How the world of Trade and Finance is being decentralized
SWIFT sanctions and Blockchain based resistance
In 1973, Central banks of the G-10 nations and 239 financial institutions from 15 countries came together to form a cooperative organization called the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Their goal was to create a centralized communication system that would provide fast, safe, secure and standardized messaging network for cross-border financial transactions.
The SWIFT network went live in 1977 with 518 financial institutions from 22 countries connected to the messaging service.
Today more than 11,000 financial institutions from over 200 countries communicate with each other over the network. More than 30 million transactions worth billions are made on the network every day.
SWIFT is a critical piece of infrastructure for the global trade-finance system and without the network, the economic and financial globalization of the world would not have been possible
The organization and its network are overseen by central banks of the G-10 countries, which includes the Federal Reserve of U.S, Deutsche Bundesbank of Germany, European Central Bank, Swiss National Bank, National Bank of Belgium, Bank of England, Canada, Italy, France, Sweden, Netherlands and Japan.
The National Bank of Belgium acts as the lead overseer of the organization as it is headquartered in the country.
Traditionally, SWIFT acts as a neutral party and refrains from making geo-political decisions. But since the organization operates under the governance of the G-10 and European Union, they adhere to sanctions imposed by the conglomerates when necessary.
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SWIFT has a history of being weaponized by the United States and Europe. Countries that do not comply with their policies are sanctioned economically by suspending them from the network.
Countries with no access to the network will not be able to have trade or financial relations overseas. This heavily impacts the life and livelihoods of businesses and citizens of the sanctioned country.
In 2012, Iran was sanctioned for their nuclear program and as a result, Iranian banks were suspended from the network.
In 2014 and 2022, Russian banks were removed from the network as a result of Russia’s military operations in Ukraine. The latest sanctions have cut the country off from its $600 billion worth of gold and foreign exchange reserves.
The authoritarian measures of SWIFT’s governing body has turned several nations towards adopting payment systems based on the Blockchain technology.
Blockchain is considered the ideal platform to develop payment systems because of its decentralized networking mechanism. Unlike SWIFT, blockchain systems are not run by a central authority that is able to control the flow of information over the network.
This aspect, along with the high security, distributed storage network, traceability of transactions and non-tamperable ledger is what makes blockchain technology highly compatible with trade and finance.
Russia and China have been developing alternate blockchain based payment systems in order to effectively replace the SWIFT network.
China launched their own international payment processing system based on a blockchain network, the Cross-Border Interbank Payment System (CIPS). The system replaced SWIFT as the primary financial messaging network in the country for processing international payments.
It is reported that 1,280 financial institutions and organizations within China and overseas conduct payments using the CIPS network in Chinese Yuan. Saudi Arabia is in discussions with China to use yuan instead of dollars for oil sales.
China also launched a blockchain based banking service called BC Trade 2.0. The system was developed by China’s largest bank, China Construction Bank (CCB) in collaboration with IBM. As of 2021, the network has facilitated over $100 billion in transactions within its branches in China and abroad.
In 2020, China deployed their Digital Currrency Electronic Payment network (DCEP) for the digital Yuan, which is a Central Bank issued Digital Currency (CBDC). According to reports, over 70 million digital Yuan payments worth $5 billion were conducted over the network in 2021. China is leading the world in launching CBDC’s.
This is in contrast to the Federal Reserve, which plans to launch the digital U.S dollar in the later part of the decade.
Unlike other blockchain based cryptocurrencies, CBDC’s are issued by the Central banks where the network is controlled by them.
In 2018, Russia launched their blockchain based domestic payment system called the SPFS (System for Transfer of Financial Messages). According to the Central Bank of Russia, over 400 Russian companies and government organizations have joined the network since its inception.
The country is one of the largest suppliers of oil and natural gas and many nations depend on Russia for their energy demands. After the latest round of sanctions by U.S and Europe, Russia is considering expanding the SPFS network to its trading partners.
Financial institutions in Germany, Switzerland, Belarus, Armenia and Kyrgyzstan are currently using the network. India is considering a Russian proposal to use SPFS for payments in Rubles.
At the 2014 BRICS (Brazil, Russia, India, China, South Africa) summit held in Brazil, an agreement was signed between the member nations to open mutual lines of credit in one another’s currency and to establish the BRICS Development Bank. This opened the pathway for the BRICS payment system to be established.
At the 2022 summit, Russia announced that they are planning to integrate the SPFS network into the BRICS payment system.
“The new sanctions are destroying the foundation of the existing monetary and financial system based on the U.S. dollar. This pushes us to the need to speed up work in the following areas: the use of national currencies for export-import operations, the integration of payment systems and cards, our own financial messaging system and the creation of an independent BRICS rating agency.”
Russian Finance Minister Anton Siluanov
Non-BRICS countries, Kazakhstan, Iran, UAE and Bangladesh have now joined the BRICS payment system as an alternate to the SWIFT network.
As more nations are breaking free from authoritarian systems and standing up to its fear tactic policies, It is blockchain technology that is driving this revolution. We are witnessing the evolution of trade and finance into a new age.