The buzz around the advantages of Blockchain technology has prompted many banks around the world to consider integrating the technology into their systems. Not only will this new technology reduce the processing time of transactions, but will also curb large-scale fraud as the transaction details are stored on a shareable digital ledger that cannot be tampered with.
While many financial institutions, including banks, are experimenting with this new technology to create contracts and clear trades, there is one organization which considers the Blockchain technology as a threat to its services. It is the Society for Worldwide Interbank Financial Telecommunication or SWIFT. A recent article on American Banker website discussed the possibility of blockchain technology replacing “an old-fashioned payment settlement and messaging technology called SWIFT”. The article concluded that blockchain could not only replace SWIFT but also enhance the security and accuracy of the system.
SWIFT is a global communication network that facilitates a 24-hour secure international exchange of payment instructions between banks, central banks, multinational corporations, and major securities firms. Before we discuss whether or not SWIFT should really be worried about Blockchain, let’s understand the difference between the two.
SWIFT Vs Blockchain
SWIFT is a centralized service and on the other hand, Blockchain is a decentralized service. In the case of SWIFT, you rely on financial institutions and in the case of Blockchain, the miners do the job. Let’s understand the difference between these two systems with an example.
Consider SWIFT as a walled city wherein no outsiders are allowed and those who are in the city use code words to communicate and trade with trusted people. On the whole, SWIFT is reliable and trustworthy. Blockchain technology, on the other hand, is completely opposite. It is an ‘unwalled city’ where there is no restriction on anyone’s entry and exit. Here in this city, the trades are carved onto a large stone which is visible to everyone present in the city.
Now that we understand the difference between the two systems, the real question is whether SWIFT really needs to be worried about Blockchain technology or not. To assess the situation better, let’s weigh the pros and cons of the two systems.
Is Blockchain Faster Than SWIFT?
Blockchain eliminates the need for a central authority to verify trust and the transfer of value; it rather transfers power and control from large entities to many. Owing to this decentralized system, Blockchain enables safer, faster and cheaper transactions – the only catch being that we are not aware of the entities we are dealing with.
As people transact in the ecosystem of Blockchain, a public record comes into being automatically. With sophisticated algorithms, the computers verify the transactions and create a log for every activity. These computers are not centrally located; in fact, they are spread across the world without the control of any central authority. The transactions take place in real time and are very much secure.
A recent report by Credit Suisse titled, “Bitcoin: The Trust Disruptor”, stated that SWIFT “should watch out for the underlying blockchain technology”. According to the report, Blockchain is seen as a cheap, fast and difficult-to-hack, completely automated transaction system, that delivers a more robust and distributed security architecture for banks.”
The same report described SWIFT as slow, expensive and old-fashioned. Transactions via SWIFT network do not happen in real time. It takes days to settle an international transaction and the fees are more than 10 percent of the total transaction costs.
What Is SWIFT Doing To Cope With The Situation?
SWIFT has been operating for 40 years, even before the age of the Internet. It now connects more than 11,000 financial institutions across the world with its services. Thus, the assumption that Blockchain will wipe out SWIFT seems to be a bit of an exaggeration. However, with Blockchain technology offering a viable alternative, SWIFT does need to upgrade its services.
In fact, SWIFT is already taking steps to brace itself for the future. It recently announced that it has successfully completed the first phase of the global payments innovation (GPI) pilot with 15 banks. GPI is a service that aims at better tracking of cross-border transactions, increasing transfer speed and transparency. The GPI service has attracted the interest of 80 more banks from across the world.
Though paradoxical, SWIFT announced that it was integrating the Blockchain technology with its products. On its successful completion, it would build a proof of concept (POC), which, in turn, will help SWIFT replace ‘Nostro’ accounts and free up cash that would be invested in other profitable measures.
The POC will leverage open-ledger Hyperledger, an open-source codebase, and include a private Blockchain with only invited members, specific user profiles, and strong data controls.
Summing It Up
With every new technological advancement, it was claimed that the services of the banks would be redundant. However, in the year 2018, there are more banks as compared past years. The Blockchain technology is undoubtedly fast. However, considering the above efforts by SWIFT, it seems like it is looking forward to leveraging Blockchain to shield its services from becoming redundant.