Bitesize Payments

Sovereignty (and Payments)

Paul Thomalla Season 1 Episode 30

In this episode of Bitesize Payments, we zoom out from the usual rails and rules of payments to explore a much bigger force shaping the industry: sovereignty. From the ancient control of coinage by kings to today’s battles over digital currencies, data, and cross-border standards, sovereignty has always been about power — who has it, who wants it, and what happens when that power is challenged.

We unpack the history, the players (from governments and central banks to Big Tech and crypto), and the growing tension between national control and global commerce. As digital ecosystems evolve, what does sovereignty mean for the future of payments — and who gets to decide?

This one’s about more than your pound, dollar, or euro…..

Here we go....

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Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education


SPEAKER_00:

Well, welcome back to Bite Size Payments, where we discuss their history, how they work, and of course, who does what. In this episode, we're going to do something slightly different. We're going to talk about sovereignty and sovereignty from a payments point of view. While we in the payments industry like to think that payments are the main event, the core infrastructure, the clever plumbing that keeps the world turning, I'm afraid the truth is payments are often just one small piece of a much larger picture. Shame, I know. And when big topics come up, whether it's politics, sanctions, digital assets, or, of course, global trade, we tend to fall back on what we know. Our systems, our rail, our protocols, etc., etc. But these topics aren't just about technology or about our rails. They're about sovereignty. governments, and of course, probably all-embracingly, power. And when these issues become so large, they start to shape our thinking, how we think about the world. And of course, it's not always easy to zoom out and see what's really going on beyond our pound, our dollar, our euro, our trade, in fact. So today I want to step back a little. I want to look at the bigger picture, and I hope that In some small way, I will do it justice. Today, I want to talk about sovereignty, but from a payments point of view. Here we go. Let's start simple. This is a big topic, probably much bigger than payments, if I'm honest, but it is such a really important thing we need to discuss that if we don't keep it simple or at least start simple, then I fear that we'll get a bit lost. So a sovereign is a body, the ruler, the government, the state, the king, the queen, whichever way you want to look at it, the supreme authority over a defined territory. It says who's in charge, who makes the laws, and of course, who collects the taxes. And with that authority comes a big responsibility, controlling the economy, amongst other things, of course. To do that, sovereigns have typically created currencies. Coins at first, and then paper money, as we discussed. Why? Well, so they can control trade, and of course, collect taxes, and defend the interests of that nation state. If you can create your own currency for your country, then you can set the rules. How much money is in circulation? What's it worth? Who gets to move it? And frankly, who controls it? This gives you the tools to manage inflation, fund wars in the past, or maybe in the future, I don't know, builds roads, infrastructure, et cetera, et cetera. But crucially, it's to say, this is ours, and of course, what isn't. Currency was a form of economic border control, a shield, a flag, a lever of power. And in the UK, quite frankly, we took it literally. We had a coin, actually called the Sovereign, first issued in the 1400s under Henry VII. Solid gold stamped with the king's image. Well, it wouldn't be a coin if it didn't have the Sovereign's image on it. It wasn't just money, however. It was a declaration of who ruled the land. That's what money was. A tool of trust, yes, but also of authority. And because payments were mostly local, shops, markets, people trading in the same place, sovereignty was easy or relatively easy to maintain. But over time, that started to erode. Trade expanded, as we've discussed several times. Money began to move across borders. And with that came new questions. Whose rules apply? Whose money is trusted? And who controls the pipes that it flows through? The idea of sovereignty hasn't gone away. It's perhaps got a little bit harder to control because now money moves faster than the rules, or at least ways faster than we can create new rules. But of course, when we talk about things like sovereignty, we tend to things of kings and queens and what have you. And of course, while they still exist, they tend not to be the most powerful people in the country. That's not always the case, but you hopefully get what I mean. And of course, in their time, it was relatively simple from a payments point of view because it was physical. It was coins, it was beads, as we've talked about, or it was paper money, etc., etc., Now, of course, that's not the case. And indeed, our messages move extremely quickly all over the world. However, the principles behind sovereignty are starting to come into sharp focus. And that's really what I'm trying to scratch the itch of and perhaps explain a little bit more about today. So in the next section, we're going to go into a little bit of how sovereignty sovereignty or how the infrastructure, probably a better way of putting it, actually works. Sovereignty isn't just about a flag or a national anthem or the coins that I mentioned earlier on that Henry VII had. It's much more important that it's these are the rules that work for my country. This is how I control it through the currency effectively. And it also says, you know, if you want to do business here, this is how you play. These are my rules. So that means our currency, our tax system, our legal framework and everything that gets wrapped around it. So when a country issues its own currency, it can shape the rules around how much is created, where it is stored, how is it moved, and of course, perhaps most critically, how it's taxed and how it's collected. That's part of the fiscal policy. And it only works if the sovereign or the government or other controlling influences can actually enforce it. If money were to flow in and out in ways that the government or the sovereign can't monitor or control, it effectively undermines all the things that they're trying to do, whether it's tax regulation or to manage the environment. And effectively, that puts the government or the sovereign in a very difficult position. And by and large, they move as rigorously as they can. for that not to happen. So they have some helpers here, of course, and we talked about central banks before with Mark, but effectively that's where they come in. They're the quiet enforcers. Some banks would say not so quiet, but nevertheless, you get my point. They're running the clearing systems, they're managing reserves, they're issuing all the liquidity, they're maintaining the trust in the system. They're not just setting the interest rates, They're making sovereignty to work in practice. They're effectively the people that are overseeing this fiscal work that needs to happen for the government to stay as it sees it in control of its country. Most countries use capital controls to restrict how money moves across or outside of their borders. Others regulate who can own the assets or impose foreign investment rules. There are tools to keep the domestic system insulated and stable to stop outside influence becoming, frankly, an inside risk. Now, we don't necessarily talk about this all the time, but inherently, I think we know that all of that is there. Then, of course, there's perhaps a more modern battlefield, which is data sovereignty. Payments generate, as we know, huge amounts of data. where people spend, how much, when, with whom, et cetera, et cetera. And governments now want that data to be stored locally, governed locally and protected by local laws. So for instance, India insists on all payment data staying onshore. It's why the EU enforces GDPR, why cloud and payments are suddenly in the same sentence. Even currency's convertibility can be a tool. Not all sovereign nations allow their money to float. Some peg it, some restrict conversion entirely. It's all about control or, depending on your point of view, stability and defensibility. But here's the catch. Over time, many countries have outsourced parts of their payment systems to, for instance, cloud infrastructures or global processes. And of course, in a slightly different way, as we've talked about before, to card networks. Those card networks, of course, can bring convenience. Those cloud infrastructures bring scale and volume. And of course, the same for the global processes. But perhaps to some, that also leads to a vulnerability or perhaps a dependence that could be influenced at a time when maybe you don't want it to. Because if a foreign company or a foreign government controls your rails, your data, or your access to cross-border clearing, then perhaps you're not fully sovereign anymore. And perhaps you don't need to be invaded to lose control. Sometimes you just sign a contract. And of course, then the issue becomes, well, okay, so the data's in the cloud somewhere. Where's the cloud? Well, it's in the cloud. Okay, well, who controls the cloud? Ah, well, this company does in this country. Oh, I'm not sure I like that. Who are they beholden to? Well, they're beholden to this country's regulation. Ah, so now you're into a whole different set of debates. And of course, that's the same for the processors and it's the same for the cards networks and what have you. So the issue then becomes, who am I outsourcing my processing, my data or my control to? And do I trust them? You get the gist of it. Well, That's kind of the problem when you have heightened tensions. And obviously we can see some of that now. And to put it bluntly, you know, when we saw not that long ago, when the world for, in my point of view, very good reasons, decided that they would stop working with Russia from a fiscal point of view, and SWIFT was put under immense pressure to take Russia out of that series of processes and that environment? Well, if they can do that to Russia, perhaps they can do it to anybody. It's a complex one, right? So who keeps all of this sovereignty in control who are the overlords that manage all these processes under a clearly a lot of them as we talked about well at the top of course it's governments and from their point of view they um help, work with, depending upon your point of view, the central banks. And from the central banks, they cascade it down. They set the policy, they issue the currencies, they control and set the rules, they regulate, etc., etc. But of course, then you have the next level, which is effectively the infrastructure, whether that's the physical mints or it's the clearing systems or it's the high value payment rails or the immediate payment rails, etc., etc. And they're the plumbing. But those pipes are effectively the way that you can move money and do it officially. And doing outside of them, unless you're using cash, is frankly pretty hard. But modern economies don't work in isolation. To trade, to settle imports, exports, to move capital, countries need to be interconnected. And so there are various relationships and agreements. We've mentioned SWIFT in the past. Of course, the SEPA. And there are loads and loads of these environments that go around the world. And these systems let money move while maintaining some form of sovereign control in each of the various countries from the from and the to. And of course, sometimes those systems are so effective, so easy to use that they become a dependency, whether it's Swift or it's the card networks, which frankly, nearly everyone uses. And of course, as I mentioned before, what happened with Russia, that was a big change. If you need your infrastructure to run my economy and you can cut me off, then that puts me in a very difficult place or you can threaten to cut me off. That's a very awkward position to be in. And as such, we've seen countries set themselves up. You know, Russia is now very effective at running its own environments. China, et cetera. India has a huge infrastructure that it's set up inside of India to make sure that it can work and isn't dependent on other players. So this interdependency thing is really important. And from a sovereign nation's point of view, it's critical. as they see it to be able to be in control. So who else is here? Well, there are some disruptors of course, and, um, In a modern world, these new players are disrupting the old world orders of, well, it's my country, my currency, my rules, to, well, of course, I can do that across many countries, many currencies. I can do it really, really quickly. So, We could start with Visa and MasterCard. These two networks handle the vast majority of global retail transactions and are extraordinarily easy to use. We use them nearly every day and that's a huge plus. But they're private companies. Clearly they are cross-border and they operate privately. by and large, that's not strictly true, but by and large above the nation state layer. Many countries rely on them to function, but they're not really involved in the controlling of pricing or the standards or the compliance rule. That's not a sovereignty bit of work. That's pretty much down to the way that Visa and MasterCard want to work. Of course, they're put under immense pressure from various countries around the world, but we also put them under pressure because we want them to be really convenient and easy to use. And while I don't want to go on about Visa and MasterCard, they're a classic example of something that works really, really well and has an immense footprint. Some countries, some regions don't like using them at all. So very different user profile in China, for instance, than you would have in America or in Europe. Then, of course, we have things like crypto. which is designed from the get-go to be stateless, borderless, immune, frankly, to central control. For some, it's complete financial freedom. For others, perhaps central banks, it's a nightmare because if people start storing value and making payments outside of the regulated system, then sovereignty loses both its visibility and, of course, control. It's control. Now, we've had the conversation about crypto, whether it's an asset or a currency. Please look back at that podcast and we go into a lot more detail. But it is a disruptor. And of course, then we have stable coins, perhaps pushing it even further. They're pegged to a fiat currency, mostly the dollar. I think entirely the dollar at the moment, but they move through private platforms, wallets and exchanges. They look like many, they behave like many, but they don't play by and large by sovereign rules. That's why we also have CBDCs. That's my point of view, but I think that's fairly well accepted. Central Bank Digital Currencies. They're the new kids on the block, really. And again, we've done the podcast on that. So if you want to understand more about that, please go back to that podcast. However, I would argue that that we are seeing the emergence of CBDCs, not because governments want to be truly innovative in their own right, and frankly, in the countries that do have CBDCs, there's an awful lot of people going, you know, what's this about? Why are we having these things? But of course, it's because they are a sovereign nation's response to decentralization. a very modern way to modernize currency without losing control. So, yes, it's traceable, it's legal tender, it's state-issued, it's centrally governed, and ideally interoperable across borders. But it looks and feels like stablecoins, crypto, etc., because it's a native of the digital world. Whether or not they succeed, well, that's an open question. But their intention is clear. Those regions or those countries that have created CBDCs want to be relevant in a digitally native payments world. So, yes, there is a lot of tension going on here. There is a lot of disruptors. And at the very heart of it is sovereignty my sovereign my country my government my currency etc etc how much do i want them to be in control how much do they want to be in control well i think that we'll see that that's a very major issue of our time and in perhaps some of these heightened issues it comes to the boil much more but it's not a new phenomenon what we'll see though i think is a lot more of activity here because what we're really looking at, what we're really thinking about is how do we move from the current world of payments in this analogue infrastructure, analogue mentality that we have into a completely digitally native world. Effectively, how do we get these sovereign nations, these regions, to move into a digital, a natively digital world and still be relevant. That's the question of our time. So, there we go. Sovereignty. well, at least from a payments point of view, trying to explain how sovereignty works from a payments point of view, at one level is super simple and another level is really complex. I hope I've done the topic some justice. So for millennia, kings, queens, governments have controlled most of the world's currencies and with them, the rules around how those countries trade, how they tax people, and the economic and fiscal life that goes on in their country. But we are no longer islands, certainly from a technology point of view. Big global topics are surfacing, climate, conflict, and of course, arguably one of the biggest ones, how we go digital. And within that shift, there are now spaces for challenges that we didn't even know that we needed. New forms of value, new platforms for trade, new ways of exchanging trust. No doubt this kind of upheaval has happened before. People will say, oh, it was the same when we went from coins to paper, when we went from golds to fiat currencies. But this time it feels different. As I used to say in many of the presentations I gave, it's very exciting, but it's a once-in-a-lifetime opportunity. And as I've said before, this isn't just digital, it's about being digitally native, and that may call for a whole new rulebook. When you see these debates playing out in Parliament, in policy forums and payment councils, what you're really seeing is countries exercising their sovereignty and how they would like their sovereignty to move forward. The question now is, can our kings, our queens and our governments move forward fast enough?