With major banks taking an interest in blockchain and metaverse, is it time for SWIFT and other outdated global payment systems to integrate blockchain into their operations? Read more!
To say that the cryptocurrency space is expanding without the word “rapidly” would be an understatement. Since the inception of Bitcoin, the most popular cryptocurrency to date, the industry has flourished to a net worth of well over a trillion dollars! Not only that, but the number of cryptocurrencies has also multiplied exponentially.
Currently, there are approximately 18,216 different cryptocurrencies in the world. Bitcoin has risen to an equivalent of $69,000 this year, its highest ever value. Future forecasts for crypto show nothing short of an upward slope and there doesn’t appear to be a shortage of investors anytime soon. Cryptocurrency is powered by blockchain technology, the functions of which are now spreading into many other industries ranging from robotics to tokenization. Blockchain technology has shown remarkable development in terms of data assortment and security. This has, therefore, caused the technology to seep into the monetary dealings at a global level since hard cash is much more vulnerable than crypto.
Blockchain Technology and Banking
Banking has forever been a centralized yet controversial aspect on a global and local scale. The incorporation of an entire decentralized system, or simply a digital currency into government-level financial operations and transactions is a massive step and it is a long way before we are able to see it is unanimously recognized as the pivotal system. However, many companies and countries alike are taking extensive crypto measures that act to push blockchain further into the spotlight. So, how did the global payment systems come to know of blockchain technology?
JP Morgan Chase & Co.
Big names in the finance world, such as the world’s leading investment banking and financial services provider, JP Morgan Chase and Co., have been investigating blockchain technology due to its various benefits, with plans of building their independent blockchain. In 2020, JP Morgan announced their own blockchain technology under the name of Onyx. According to JP Morgan, Onyx is “a blockchain network enabling the exchange of value for various types of digital assets,” thus the technology enabled the integration of blockchain into non-virtual finance. Onyx has a built-in communication system called Link, the main purpose of which is to accelerate the process. To expand its virtual services, in February 2022, JP Morgan became the first bank to provide its services in the virtual world via their metaverse shop in the Metajuku mall. The bank’s lounge is located in one of the most popular Metaverse platforms, Decentraland, and upon entering the lounge, “visitors are greeted by a digital portrait of Jamie Dimon and a roaming tiger”. Taking a bullish route, the bank presumes that the metaverse will expand past a trillion dollars in the coming years.
Similarly, Goldman Sachs, a leading global investment, securities, and banking firm also conducted intensive research in the field and the firm has successfully been able to utilize blockchain technology in “building transactions into blocks“. The official website states,
“On the network, the record is combined with other transactions into a block—like a traditional computer database. Each transaction is time-stamped.”
The two internationally acclaimed companies that are primarily investment and banking firms have shown a massive interest in blockchain technology, as a result of which, blockchain is being more and more incorporated into the world’s banking systems. Goldman Sachs, too holds a bullish stance on the metaverse, forecasting an $8 trillion dollar future market cap. Speaking on behalf of Goldman Sachs, Eric Sheridan, in a branded podcast, spoke of the virtual aspirations of the firm, stating that “We’re going to take what our physical world experience is, and broadly move them into elements of mixed reality, virtual reality, and eventually augmented reality… We think this could be as much as an $8 trillion opportunity on the revenue or the monetization side.”
The International Monetary Fund
On a global scale, the International Monetary Fund or IMF, which functions to “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment, and sustainable economic growth”, might be treading towards cryptocurrency, following Christine Lagarde’s statement in favour of blockchain technology. At a Singapore convention, Lagarde said,
“I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy… The advantage is clear. Your payment would be immediate, safe, cheap, and potentially semi-anonymous… And central banks would retain a sure footing in payments.”
The statement clearly shows that the International Monetary Funds consider blockchain technology to be having a positive prospect for the financial world, and in the future, there is a high probability that the IMF will adopt blockchain tech for its many functions.
Russia and China
Following Lagarde’s statement, many countries introduced new tools into the blockchain industry. Russia, for example, worked on a new form of currency called a “Digital Ruble“, which the Bank of Russia asserts is not a cryptocurrency, but functions the same as crypto. The currency will be issued digitally by the Bank of Russia and will be used for online and offline transactions alike, thus functioning both as a cryptocurrency and hard cash.
Russia hopes that the stance of the IMF on blockchain technology is shared globally so that the Digital Ruble can be internationally recognized. The Bank of Russia further asserts that “a digital Ruble is not considered as a replacement for cash or non-cash Rubles; it is viewed as an addition to these common and convenient forms of money”, meaning that the original status of cash as a pivot in transactions on the global and local level can be maintained alongside the induction of blockchain-run currency into the economy. The Chinese government, amidst the Bitcoin ban and strict crypto measures, took the route of Russia and came up with a digital currency of their own. The People’s Bank of China, like the Central Bank of Russia, asserts the non-crypto status of their digital currency by placing it under the control of the bank, rather than a totally decentralized system. The currency, known as a “Digital Yuan” is another step of incorporating the blockchain into government-level finance.
The above instances are testaments of how the blockchain appears to be making massive impressions upon global finance and global payment systems.
The Inner Workings of Blockchain Technology
Blockchain technology is a revolutionary distributed ledger technology (DLT) that can daily be given 100% credit for the booming world of cryptocurrency. Blockchain, as the name suggests, is a chain of blocks filled with data, arranged in chronological order. Each block acts as a large database for transactions occurring on the block. The digital ledger acts as a receipt for digital transactions that revolves around and can be accessed through every system connected to the particular blockchain. It is a digital chain consisting of numerous blocks. Each block then consists of a ledger of digital transactions in every buyer’s record. Distributed Ledger Technology or DLT is a decentralized digital records database. A signature, in the form of a hash records each transaction with such scrutiny that tampering with only one block would be nearly impossible, as it would leave behind a massive trail that can be tracked by the authorities. This significantly decreases the chances of potential crypto theft.
Pros of Blockchain Technology
Blockchain technology went from a novel idea that sounded too good to be true, to a multi-billion dollar business model. There are certain specific features that brought forth the innovations that led to the expansion of the market cap. Following are the major pros that make it the best transaction system today.
Blockchain technology is decentralized, meaning that it does not have different focal governing bodies running it, where a breach into any one of the centres would cause the entire system’s security to fail. The decentralization makes it so that even if a portion of the chain is somehow hacked, the overall consumer data will keep on running through the blockchain safely.
Open Ledger System
It makes the transactions and their receipts saved forever in the form of a digital ledger that will stay on the blockchain, within their specific time at their specific position, as long as the blockchain is up and running. This means that all parties participating in a blockchain transaction, be it the seller, the store, or the buyer can access the ledger at any time they wish, to ensure full transparency to the exchange.
Where on one hand, the ledger is readily available to the participants of exchange, on the other hand, there is the anonymity that blockchain technology provides its buyers with a sense of anonymity by protecting their identities. This can be seen in the owner of Bitcoin, Satoshi Nakamoto, a mystery person or group of individuals, whose identity still remains hidden despite being a founder of the world’s largest cryptocurrency with such a spectacular market cap.
How Did the Blockchain Technology Develop Into What It Is Today?
According to XanPool CEO Jeffery Liu,
“Cryptocurrency on and off-boarding typically involves counterparties, like P2P marketplaces and exchanges. Users give custody of their money to these counterparties and can only buy and sell on that platform. This is risky and comes with a lot of fees. What makes things worse is that for users to get their money onto the platform, they must deal with the traditional financial infrastructure, like credit cards or SWIFT, which adds yet more expense and slows down the process even further. Cryptocurrencies were invented to avoid legacy infrastructure, so it seemed crazy that buying some meant routing funds this way.”Blockchain technology has been extremely effective in many fields. Cryptocurrency, however, takes the cake as the blockchain network has managed to keep it relatively good and secure as far as data privacy and regulation are concerned. The technology began with the simple decentralization of digital assets, however, today, it is the name of a system that can perform multiple functions in the crypto world and outside of it just as efficiently.
Established in 2009 by an anonymous figure or group, under the pseudonym of Satoshi Nakamoto, Bitcoin eventually led to the emergence of the multi-billion dollars crypto world that is all the rage today. As the world began to realize the popularity and effectiveness alike of the blockchain system that supports Bitcoin, it was further researched to extend into other data-related functions. Bitcoin introduced an efficient digital transaction platform where there was no trace of actual money or cash, rather a secure, forever imprinted transaction receipt was engraved into a block. The Bitcoin blockchain uses the SHA-256 algorithm for its software to keep notes of the transactions taking place.
Where the Bitcoin blockchain introduced a decentralized assets system, the Ethereum blockchain, with a market capitalization of around $250 billion, introduced a coding system where the blockchain was used to store codes that could power smart contracts. This made blockchain technology significantly tamperproof. The Ethereum blockchain network is software in itself with the capability of self-programming to generate decentralized contracts for each transaction to be added onto a ledger that is within the reach of all parties involved in the transaction at any point in time. This blockchain uses the Ethash algorithm, making its transaction confirmation rate as low as mere seconds.
Society for Worldwide Interbank Financial Telecommunication: SWIFT
Society for Worldwide Interbank Financial Telecommunication( SWIFT) is an intricate network of global organizations acting as a platform for monetary transactions. SWIFT is a “cooperative society” based in Belgium. A cooperative society is a sovereign organization, local or global, of many different parties, personnel, or organizations, that band together on a single platform to solve their socioeconomic issues. Similarly, SWIFT is also a cooperative society of worldwide banks, founded in 1973, spanning every continent with operations in over 200 countries. The intermediary functions of SWIFT are to provide a common ground for all banks and financial organizations worldwide. International transactions today on SWIFT, are a colossal while back in ‘73, the countries within its reach were around 22. Over 11,000 financial institutes in the world affiliate themselves with SWIFT, giving the platform a monopoly over the financial forefront of the world. Modern banking is heavily dependent upon the network as SWIFT hosts about 15 million messages on a daily basis. SWIFT does not take part in the transactions itself, rather it is the service that allows banks to deploy messages that then add credit to their account as the transaction is finalized. It acts as a medium of communication between the majority of the banks in the world. Each user in the SWIFT system is given a special SWIFT code for communication.
Shortcomings of SWIFT
The SWIFT system has many flaws that not only makes it recede in function, causing discomfort to the customers and banks associated with the system but also makes a way for dangerous prospects that can compromise consumer data along with causing heavy financial damages as we saw in Bangladesh Central Bank heist back in February 2016.
Vulnerability to Attacks
The SWIFT system is heavily vulnerable and prone to attacks and cyber hacks. The integrity of the system was brought into question following the Bangladesh central Bank losing $81 million to a heist. This vulnerability places customer data and asset privacy at stake and can cause many issues on the global level too as the organizations dealing within SWIFT are countries or giant corporations.
Painfully Slow Process
Contrary to what the brand name implies, the SWIFT banking network is painfully slow. SWIFT has democracy in place, where it is decided through an organized referendum, who governs the entire monopolizing brand. This system also makes way for bureaucracy, while the governance itself, being political in nature, does not act accordingly. These internal organizational issues ripple out into the system’s overall performance where the transaction process takes literal days to end up finalized. Since its inception, the brand has refused to innovate much, stressing on staying true to its roots, which has led to a gap in the talent space as the system is outdated for the modern world. This is what led JP Morgan, a member of SWIFT, to delve deeper into alternatives and eventually come up with Onyx. The innovations that the organization does attempt are in following the footsteps of other organizations, which makes it all the worse instead of helping the conditions become more efficient. An instance of this is when back in 2021, SWIFT, in its attempt at digital innovation, announced that it will be implementing a “global payments innovation” program or GPI, which will spring into action in November of 2022. This, however, raised many eyebrows as the 15-month long duration for the implementation of the program is considered ridiculously snail speed in the financial world where things heat up and change their course within mere days.
Centralized Data Centers
The SWIFT system runs on a centralized network with centres scattered across the world for data storage and maintenance. Comsec consultant Nadav Shatz asserts that “As Swift provides the solution, Swift should have proper assurances it is secure ‘out-of-the-box’ and also securely implemented and maintained by a member bank. It is a matter of cooperation and shared responsibility when it comes to security. The banks cannot rely solely on Swift.” Moreover, spokespersons from SWIFT, following the heist, blamed the banks for not regulating their security properly as Evans from ANZ follows: “The bank does not use Swift as its sole protective barrier from cyber-attack on its transactions. Banks should ensure they have their own security systems up to date. We take cyber security seriously and have processes in place to detect and prevent fraudulent transactions.”
Lack of Transparency
The ledger of global banking systems is hidden from the public eye, meaning that people or organizations dealing in the transaction do not have access to the full receipt with respect to time stamps. The governing body of the system is not trustworthy enough to be the only party with access to the crucial details of a transaction. Moreover, it places too much power in the private institute, when they can access your ledger but you yourself cannot.
Other Global Payment Systems and Their Shortcomings
Although SWIFT is one of the world’s largest centralized payment systems, it certainly isn’t the only one. A global payment system called Single Euro Payments Area or SEPA deals mainly in Euros and has as its members, the countries that are a part of the European Union. Similarly, Global Payments is another company that apparently specializes in digital transactions of all sorts. The main issues with the global payment systems, whatever they might be, are that they are slow, unnecessarily expensive, energy-draining, and translucent or even opaque to some extent.
There is an air of mistrust among consumers of global payment systems due to them not being able to see their ledgers and the full, unparalleled records of their transactions and transfers. The global payment systems are not innovative enough to keep up with the rapidly changing world of finance. The system is outdated and takes a lot of consumer time, ranging from days to weeks, in finalizing a transaction. Moreover, the global payments systems are relatively unsafe and can be vulnerable to external attacks as they run on a centralized banking system and scammers or hackers can hack into a central body and cause ripples in the entire system. From the organization itself, there is this constant risk that your account would get blocked as there is heavy politics that impacts the global payment sphere.
All in all, the global payment systems either need extensive upgrades, or there needs to be a substitute that fills in the gaps that the organizations leave out.
What Makes Blockchain Tech More Attractive Than SWIFT?
Blockchain technology shows bright future prospects, while SWIFT appears to be losing influence if it does not renovate and innovate. According to research by MIT Technology Review:
“The whole point of using a blockchain is to let people — in particular, people who don’t trust one another — share valuable data in a secure, tamperproof way.”
There is a cryptographic fingerprint that sets blockchain tech apart and attracts consumers towards it.
Taking Ripple as an example, Ripple is a company that utilizes blockchain technology to provide financial services for individuals and organizations. The company has all the perks of blockchain technology, being quicker, cheaper, and much more transparent to use, not to mention secure too. According to the company spokesperson, “With the most advanced blockchain technology for global payments, financial institutions are able to expand into new markets around the world and even eliminate pre-funding by leveraging the power of XRP through RippleNet’s On-Demand Liquidity service.”On the XRP ledger, Ripple’s open-source program allows for new developers to develop nonvirtual payment solutions. XRP is the asset used as a mode of payment on the XRP ledger. XRP has the capability of being directly used in transactions, overriding extra payments. The process is instantaneous, taking about 3 seconds, which, compared to SWIFT’s days worth of wait, is a step from the stone age to the 21st century.
The system handles 1,500 transactions in a second. Bitcoin takes about one minute, (60 minutes) to complete transaction settlement time for BTC. Litecoin takes about ten minutes (600 seconds), while Ethereum uses 2 minutes (120 seconds) to complete the transaction settlement time. The XRP ledger, on the other hand, takes only 4 seconds to finalize XRP transaction settlement time which is a remarkable step up.
Blockchain technology makes user data much more secure by compiling it all into properly managed data blocks that are quite unbreakable as they are all part of a long chain of blocks, called the blockchain so alterations or tampering with any one of the blocks will lead to a rippling chain reaction meaning that the change in that specific block will definitely be identified on the blockchain. Security is crucial when it comes to blockchain technology, so much so that even if a customer loses their private key, their own wallet will be locked forever with no way of retrieval. SWIFT, on the other hand, due to its centralized status, is more prone to be hacked. Each centre is a weak spot as it is where all the wealth within the system is condensed and acts as a treasure chest that if breached, will provide the robbers with all the assets in one place. Blockchain technology with its decentralization has scattered all of its data across the infinite blockchain, meaning that no governing power has a monopoly over it.
Blockchain Technology is best known for its transparency where the ledger is a public record. The details of the transaction are coded onto a block on the blockchain and all parties of the exchange have access to that data to remove any potential scams from taking place. SWIFT and Global banking, on the other hand, expect consumers to trust the system enough to allow only the governance access to their ledgers while the consumers of the services themselves, do not have access to it.
Blockchain transactions take mere seconds to finalize while SWIFT takes some good days through the process. The cross-border, international transactions are instantaneous on the blockchain taking an estimated 4 to 6 seconds for the entire process to unfold. SWIFT and global payments systems, however, take an average of 2 to 3 days, which is a massive inconvenience for many parties going through the exchange. Silicon Valley is extremely competitive and always on the move. New ideas, innovations, and processes are pouring in by the second. It is therefore crucial that all transactions are effective immediately as their impact matters with respect to their time frame. The faster the transactions take place, the better it is for all parties involved in it. SWIFT and global banking, therefore, end up costing more time as compared to blockchain technology which is a lot quicker.
No Additional Fees
SWIFT and global banking are relatively costly with many intermediary fees and hidden payments. This makes the process more unpleasant for the organizations dealing within the system as they pay more for a service that could, through the use of blockchain technology, end up costing a lot less in terms of assets. This is achieved by the eradication of centralization thus, removing the intermediaries that take up additional fees during business-to-business or person-to-person transactions. Blockchain technology, however, takes about 60% to 80% less as network fees.
Blockchain Technology: The Ultimate Payment System
Blockchain technology is taking over the financial world and shaking SWIFT to its core. All major organizations and countries that have an impact on the financial world have taken interest in blockchain technology due to its massive potential. IBM invested around US$200 million on blockchain research while around 90% of European and American financial organizations are putting assets and efforts into researching more about blockchain.
As compared to SWIFT, which offers outdated technology and a relatively unsafe system, blockchain-based networks, including Ripple and Solana, offer decentralized, transparent, cost-effective, and heavy capacity-on-demand liquidity services for finances. It is, therefore, no wonder, that SWIFT and global financial service providers appear to be in trouble as maybe not immediately, but somewhere in the future, blockchain technology could take over the financial sphere as the leading digital transactions provider. SWIFT’s GPI program was promising when first announced but the ridiculous 15 months duration between the announcement and implementation exposed the issue of outdated technology in SWIFT where the organization is at least a year behind the rest of the finance world. These issues aren’t beyond fixture, however, SWIFT has a long way to go and blockchain appears to be catching up.
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