SWIFT: Why is blockchain revolutionizing the payments industry?

Initially, blockchain technology was pioneered to make bitcoin (BTC) work. However, companies are gradually realizing that this innovation can completely revolutionize many industries. It is not limited to how cryptocurrencies work. To sum up very simply, the blockchain allows you to share information without intermediaries (disintermediation), in a safe and transparent way, without modifying it. As a result, blockchain allows for very different use cases for many industries. We regularly cite the example of the Supply Chain (the different phases of the supply chain) as a sector that can greatly benefit from the blockchain. However, the payments industry is an equally interesting and promising sector for the blockchain. This sector is booming! In summary, we can distinguish three major innovations that are revolutionizing this sector: mobile payment (widely used in developing countries), the emergence of payment service providers (a PSP allows third-party companies to accept payments online) and the blockchain. Today, based on SWIFT’s concrete example, we will examine the potential of blockchain in this key sector for the economy.

New to SWIFT? However, you use its services on a daily basis …

Indeed, SWIFT is a rather unknown company, but omnipresent in our lives. SWIFT, short for Society for Worldwide Interbank Financial Telecommunication, is a Belgian company created in 1973. This company has established itself as a giant in the financial sector. Indeed, it offers a highly secure messaging platform with many features for financial institutions. It is on this network that banks transmit information to make transfers. SWIFT is the intermediary for the transmission of payment instructions between financial institutions linked to a transaction. For caricature, it is the “WhatsApp” used by bank A to communicate with bank B when A’s customer (individual or company) makes a wire transfer to a customer of B. This network has no competitors. It is used by most financial institutions. SWIFT registers more than 11,000 financial institutions as clients. In 2021, the SWFT network sent 10 billion payment orders!

The network stops its activities in Russia

Due to its Belgian nationality, SWIFT has to apply European sanctions against Russia. Although the latest studies show very clearly that European sanctions penalize EU countries more than Russia, the closure of SWIFT in Russia is one of the rare (if not the only) sanctions that clearly annoy Russians. In addition, several bankers fear Russian cyber retaliation against the SWIFT network which could lead to a paralysis of payments… Since SWIFT was banned from operating in Russia, the country of the tsars has been trying to find an alternative. Since the invasion of Crimea in 2014, the country has developed the SPFS network with the aim of replacing SWIFT. This network only works within the country. However, the SPFS network excludes them from foreign payment infrastructures. It simply allows banks to operate in Russia.

Therefore, the Russians are wondering if the blockchain can replace SWIFT for cross-border payments

To overcome this problem, on paper, the blockchain seems to be the best solution. A blockchain solution, in fact, would do without SWIFT (disintermediation), would guarantee a high level of security and would process a large number of messages per second (25,000 according to the project researchers). To avoid the disconnection of Russians from banks and other countries, many experts have been working on a blockchain-based interbank financial messaging system for several months. The goal of these Russian researchers is to create a SWIFT in which it would be impossible to disconnect a state or a financial institution. In fact, each client of this messaging system would have the same rights and access as the others. Russia could therefore easily. fun factsto clearly announce the color, the Russian project was also named “Domestic SWIFT”. Although information is difficult to obtain, we know that this project is being tested in Russian banks. A question then arises: can the SWIFT network be replaced by the blockchain?

The Swift protocol wants to integrate blockchain technology

SWIFT has decided to use blockchain technology to improve its network

Rather than letting its network be potentially challenged by the emergence of blockchain as a tool for messaging between financial institutions, SWIFT sees blockchain as an opportunity. SWIFT is in fact partnering with fintech Symbiont Inc as part of a blockchain pilot project. This collaboration also includes other financial players (such as Vanguard, Citigroup Inc, American Century and Northern Trust). Its purpose is to improve the effectiveness and communication of important events for listed companies “. SWIFT therefore wants to use the Symbiont platform, which uses blockchain to solve problems related to financial institutions, in order to quickly transmit important information when an event occurs in a listed company. These events can be a dividend payment, mergers, Dutch auctions or other equity transactions. Therefore, this partnership wants to associate Symbiont Assembly (the blockchain platform) and severalsmart contracts to SWIFT’s extensive network of financial institutions (over 11,000).

Why does SWIFT want to use the blockchain?

According to the company’s Chief Strategy Officer, “S WIFT uses blockchain technology to offer a solution that provides accurate corporate stock data to market participants in real time.“In a simple way we can distinguish 6 ways in which the blockchain optimizes the SWIFT network for the communication of important events of listed companies.

  1. Instantness : the blockchain allows information to be quickly shared. The decision-making process would therefore be much faster.
  2. Automation : Using the Symbiont platform, manual processes will be eliminated. Being human error, some data entered manually may be incorrect. Small errors on transactions of several million or billions of euros have significant repercussions.
  3. Disintermediation : this project aims to reduce the number of intermediaries in the investment chain (central securities depositories, fund managers, paying agents, etc.).
  4. Simplification : currently, the high number of intermediaries adds complexity. Indeed, the recipient receives information about the same event from different sources. This information is often incomplete or partially inaccurate.
  5. Reduction of operating costs : According to a study conducted by SWIFT, 30% of the operating cost when transmitting information about an important event that happened to a listed company is explained by manual activities. Their removal therefore reduces operating costs.
  6. Transparency : the Assembly blockchain allows for greater transparency with the creation of a unique and unalterable data record. This would therefore greatly facilitate digital audit.

Specifically, how does it work?

Let’s try to put the words on the slightly more technical part! Event (or transaction) data relating to listed companies is translated by the SWIFT translator into “SWIFT language”. They will then be uploaded to the Symbiont (Assembly) blockchain. Their technology ofsmart contractit can then compare the information shared between the participants (senders or recipients). This then makes it possible to highlight discrepancies, contradictions or inconsistencies.

We were interested in the messaging network that relayed the information needed for financial transactions. However, other segments of the industry can benefit from blockchain. To name a few: traceability (who financed what?), Identification, payment security and cross-border payments (to circumvent exchange rates between currencies). However, despite its apparent complexity, the payments industry is fascinating and central to economic functioning. And this sector will undergo (and is) drastic improvements thanks to the blockchain. We analyzed the project to use the blockchain of the SWIFT giant. It’s also nice to know that this secure financial messaging service is working in parallel on pilot projects for asset tokenization and CBDC interoperability.

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Avatar by Gregorio Morat
Gregorio Morat

Entrepreneurship enthusiast student fascinated by the technologies behind cryptocurrencies! Yes, I am convinced that the two are intimately linked: blockchain and NFT are revolutionizing many sectors and present unprecedented opportunities.

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