Earlier this year, China announced that it would be creating the Chinese International Payment System (CIPS) to rival the SWIFT banking system. With the first phase launched earlier this month, the CIPS system would allow the acceptance of payments in cross-border trade, direct investments, financing, and personal remittances in Yuan through the same messaging format as SWIFT. The country has created the system in an attempt to internationalize the Yuan and establish it as the dominant global currency.   So far nineteen (19) banks have been accepted into the new system, thirteen of these banks are Chinese, while the remaining banks are foreign subsidiaries of international banks, including subsidiaries of Citibank, Deutsche Bank, HSBC and Australia and New Zealand Banking Group.

It appears as if the new system is getting off to a good start. On October 8, Standard Chartered proudly celebrated the fact that they had become the first to break in the new CIPS system in what they called a ‘landmark’ clearing with a transaction involving Swedish furniture company IKEA.

While this new system is a strong step towards internationalizing the Yuan, it is important to note that CIPS could have major implications for nations impacted by sanctions. The new system, which facilitates cross-border payments in Yuan, could allow non-Western parties to bypass U.S. and EU sanctions as payments will not be in USD or Euros. Further, access to CIPS could become attractive to financial institutions in sanctioned nations because the use of SWIFT’s, a Belgian organization, platform would require compliance with EU law, including EU sanctions regulations. CIPS, as a Chinese organization, would not subject payments made on its platform to the same level of scrutiny as SWIFT, nor would those payments have to comply with EU sanctions. As readers of this blog likely understand, China has generally opposed sanctions as a political tactic, using its seat on the UN Security Council to repeatedly criticize and even veto sanctions resolutions in the past.

For example, countries like Zimbabwe that have suffered greatly under U.S. sanctions are already warming up to the idea of adopting CIPS as an alternative to SWIFT. Having adopted the Yuan as an official form of payment in January 2014, as part of Mugabe’s “Look East” policy and being passed over by a number foreign investors this year, Zimbabwe has made a concerted effort to court China to become an even greater trading partner, and play an ever more dominant role in Zimbabwe’s economy. The CIPS system would be an opportunity for Zimbabwe to strengthen its relationship with China and help assuage the economic turmoil the country has once again found itself in.

While Zimbabwe may be looking to take advantage of the new payment platform, some may wonder what other countries impacted by sanctions, such as Iran, think of CIPS. As readers may be aware, many of Iran’s major banks were cut off from SWIFT in 2012. The loss of access to SWIFT has played a major role in frustrating trade between Iran and those around the world. As such, it would seem natural that the Islamic Republic would want to utilize a system that would not be impacted by the sanctions targeting Iran. However, the adoption of CIPS by Iran makes little sense. Currently, 65% of the payments Iran receives from oil exports to China is made in Chinese goods and services and the remaining 35% is made in Yuan. To Iranians, Yuan are a non-convertible currency and can only be spent on Chinese goods. As such, CIPS would do little to advance Iran’s current position, and would have little impact on Iran regaining access to global markets. Moreover with the removal of many EU sanctions on under the Joint Comprehensive Plan of Action, Iran’s limited ability to access SWIFT may be resolved.

As of now the effectiveness of the new CIPS system in elevating the Yuan and/or helping avoid sanctions remains to be seen. To rival SWIFT, the Chinese may want to include some additional features. For example, basics such offering the service 24 hours a day as opposed to CIPS’ current 11 hours, would be a good start.