The Pros and Cons of a SWIFT Response

by Nikhil Joseph 0

The latest issue of The Economist has a very interestingpiece discussing the consequences of blocking a country’s access to theglobal financial-messaging system SWIFT to further geopolitical aims. SWIFT,which stands for Society for Worldwide Interbank Financial Telecommunication(SWIFT), is a global cooperative of banks based in Belgium, which operates oneof the world’s most important pieces of financial infrastructure—a securemessaging system that makes global commerce possible by facilitate cross-borderfunds . In 2012, for instance, European sanctions required SWIFT tocut off access to Iran banks. Now there are calls to do the same to Russianbanks. The Economist rightly highlights the unintended consequences that couldresult from such a drastic move:

“Another riskis that using SWIFT in this way could lead to the creation of a rival. Russia’scentral bank is pre-emptively working to develop an alternative network; Chinahas also shown interest in shifting the world’s financial centre of gravityeastward. Earlier this year it co-founded a BRICS development bank with Russia,India, China and South Africa, and its UnionPay service, set up in 2002, hasloosened the stranglehold of MasterCard and Visa on card payments. If China andother countries that feared being subjected to future Western sanctions joinedthe Russian venture, it might become an alternative to SWIFT—and one lessconcerned with preventing money laundering and the financing of terrorism.”

In an upcoming Mercator reporttitled “A SWIFT Disruption? Bitcoin and Peer-to-Peer Models Challenge theRemittance Business,” I take a deep dive into how the global consumerremittance business works, explaining its reliance on a network ofcorrespondent banking relationships across the world, an infrastructure thatwould be impossible to sustain without SWIFT. I point to the examples like Rebit, BitPesa, and Transferwise, as radically newmodels of facilitating consumer remittances across borders, one which does notrely on SWIFT to transmit value across borders.

It’s possible that one of theconsequences of excluding an economy as large as Russia’s from cruciallyimportant financial infrastructure could be to spur greater adoption of Bitcoinas a way to meet financial needs across borders. The outcomes that suchtechnology makes possible would blunt the effect of financial sanctions as atool of international politics. It’s therefore not surprising why regulators inthe US want Bitcoin wallet providers and exchanges to be regulated as moneyservice businesses under the Bank Secrecy Act.

Overview by Nikhil Joseph, Analyst, Emerging Technologies Service for Mercator Advisory Group

See story at the Economist