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SWIFT Is Experimenting With Decentralized Technologies

by Richard Pollina

July 21, 2022

SWIFT was founded in 1973 to facilitate cross-border fund transfers through financial messaging services. The platform was like a messaging service for member banks where they could share information about cross-border fund transfers. The system works on centralized server technology. Each member signed up with SWIFT has a SWIFT to ensure data protection and privacy.

However, recently SWIFT network came under the scanner when the Central Bank Of Bangladesh was hacked and robbed of $81 million. SWIFT has over 11000 clients and supports transactions worth 15 million dollars every day. However, recently, SWIFT came under a strict scanner regarding data security and protection. Also, with the popularity of blockchain these days, SWIFT has been forced to transgress from traditional payment methods.

Blockchain has become popular with millennials because it uses decentralized technology. That is to say, a single authority or person cannot take control of the network or manipulate it. Additionally, a decentralized network also ensures data protection of the highest order. The data is stored on nodes distributed across the globe so it is impossible to hack the entire network. Also, the ledger that stores information about transactions is open to the general public ensuring complete transparency.

The reason why SWIFT networks are a prime target for hackers is that it promotes monopolistic banking structures. That is to say, the transactions are secret which hinders transparency. A few big players have access to all the sensitive data which appeals negatively to the hackers who have strong ethics and principles.

Moreover, central networks make things easy for hackers because once they break into one data center, they can make millions of dollars. To summarize, we can say that blockchain balances out all the negative aspects of SWIFT. For this reason, blockchain-backed Ripple is coming out on top today and has already signed up 100+ clients.

Also, some institutional bankers like JP Morgan have started developing their own blockchain networks to ensure the decentralization of data. Owing to the shift in transaction technology, banks are under tremendous pressure to ensure complete data protection while lowering costs. This has put SWIFT under a lot of pressure to come up with innovative solutions.

Pursuant to this, SWIFT is experimenting with decentralized technologies to allow CBDC interconnection. This is not the first time SWIFT is romancing with this idea. In 2019, SWIFT partnered with the consortium to announce they have proof of concept to reconcile all the databases and decentralize the network.

However, this required enormous infrastructural changes for the banks, which was hardly feasible. Moreover, Ripple continues to gain popularity because it can complete a cross-border financial transaction within seconds as opposed to SWIFT which takes days to complete a minor cross-border transaction. The aforementioned paragraphs explain the reason behind SWIFT ushering into a new era of technology.

What is CBDC?

Central Bank Digital Currencies are the digital equivalent of the fiat currencies issued by the central bank of a country. The fiat currencies are the ones not backed by gold or silver. Instead, these currencies are a form of legal tender used in exchange for goods and services. But why is every country issuing its own digital currency?

There are two contributing factors behind this. First, internet accessibility has improved significantly in the past decade so millennials and the general public have shifted to online modes of payments because they are convenient and safe. In first-world countries, hardly anyone carries physical cash now. Second, digital currencies are backed by blockchain networks, which are safe, secure, and transparent.

The governments can set up their own team to analyze the open ledger on nodes to keep track of all the transactions. The value of digital currencies is equal to the market value of fiat currencies.

Moreover, government-backed digital currencies are set to stabilize the volatile market of digital currencies and ensure better prospects for crypto investors. Conventionally, CBDCs are used for domestic transactions only but SWIFT is trying to explore the possibility of cross-border fund transfers using CBDCs.

Goals of CBDCs

Governments are head over heels on the idea of CBDCs because they are the currency of the future. CBDCs will significantly reduce transactional costs and ensure better flexibility for cross-border transfers.

Moreover, all the transactional details will be stored digitally on a decentralized network, which will reduce all the infrastructural costs for the financial institutions. The ultimate goal of CBDCs is to provide privacy, security, transferability, accessibility, and convenience to consumers.

SWIFT Set to Modernize Connection Systems

While many market gurus wrote SWIFT off owing to its obsolete technology, the leadership group at SWIFT is exploring new market possibilities on a decentralized network. The banks and payments interconnection wing at SWIFT is working on innovative methods to bring SWIFT services to the upcoming global CBDCS.

SWIFT in its annual conference has already hinted at the ongoing experiments to provide cross-border remittances and payment services to the user of CBDCs. Right now, CBDCs have a limited domestic application but if the experiment is successful, SWIFT will open new doors of opportunity for global trade.

Many believe that going forward, CBDCs are the future and SWIFT can gain back its clout once more and more CBDCs come into the market. As of now, only limited countries have issued their CBDCs while many other are still drafting rules and regulations for the operation of digital currencies. According to a recent survey, every 9 out of 10 countries want to issue CBDCs, which can be a game-changer for SWIFT.

CBDC Experiments

To facilitate cross-border fund transfers using CBDCs, SWIFT has partnered with the French telecom giant Capgemini. The purpose is to allow the functionality of CBDC to CBDC, Fiat to CBDC, and CBDC to fiat.

As of now, the conversion facility for CBDC is not available but SWIFT has clarified that they are reusing the existing payment infrastructure to allow this conversion.

The payment infrastructure is being coupled with SWIFT’s popular messaging and bank authentication technology to provide seamless and secure cross-border fund transfers. The experiments at SWIFT have used decentralized ledger platforms like Corda and Quorum which have shown promise for CBDC conversion.