The Role of the City of London
The City of London has long stood as a pillar of the global economy, with a history stretching back hundreds of years. As a focal point for finance, trade, and professional services, its influence has been far-reaching, driven by the robust framework of English common law. This legal system has long been the jurisdiction of choice for international business and commerce, providing a stable and predictable environment that has fostered growth and innovation.
This leading role was the result of the prominence of Britain as the centre of the global economy, with London being its focal point and the City of London as its inner core. From the position of London being at the centre of the global “gold standard”, Britain could build the “pipelines” of the international financial system, which stretched from North America to the Caribbean, from South Africa to Northern Europe, from Honk Kong to Australia.
This network of global physical and institutional infrastructure centred on Britain/London/the City provided the financial architecture on which the massive expansion of trade (today we would call it “globalisation”) of the 19th century was built, before it came to a sudden stop with the outbreak of World War 1. During the war, Britain lost its leading international role, which shifted to the USA, with New York becoming the new centre of global finance (and – later on – the epicentre of the first global financial crisis, originated by the collapse of the Dow Jones in 1929).
The Americans had inherited from the British the financial architecture of the global financial system, on which they super-imposed the mighty size of their public debt (Treasury) market, of their equity market (“Wall Street”) and – from 1944 – of the US dollar. The US have refined the British system, but they haven’t changed it radically. The infrastructure has remained the same, the legal system has remained based on common law, and its underlying approach as remained a “liberal” one.
The collapse of Bretton Woods in 1971 (decided by US President Nixon) and the end of Cold War 1 between the US and the Soviet Union in 1991, with the establishment of the ensuing “Washington Consensus,” have only further strengthened the role of the US and New York as the centre of the global financial system, which was still running on the old “rails” built by the British empire (as epitomised by the birth of the Eurodollar system in London in 1957, whose value was estimated to be USD 1.7 trillion in 1985, almost 14 trillion in 2016 and USD 56 trillion today).
However, we find ourselves at the cusp of a new era. The rise of China over the last half century has created a formidable competition for the global supremacy of the US and the dollar. The world is no longer unipolar, led by the Washington Consensus, but is - at least - bi-polar (and some argue multi-polar). The digital transformation of trade and commerce presents both challenges and opportunities. Traditional financial centres like the City of London, face an existential threat from emerging digital trading platforms, which are poised to shift the centre of gravity of global trade and finance.
The US seem unable to resist the formidable ascent of China: the most they seem able to willing to do is “containing” China, before falling in the so-called “Thucydides trap” of an open conflict between the incumbent hegemon and the rising challenging power. This global competition, which is taking the semblance of a new Cold War, is fought on many fronts, including a fierce “tech war.” A key battlefield of this “tech war” is the race for the control of the global payment system.
Long dominated by the US-centric SWIFT, global payment systems are becoming more articulated, and based on new networks and infrastructure. China is able to offer, for example to the countries of the Belt and Road Initiative, the alternative CIPS (Cross-Border Interbank Payment System). Along the countries of the Digital Silk Road initiative, China is building the new “rails” over which its e-CNY, and other currencies, will run. The US seem unable, or unwilling, to react, fearing that any innovation to the system could threaten the supremacy of the US dollar as global reserve currency.
But the world needs a healthy competition between systems, and the West needs to provide its “liberal” alternative to the rising challengers, which are based on a different set of core values. In this changing landscape, the City of London must adapt and take a leading role in shaping the new financial architecture, based on common law and liberal values (such as the respect of privacy), leveraging on its historical position of global financial centre.
This new financial architecture must be built on open and fully interoperable standards, distributed systems, strong identity assurance and rigorous regulatory compliance. This vision has been championed by the Smart Economies Network, a vision established in 2023 by the Rt Hon Lord Mayor Michael Mainelli. By collaborating with experts from across the public and private sectors, the Smart Economy Network aims to develop a comprehensive architecture for digital trade and commerce.
The US may be the last moving actor, but there are undoubtable first mover advantages. Britain, London and the City of London must show the way to their much larger and more powerful ally.
This paper will outline the foundational elements of this vision, providing a detailed framework for stakeholders to convene, build consensus, and drive forward the evolution of a smart economy.
Brunello Rosa, CEO Rosa & Roubini Associates