Why Swift’s ‘Almost Blockchain’ Functionality Makes It Important

Swift, the international payments system, has suddenly become a mainstream news topic. It’s not every day that money transfers become the subject of high-level meetings between politicians. So, what is it, why is it important, and what do recent news events mean for retail investors?

What is Swift?

The Society for Worldwide Interbank Financial Telecommunication was set up in 1973 by a group of global banks to upgrade their processes for transferring vast sums of money between them.

To say it oils the wheels of industry would be a massive understatement. It now links 11,000 banks worldwide and sends more than 40m messages a day, each one of those messages relating to cash transactions which can be millions of dollars in value. It’s also highly efficient as it uses standard templates and codes, which helps keep transaction costs down.

Think of Swift as operating a blockchain approach

Certain technological advances in the Swift payment system solved problems that cryptocurrencies also addressed when Bitcoin was created more than 30 years later in 2009. They also hint at why the ‘traditional’ banking system might not be in such a need for a makeover as crypto fans claim. Swift payments also have a much smaller carbon footprint than cryptocurrencies which have recently come under fire because of the energy used by crypto.

A Swift payment sent from one bank to another generates two confirmation messages, one that the money has been sent and another that it has arrived. That transparency doesn’t quite match the openness of blockchain, where all parties can see all transactions which take place, but it’s enough to remove the risk of disputes between banks claiming they haven’t received payment.

Why is Swift in the news?

Swift was established by a group of banks wanting to avoid the risk of one of them being the ‘go-to’ processing agent for banking payments. The firm is based in Brussels and is owned by the members of the system. It is overseen by the National Bank of Belgium in partnership with other central banks worldwide, including the Bank of England and the US Federal Reserve.

That governance structure ensures the firm is commercially independent. Whilst essentially neutral in terms of political stance, there is historical precedent for countries being banned from the system, as Iran was in 2012. Reports from news agencies such as the BBC suggest that Russian banks might be stopped from using Swift. Doing so would remove their access to a convenient payment system and cause knock-on effects in the Russian economy.

It’s hard to gauge what impact a ban on Russia using Swift would have on retail investors. That would come down to personal circumstances and any knock-on effects. However, the situation highlights why it is essential to consider a broker’s operational and regulatory structure when selecting a platform to support your trading.

Crowdsourcing information about scam brokers can help others avoid falling into the traps set by disreputable brokers and you can share your experiences here. If you want to know more about this particular topic, or have been scammed by a fraudulent broker, you can also contact us at [email protected]

About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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