Among the recent economic sanctions imposed on Russia is to remove it from the Swift system. But what are the implications, and are there alternatives to it? why is it so controversial? learn more here.
Hello leofinance friends, I hope you are very well, today I will talk about a topic that has had some boom in the networks due to the Russian-Ukrainian conflict, the SWIFT system, which is one of those mechanisms in the world that we usually ignore and know little about, but are vital to the modern economy, and therefore for the lifestyle of much of the world's population.
To understand what the SWIFT system is and why it is so important we need to understand the basics about it.
SWIFT stands for Society for Worldwide Interbank Financial Telecommunication. The institution is not a company, nor is it owned by a government or an international organization, it is a society financed by its members. In this case, almost all of the world's major banks.
The basic function of SWIFT is to serve as a communication channel for banks globally, serving as a bridge to transmit all kinds of financial information, such as payment orders, files with documentation relevant to financial transactions or purchase transactions of shares or goods and services etc..
SWIFT does NOT store money, it does not act as an intermediary in agreements, nor does it store information about individuals or their transactions, SWIFT is basically a communication channel like the Internet or GSM service. But specialized for banking.
The SWIFT system has become so important and popular because of the advantages it brings, starting with the adherence of its protocols to the International Organization for Standardization [ISO], which offers a level of quality and COM probability in all its operations that is acceptable worldwide, something very important when we are talking about huge amounts of money.
Another important advantage is to simplify the operating language for financial operations around the globe, making possible transactions between institutions with language barriers as marked as the Japanese with the European ones.
Additionally, the SWIFT Society provides software for the connection to the same, technical assistance and other related services to operate in its network, offering at least on paper, high standards of security and reliability, it should be noted that these services are sold to partners and are an important source of income for the society.
SWIFT was founded in 1973 under the leadership of Carl Reuterskiold and with the support of 239 banks from 15 countries who were the initial members of the society. The idea of a decentralized international system for managing financial information arose out of the concern of many European countries that a predominantly American institution would monopolize such a service, and by extension, put it at the service of a nation state that did not always have the same interests as its members, or did not take their needs into account.
Initially SWIFT's headquarters were in Brussels, Belgium, but currently they have 4 major operational centers, one in Holland, one in Switzerland and one in the state of Virginia in the United States. These are operations centers where message traffic from different regions is handled.
[Photo of SWIFT's 2022 data center in Switzerland, heavily guarded by police amid tensions in Europe].
The 4 operational center is currently located in Hong Kong and is the command and control center, i.e. where important decisions are made and the network architecture is worked on.
Now we will address a couple of important questions, to start with,
Is SWIFT completely secure?
And the answer is NO, although SWIFT is a very secure system, like anything connected to the network it is susceptible to hacks. And in fact there have been several major ones.
In 2018 a couple of employees of a bank in Punjab India, managed to steal 1.8 Billion, yes BILLION dollars from other institutions by entering fake payment orders into the system.
Between 2015 and 2016, a group of hackers, presumably North Koreans managed to manipulate the SWIFT software code using small flaws in the system and a Malware designed for that purpose, by accessing the database code they managed to manipulate the same to delete messages requesting money transfers, intercept those containing requests for the same, and manipulate those concerning account balances, with which they managed to steal 100 million dollars, and cover their tracks from the authorities.
These are only 2 examples, although very important, there are many more instances in which the SWIFT system has been hacked. I recommend you this link https://medium.com/@kvantorcom/top-5-biggest-swift-hacks-52fca78145c
Now we must address another point, is SWIFT a system that guarantees privacy, and is it completely independent?
Although the original intention of the founders of the SWIFT system was precisely that, that of a system that guarantees the privacy of its members and at the same time that is alien to the influence of states or nations, it has recently failed on both counts.
Since 2006, after the United States announced the Terrorist Finance Tracking Program, there have been many instances of international complaints that the CIA and the Treasury Department are accessing the SWIFT system with impunity. In 2013 the magazine Der Spiegel launched a good report on how the NSA spies on world finances through the SWIFT system, this caused a stir in the European Union where some called to get the United States out of the society. here the full article https://www.spiegel.de/international/world/how-the-nsa-spies-on-international-bank-transactions-a-922430.html
This, coupled with the possibility of hacks and espionage by other major powers such as China or Russia leave much to be desired from the protection that SWIFT can give to the banking information of its partners.
In 2017 the famous Edward Snowden revealed documents showing how the NSA spied through SWIFT and even published descriptions of the methods used.
Another important point is the independence of the system, this has become more relevant lately.
In 2013 US authorities managed to seize 26,000 dollars from a Danish businessman after he made a transfer to a German bank, the terrible crime of buying Habanos, in violation of the embargo against Cuba....
This was proof not only of the ease with which the U.S. government, [and possibly others] access information in the SWIFT system, but the power they have to exert their influence on institutions that are part of society itself, being able to apply their law in a society that was considered neutral.
But this case is only an example for a private citizen, already in 2012 the United States, worried that Iran could use the SWIFT system to avoid the sanctions imposed on it because of its nuclear program, began to pressure the SWIFT company to remove the Iranian banks from the system, in February 2012 the U.S. Senate Banking Committee approved sanctions to the SWIFT company to remove the Iranian banks from the system. At first SWIFT tried to fight the measures, but eventually, after negotiations with U.S. and European Union authorities, it opted to expel 27 Iranian banks from the company and disconnect them from the system.
Eventually in 2016 the Iranian banks were reconnected to SWIFT after successful negotiations with the U.S. to curb its nuclear program.
The Russian case.
Back in 2014, after the annexation of Crimea by the Russian federation, and the confirmation that Russian forces were involved in helping the separatist movements in Donbass, Luhansk and Donesk, the UK parliament started to pressure the European Union to remove Russian banks from the SWIFT system, however the SWIFT company refused, since then Russia started to work on an alternative, more on that later.
Before Russia's full scale invasion of Ukraine in the last month, and the announcement of severe economic sanctions on Russia, the Baltic countries started to call on the European Union to get Russia out of SWIFT, however, the European Union hesitated due to the severe economic impact this would bring not only to Russia, but to the European nations as well since their economies were very interconnected, but after the invasion started, the European Union, the United States, Canada and even Japan agreed to get Russia out of SWIFT. The economic impact of that decision for Russia is already being seen due to the massive depreciation of the Russian ruble.
A video about it here
These are some examples of the loss of independence of the SWIFT society, I am not arguing about whether it is morally correct or not to use the system to sanction some nations such as Iran, which supports several terrorist organizations in the middle east, or Russia, which pretends to invade Eastern Europe with Neo Sovietic yearnings, to have a totally independent economic system in the new globalized world is almost impossible, and where it has been possible, as in North Korea, it has proven to be unpalatable, however, we must be aware that perhaps tomorrow we will be the ones sanctioned, trusting governments, no matter what country they are from, can be at times, a mistake.
This brings us to the alternatives.
Russia developed since 2014 the Sistem for Transfer of Financial Messages [SPFS] although it has had a limited adoption, with about 400 banks affiliated to it. Mostly from strategic partner countries, such as China, Iran, Belarus or Kazakhstan, although there are some German and Swiss banks.
To understand the difference in size, more than 10,000 financial institutions from 212 countries operate in SWIFT. And it moves more than 5 trillion dollars, DAILY.
The SPFS system has several limitations, among them the cost of transactions in it is much higher than the SWIFT system, and the simple fact that it is associated with the Russian government makes it an unappetizing option in these times.
China also launched its financial messaging system called Cross Border International Payment System [CIPS], which has the financial backing of the People's Bank of China.
CIPS has been relatively more successful than the Russian alternative, although it still has a long way to go to be a credible contender to SWIFT. CIPS currently has more than 1280 partners in 103 countries, and includes prestigious institutions such as Citi Bank, HSBC and BNB paribas. Although most of the members are from Asia and China's partner states in Africa and Latin America, some limitations of CIPS are firstly the fact that it only allows transactions in Chinese Yuan, in order to promote the Chinese currency as a rival to the dollar, but at the same time it closes the doors to those who want to do business in dollars, that is, most of the world. And another is the association with the Chinese communist system, famous for its authoritarianism.
A very important alternative to the SWIFT system are the Cryptocurrencies, which operate each one in their own independent network, and depending on their contract, can offer anonymity, transparency, and high levels of security, without being linked to any government of a state or nation.
The top 5 cryptocurrencies alone exceed $60 Billion in daily money circulation, far surpassing the Chinese CIPS and obviously the Russian SPFS.
Conclusion.
The SWIFT system has served well for almost half a century, and has been a great step forward for global trade, this in turn is an engine of prosperity that has improved the standard of living of millions of people around the world, however, in this new interconnected world, the birth of governments that offer security in exchange for freedom has made many wonder if it is worth belonging to a guild that responds only to the interests of a select group of people, and if it is not better to go working on alternatives. Perhaps we already have those alternatives with cryptocurrencies, which, compared to all the others, are for now the best option.
Recommended Bibliographic Reference
[2] SWIFT HACK LESSONS FOR INDIA A 9095< /a>
Although SWIFT began as a decentralized system, and today remains a nominally decentralized system, it has been captured by nation-state actors who use it for their own purposes. Chief among these is the United States, and the latest example is the situation with Russia and its invasion of Ukraine. From the point of decentralization, SWIFT is not functioning as intended.
As you noted, alternatives such as SPFD and CIPS exist. Although they are small in scale relative to SWIFT, participants in these alternative systems primarily trade with each other. Over time, more alternatives to SWIFT will come online for other, more localized regions.
Cryptocurrencies have a place as an alternative to SWIFT, especially if other nations follow the lead of El Salvador and declare some cryptocurrency or other as legal tender. While not perfect (because nothing made by human beings ever can be), cryptocurrency offers better protection against hacking thanks to blockchain. (When people say that "Bitcoin was hacked!" what they really mean is that the centralized exchange where the wallets were stored was hacked; the Bitcoin network itself remained untouched by hackers since it would require immense time and resources to succeed in truly hacking Bitcoin.)
Thank you for publishing this post regarding SWIFT!
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