftstatistics,andfortheirconsequences. WORKINGPAPERS CurrencyUsageforCross-BorderPayments PreparedbyHectorPerez-Saiz,LongmeiZhang,andRoshanIyer1 1TheauthorswouldliketothankJoseMarzlufforoutstandingresearchassistance,andHelgeBerge,MartinČihák,DongHe,AstridThorsen,FabiánValenciaandIMFdepartmentsforveryhelpfulcomments. Contents Introduction3 DataSources5 SwiftData5 Country-LevelData7 DatabyPairsofCountries7 PatternsofCurrencyUsage9 EmpiricalAnalysis12 HypotheticalSimulations18 Conclusion21 AnnexI.StatisticsforMainVariables23 References24 FIGURES 1.SwiftMessagesMT1036 2.SwiftMessagesMT7006 3.ShareofWorldCurrenciesOvertheYears(SwiftMessagesMT103andMT202)9 4.NumberofCurrenciesUsedforCross-BorderPayments9 5.DistributionoftheConcentrationofCurrencyUsageAcrossCountries(HHIIndex)11 6.CrossCountryDistributionofSwiftPayments11 7.DynamicProjectionofMarketShareGrowthforRMB,ChangesinLegalTenderStatus19 8.DynamicProjectionofMarketShareGrowthforOTHandRMB,ChangesinPoliticalProximity20 TABLES 1.MainVariablesandDataBasesUsedinEmpiricalModel8 2.RegressionResults,CurrencybyCurrency,Transfer-relatedMessages(MT103andMT202)13 3.RegressionResults,PooledPanelofCurrencies,Transfers(MessagesMT103andMT202)15 4.RegressionResults,CurrencybyCurrency,Trade-relatedMessages(MT400andMT700)16 5.RegressionResults,PooledPanelofCurrencies,Trade-relatedMessages(MessagesMT400andMT700) ............................................................................................................................................................................17 Introduction Cross-borderpaymentsareattheheartoftheinternationalmonetarysystem(IMS).Theyenabletheexchangeofgoodsandservicesbetweennations,thesettlementoffinancialcontractsbetweencorporationsacrossbordersandthechannelingofinternationalaid.Byfacilitatingcross-bordertransactions,theIMSisthebackboneofglobalizationintradeandfinance. Thecurrencyconfigurationforcross-borderpaymentsisdominatedbytheU.S.dollarandtheeuro.Whiletherearemorethan150currenciesintheworldthataredeemedlegaltender,cross-borderpaymentsmainlyconcentrateinasmallnumberofcurrencies.Asofend2021,theU.S.dollaraccountedforabout40percentofcross-borderSwiftflows,followedcloselybytheeuro.Afewothercurrencies,theBritishpound,theJapaneseyen,theAustraliandollar,theHongKongdollar,andtheCanadiandollar,alsohaveashareofmorethan1percent.TheChineserenminbi(RMB),theonlyreservecurrencyissuedbyanemergingmarket,1hasalsogainedtractioninrecentyearswithitssharerisingtoabout2.5percent. ThepaymentlandscapeiscloselyinterrelatedwithotherfacetsoftheIMS.Moneyperformsthreedistinctfunctions,asamediumofexchange,aunitofaccount,andastoreofvalue.TheU.S.dollarusuallyplaysavehiclecurrencyroleintradeinvoicing,pricingoffinancialassets,