Can Blockchain Technologies Potentially Replace SWIFT with its 74-year History of Economic Control?
When it comes to cross-border payments, there are a plethora of solutions in the form of apps like PayPal, Circle and Square. However, the leading method has long been provided by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). But there is an issue with its dominance.
SWIFT has become co-opted by the United States as a powerful tool of economic control. Its primary currency, for ease of application, is the US dollar. This link to a central economy has allowed the US to enforce its political agenda when it comes to matters of moving money across borders.
Even when you put politics to one side, SWIFT is also really outdated. Because of both of these factors, it’s being lined up for disruption by blockchain technology. Blockchain has long been identified as a potential tool for money transfer - its very nature makes it more efficient, not to mention far less corruptible, than centralised technology.
However, despite the attributes that make blockchain perfect for cross-border payments - decentralisation, transparency and immutability - it faces a number of handbrakes in its development. One is its regulation as a global technology.
SWIFT’s reliance on the dollar has seen it fall into the gamut of US regulation and, thus, US control. When it comes to blockchain, though, there is no government. There is no HQ, no leadership that regulates it entirely, and also no source of hegemonic control.
SWIFT’s 74-year History
The idea of using the dollar as a world reserve dates back 74 years. Since that date, the economy of the U.S. has taken a major step up in centralised global economic control. In 1944, 44 countries met in New Hampshire for the Bretton Woods Agreement and agreed to use the US dollar – at that time backed by gold – as the world’s reserve currency for cross-border settlements in order to foster international trade.
The problem with setting a world reserve on a centralised currency is that it’s prone to influence from all manner of different socio-political and economic factors. In the 1960s, for example, the US was waging a losing war with Vietnam and was printing more currency than it had gold reserves.
This led to France labelling the Bretton Wood Agreement ‘America’s Exorbitant Privilege’. France, along with the rest of the world, had to produce $100 worth of goods in GDP and then trade those to the US for that $100 bill which, at the time, was not worth the paper it was printed on.
The Bretton Woods agreement was soon suspended by President Nixon, and all attempts to modify it failed. Even so, the world has been left in a situation where the US dollar is the global reserve currency, but it’s not backed by anything.
To this end, SWIFT – the original function of which was solely cross-border and international payments – picked up the US dollar. As the least-worst-performing global currency, it was the only viable option.
Hegemony of Control
So, while it was ostensibly never intended that SWIFT be political, it has become an economic weapon for the US. It is powerful in the threat of sanctions, and other countries have felt those threats.
Russia was threatened with SWIFT expulsion in 2015. That would have partially isolated Russian business and banking from a huge trading partner: Europe. The US, with its currency leading the way and a cross-border technology under its control, has the potential to exert a monopoly over world trade.
“Limiting SWIFT access has been used as an economic-sanctions tool against Russia, Iran and North Korea, as it’s still the dominant international payment network. It’s a centralised network, an industry standard, so limiting access is simple”
Russell Perry, founder and CEO of kompany, was the winner of the 2016 SWIFT Innotribe Marketplace Challenge. kompany helps businesses verify and check their international business partners, suppliers and customers. We discussed the so-called ‘SWIFT war’ with Perry.
“It’s a very helpful system to ensure the US dollar becomes and remains the world reserve currency,” he says. “Limiting SWIFT access has been used as an economic-sanctions tool against Russia, Iran and North Korea, as it’s still the dominant international payment network. It’s a centralised network, an industry standard, so limiting access is simple.”
Circumventing this level of control was at the crux of blockchain’s creation. It was originally seen as a way for individuals to break traditional banking dominance by offering peer-to-peer digital cash. However, on a much grander scale, it could level the global playing field.
Perry readily admits that SWIFT is under threat. “Blockchain technology is already starting to replace SWIFT,” he says. “SWIFT is a legacy system and there are several SWIFT-killers emerging, because of its inefficient store-and-forward messaging system. Commerce needs systems that are real-time and process transactions instantly. It can take up to a week for international payments to be processed as there are so many intermediaries, store and forward or batch processes, and a network topology that doesn’t allow for direct payments.
“Blockchain technology is already starting to replace SWIFT. [SWIFT transactions] can take up to a week… as there are so many intermediaries… [With blockchain] live payments are possible at a fraction of the cost… [lowering] transaction costs by 50 to 75%”
“With blockchain, there’s a leap in efficiency because of the decentralised network, alleviating the need for intermediaries. All of a sudden, live payments are possible at a fraction of the cost and in only a few seconds. Multiple currencies – fiat or crypto – can be transferred instantly within one chain and with no need for multiple-correspondence banks.
“This means companies will soon be able to lower their transaction costs by 50 to 75% because there will be fewer local gatekeepers – ie, banks – limiting business. Banks will not go away, but there will be another option for international transfers: SWIFT or ‘now’ – that is, via blockchain.”
China’s Blockchain Revolution
It’s interesting to note how places such as China are diving headfirst into blockchain technology, even if it is devoid of traditional cryptocurrencies. A blockchain solution for cross-border payments could release them from the prospect of sanctions or other economic threats from the US.
China has filed for 41 blockchain patents in the past year, and President Xi Jinping has openly stated that blockchain features in its most recent five-year plan. The Socialist Republic has long been under the thumb of the US, but has also been striving to break away and assert itself as a leading global economic power.
“China has filed for 41 blockchain patents in the past year, and President Xi Jinping has openly stated that blockchain features in its most recent five-year plan”
Through blockchain, it could more easily achieve this as its cross-border transfers would not only be decentralised and transparent but also more efficient, readily available and easily adopted by other countries or parties.
Blockchain’s Power to Disrupt
The fact of the matter is the biggest cross-border payment system is not only outdated, but also completely and unfairly monopolised by a central entity. In terms of international trade, it makes no sense to give one entity additional power when it comes to the manner in which transfers are made.
Challenges to the status quo are coming not only from China. They are also coming from corporations within the US, many of which are looking to create a solution that is fairer, less controlled and ultimately more efficient.
IBM is one such company that is looking to climb aboard the blockchain wave as it gains momentum. Given its relationships with major corporations as well as banks, there is little doubt that whatever changes it makes to its own method of cross-border payments could have a big influence globally.
“Whatever changes [IBM] makes to its own method of cross-border payments could have a big influence globally… [as] IBM machines are still being utilised in 92 of the world’s top 100 banks”
IBM machines are still being utilised in 92 of the world’s top 100 banks. It’s a company that has a long history, but also an eye on the future, which is becoming more and more blockchain-oriented.
We’ve reached a point where the need for disruption in the banking sector is clear. With blockchain’s ability to remove not only the centralised middleman, but also the global control enacted through the dollar, the technology is the obvious next step.
“Blockchain offers a void of control, and yet still the ability to trust and be assured that transfers take place. It’s transparent and immutable and, as such, leaves no room for fraud or misdealings”
Blockchain offers a void of control, and yet still the ability to trust and be assured that transfers take place. It’s transparent and immutable and, as such, leaves no room for fraud or misdealings. It’s also a far quicker and cheaper solution, bringing substance back to cross-border payments but remaining merely a tool, rather than a business in and of itself.
Is Regulation Slowing Blockchain’s Disruption of SWIFT?
With all the positives that blockchain can offer over SWIFT, it’s probably surprising that bigger strides haven’t as yet been taken to disrupt and replace what is a legacy store-and-forward messaging network.
Regulation of blockchain technology is a slow and ongoing process, particularly when it comes to payments, and even more so when those payments cross borders. It would be easy to blame regulation for stunting Blockchain’s growth as a cross-border payment system, but Perry disagrees.
“Regulation is key for B2B-payment blockchain networks,” he argues. “Regulation will, in fact, increase the speed of adoption! Without defined and accepted standards, adoption by industry, companies or businesses will be limited because those sectors need to be confident that the technical solution will also be available in the near future.
“SWIFT, as we understand it today, has been around for nearly 45 years. With regulation, there also comes enforcement. Even with a B2B blockchain, things can go wrong, and the human factor will most likely be the weak link – be it because of human error in initiating the payment to the wrong recipient, or outright fraud. Where money is transferred, someone will always try to game the system. With enforcement of the regulation of B2B blockchain networks, industry will have the confidence of payments being legit, but also a legal process to fall back on if something goes haywire.”
“With enforcement of the regulation of B2B blockchain networks, industry will have the confidence of payments being legit, but also a legal process to fall back on if something goes haywire”
The technology itself is just entering the realm of regulation, and that is because it’s still in its embryonic stage. It has masses of potential but, for cross-border payments, it has a big legacy to try and take down. SWIFT may have its flaws and it may be outdated, but it’s still proven, trusted and entirely regulated.
Cross-border payments on Blockchain are revolutionary and a step in the right direction, but it’s likely the technology will need to prove itself and be proven through regulators, before there is widespread adoption.
If blockchain has the potential to be a great leveller then this need not only apply to international money transfer. In fact, any industry that relies on data to function will be affected by the widespread adoption of blockchain technology. One of these is artificial intelligence (AI), an industry already looking like it might be dominated by a handful of giants - namely the likes of Facebook and Google.
Through decentralisation, data cannot be hoarded into monopoly pools. There have already been a host of blockchain marketplaces established, in which users can buy and sell data. There are projects underway with the intention of anonymising all data in such a way that not even the company using it has a copy. These encrypted bundles of data could be confidently used by researchers in machine learning algorithms, without those researchers every seeing the underlying data. Blockchain potentially threatens not only established financial systems but established technology companies - this is exactly why it’s so exciting.
Illustrations by Kseniya Forbender
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]
- How Vulnerable Is the Internet of Things (IoT) to Hackers?
- Blockchain Interoperability Remains a Critical Missing Puzzle Piece
- How to Keep A Business Safe: Tips From IBM and Shapeshift.io Cybersecurity Experts
- China Vs the US: Who Will Win the AI Race?
- AI Applications and “Black Boxes”: How to Make Use of Recent Research on Artificial Neural Networks