A Chinese Perspective on the Unique Value of the LEI in Cross-Border Payments
Dr. Chuanwei (David) Zou, Director of the Frontier Research Center at the Shanghai Institute for Finance and Development (SHIFD) and the Chief Economist of Wanxiang Blockchain, explores how increasing global adoption of the Legal Entity Identifier (LEI) is enabling faster, cheaper, more transparent, and inclusive cross-border transactions—while maintaining their safety and security. Dr. Zou also delves into the growing role of the LEI across the Chinese economy.
Author: Dr. Chuanwei (David) Zou, Director of the Frontier Research Center at SHIFD
Date: 2024-05-28
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Since 2020, the G20 has identified improving cross-border payments as one of its main working priorities and has emphasized the importance of exploring new applications of the LEI. How can increased global adoption of the LEI help to tackle some of the main challenges in cross-border payments?
In April 2020, the Financial Stability Board (FSB) identified "fragmented data standards" and "lack of interoperability" as key issues hindering the efficiency of cross-border payments. Currently, numerous standards co-exist to capture key information about legal entities involved in financial transactions, such as names, legal addresses, and other relevant details.
Given that the Global Legal Entity Identifier Foundation (GLEIF) has already established certified mapping services with five major industry identifiers, including Swift's Business Identifier Code (BIC), the LEI is poised to address this fragmentation and enhance interoperability in the cross-border payments ecosystem. This improvement will also support straight-through processing (STP), streamlining transactions and reducing friction.
In February 2024, the Financial Action Task Force (FATF) launched a public consultation on Recommendation 16 and its Interpretive Note. The proposed revisions recommend the use of the LEI in payments and value transfers where the originator and/or beneficiary is a legal person. Considering this recent development, what value can the LEI bring to the global fight against financial crime?
The LEI will significantly improve transparency across the cross-border payments ecosystem by enhancing market participants' data management efficiency and streamlining the information matching between the payment message and their own internal risk management database.
As a global identifier, the LEI will also ease information consolidation and improve the risk exposure assessment for each legal entity. As a result, the LEI will help facilitate compliance with critical processes and requirements, including Know Your Customer (KYC), anti-money laundering (AML) and counter-terrorist financing (CFT) measures, customer due diligence (CDD), and sanctions screening.
The ISO 20022 standard is set to simplify global business communications, and there is already an international consensus on a gradual transition. According to the Bank for International Settlements' Committee on Payments and Market Infrastructures' (CPMI's) 'Harmonised ISO 20022 data requirements for enhancing cross-border payments', the LEI and/or the BIC may also substitute or complement name and postal address information to aid the identification of all legal entities involved in a cross-border payment in a standardized and structured way.
What are the benefits of including the LEI reference data in the ISO 20022 messaging format?
ISO 20022 is an open messaging standard characterized by its comprehensiveness, interoperability, and flexibility. These characteristics will create more accessible, efficient, and transparent cross-border payments. Considering the current global migration to this industry standard, the inclusion of the LEI in ISO 20022 messages can bring various benefits, including facilitating STP, enabling automated reconciliation and improving the efficiency of cross-border payment-related business processes, allowing more effective AML and CFT measures, and enhancing interoperability and interconnectivity levels between different payment systems.
In addition to enhancing transparency in cross-border payments, the LEI can also actively promote digitalized supply chains and international business cooperation. In China, the Shanghai Municipal People's Government plans to set up a pilot zone for Silk Road e-commerce cooperation in 2025 and establish a new cross-border interoperability platform for digital identity leveraging the LEI.
What future applications of the LEI can we look forward to in China?
The Chinese government attaches great importance to the application of the LEI in areas such as optimizing the general business environment, promoting economic opening up, and internationalizing the renminbi (RMB). This long-standing commitment, reflected in the roadmap for implementing the LEI published by the People's Bank of China (PBOC) in November 2020, has allowed China to become one of the jurisdictions with the fastest-growing LEI population.
Mr. Xu Zaiyue, President of Cross-Border Interbank Payment System (CIPS Co., Ltd.), once referred to the LEI as the "passport for companies going international." In your opinion, how can the LEI support Chinese companies in going international and international enterprises looking to expand their business in China?
The LEI can play a vital role in these two directions. As an international standard, the LEI can easily facilitate the digital identification of legal entities in cross-border scenarios by supporting a wide range of existing solutions, such as e-seals and e-signatures. The LEI acts as an essential trust foundation for all companies involved in cross-border business and financial activities by providing open, standardized, and high-quality legal entity reference data—effectively tackling the trust deficit that has traditionally characterized cross-border transactions.
How do you envision the landscape of cross-border payments evolving by 2040, considering technological advancements, regulatory changes, and the increasing demand for cheaper, faster, more transparent transactions?
Driven by market, technological, and policy factors, the cross-border payments ecosystem is entering a phase of active innovation. This, combined with the modernization of national-level payment systems, will profoundly reshape the international financial infrastructure.
By 2040, all "quantitative global targets" reflected in the Roadmap for Enhancing Cross-border Payments and recognized in the G20 Rome Leaders' Declaration should have been achieved, translating into an improved cross-border payments ecosystem regarding cost, transparency, and accessibility. While it is difficult to predict what will happen in the next 16 years, I expect that by 2040, the average cost of global retail payments will have fallen to 0.8%. The average price of international remittances will have fallen to 2.4%. Regarding efficiency, I expect 85% of cross-border payments to be made in less than one hour and the remaining 15% within one working day.
Likewise, we will see increased transparency levels, with users able to track the flow and arrival of funds in real-time. In addition, by 2040, the multiple wholesale payment systems are expected to be highly interconnected, leaving no gaps in operation time. Faster payment systems will also be more connected, solving one of the industry's longest-standing challenges.
Regarding the data standards, I expect the LEI will have gained a ubiquitous presence across the cross-border payments ecosystem, allowing improved data and risk management. Based on the successful adoption of ISO 20022, I also predict the rise of new message standards with even more robust information exchange capabilities.
Lastly, I project that wholesale central bank digital currencies (wCBDCs) and Multiple CBDC Bridge (mBridge)—a multi-CBDC platform—will have a significant market share, accounting for at least 25% of cross-border payment volumes. This shift in market dynamics will herald a crucial paradigm change in the industry, underscoring the transformative potential of these technologies.
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Dr. Chuanwei (David) Zou is the director of the Frontier Research Center of the Shanghai Institute for Finance and Development (SHIFD) and the Chief Economist of Wanxiang Blockchain. Prior to his current role, Dr. Zou was the Chief Economist of Bitmain, and he held various positions at China Investment Corporation and Nanhu Finance Corporation. Since 2014, Dr. Zou has also collaborated with the People's Bank of China as an associate research fellow. In 2015, Dr. Zou won the 1st Sun Yefang Prize for Financial Innovation. Dr. Zou holds a Ph.D. in Economics from Tsinghua University.
