SWIFT - a messaging system used by banks and  other financial institutions all over the world.

SWIFT stands for the Society for Worldwide  Interbank Financial Telecommunication,  

and it's been around for almost five decades.

It's headquartered in Belgium  and is controlled by the G-10's  

central banks, as well as  the European Central Bank.

It was founded with 239 banks in  15 countries, and now connects  

more than 11,000 member banks in 200-plus  countries and territories around the world.

Trillions of dollars'-worth of currency  

is sent across borders every single  day - and it's largely thanks to SWIFT.

Before SWIFT, the world used  telex – or a telegraphic  

transfer - to transfer funds internationally.

The system was slow, usually taking between  two to four business days to complete a  

transfer and it involved describing each  transaction with sentences instead of codes.

So how does SWIFT work,  

and what happens if you lose access to this  important part of the international economy?

SWIFT is how banks communicate  - securely and quickly.

Let's say I want to send money from  Singapore to my friend Tom in the U.K.

My bank is going to require a few details like  Tom's account number and his bank's SWIFT code,  

which is a unique 8–11-character code  that identifies each bank in the network.

Once I've keyed those in, SWIFT  sends messages between the two banks.

Remember, SWIFT is a messaging  platform, not a payments system.

If these banks have an account with each other,  

they authenticate the payment request  and Tom receives his funds transfer.

If the banks don't have a relationship, the  banks would be sent through intermediary banks  

until the payment request is verified  for Tom to receive his money.

Because many institutions do not have accounts  with one another, they rely on intermediaries.

And these intermediaries usually  have a presence in the United States,  

given the dominance of the greenback, which  means they can be policed by U.S. authorities.

Alistair Milne, a professor of  financial economics, explains more.

It's really about secure  

automated payments, so they help banks make  payments to each other in a secure way,  

but particularly in an automated way so that  everything integrates with the bank's systems.

While SWIFT is overseen by a neutral  organization, its influence has made  

it a tool for policymakers to impose economic  sanctions on countries that step out of line.

In February 2022, several Russian and Belarusian  banks were barred from the SWIFT network,  

as part of economic sanctions  after Russia's invasion of Ukraine.

It's become a symbol. So, it says  we can exclude you from Swift,  

and that's kind of a substantial threat.

But really, it's shorthand for saying  we're going to exclude you from  

financial transactions around the world.

However, Russia's not the first country  to be disconnected from the SWIFT system.

North Korea and Iran have  also had their banks barred.

What that kills is the automation of payments.

What SWIFT allows is for all the messaging  to integrate into the bank systems,  

and so there's no manual intervention.

If I'm sending $100 somewhere around the world,  

SWIFT will make sure that gets through, and the  true cost of that is probably only a few cents.

But if I do it manually, it could easily cost $100  

or more to get people to make  the necessary telephone calls.

But for the big payments of a million  dollars, the automation, convenient,  

maybe it helps get things done a bit quicker, but  in the end, it doesn't matter so much, they can  

still communicate, and get banks – if the banks  are willing – to make those transactions anyway.

SWIFT is a critical part of the  world's financial infrastructure,  

but it isn't the only system  for international transactions.

For example, the Russian Central Bank  

set up the System for Transfer of  Financial Messages or SPFS in 2014.

As of February 2021, it had about 400  users - mostly Russian banks and legal  

entities. 23 of the users were foreign banks.

China is also trying to create its system.

In 2015, the People's Bank of China  established the CIPS network – the  

Cross-Border Interbank Payment System.

By 2019, it reached more than 3,000 banks directly  and indirectly, across 167 countries and regions.

I think the CIP system can be quite  attractive for Renminbi transactions.

So when China is engaged in trade with  particularly, its near neighbours, we don't know  

what's going to happen as a fallout of the Russian  invasion of Ukraine, but it's certainly possible  

that a response to Western sanctions, Russia  will be engaging in greater trade with China.

And one can certainly see the  payments messaging for all those  

products and services going through  the Chinese system, rather than SWIFT.

How hard or easy is it for a bank  to join alternative networks?

It's hard to see that being used much  outside of those specific countries.

Ultimately, you want to deal directly as possible  with the banks you have relationships with, and  

SWIFT is in a very strong position in being  able to provide that required connectivity.

With any sort of legacy technology, you do  have the stickiness that occurs with it.

Caroline Malcolm heads policy at  blockchain data platform Chainalysis.

I asked her whether cryptocurrency and blockchain  solutions such as Ripple could replace SWIFT.

There's an adoption curve that really happens.

You have your crypto native  companies, for example.

You've got your sort of fin-techs, and then you've  got your more traditional financial players.

At that end of the spectrum, your  traditional financial players,  

you are looking at a number of different  issues in terms of how to integrate,  

how to actually participate in new  payment systems like crypto-based ones.

But there's also a sort of  an education process as well,  

that has to happen both inside these  institutions, but also with customers.

How effective could cryptocurrency be  as a workaround for economic sanctions?

There's a number of reasons why crypto  is probably not your tool of choice.

One, just as we have in traditional finance,  crypto has systems in place which allow people to  

be alerted if they are actually interacting  with a sanctioned entity or individual.

Secondly, blockchain, on which crypto is  based, is a permanent, immutable record that  

is publicly available of all transactions  that have taken place on that blockchain.

Should SWIFT be afraid of blockchain technology?

I don't really recognize that view  of SWIFT is ripe for disruption.

I know there're a lot of technology start-ups  who claim that they can grab a big piece of the  

action, but I think we've got to remember the  importance - in payments – of network effects.

It's really very difficult to try and attract  all 11,000 banks on to another system,  

and especially which actually,  on the whole, works pretty well.

And 95% of SWIFT payments throughout the world,  they're all completed comfortably within 24 hours.

That's not to say that SWIFT is perfect.

All this discussion about disruption has been  quite positive because it's actually accelerated  

changes in the SWIFT system, including the GPI.

GPI stands for Global Payments Innovation.

It was launched in 2017 to provide  end-to-end tracking of funds,  

to increase the speed of payments, and to help  make international payments more transparent.

SWIFT doesn't actually transfer money per se.

It's transferring information like banking orders.

What's interesting about a system  

based on blockchain is that you will have certain  services which continue to be intermediate,  

like centralized crypto exchanges, for example,  but it also allows people to hold their own funds,  

their own different forms of value and allows  you to control that in a very direct way.

And I think what we've seen in terms of  how the industry evolves, is that that's  

something that some people want to do. They  want to have that sort of personal control.

Other people still want to keep using  an intermediated service. But the nice  

thing about this technology is that  it finally gives people that choice.

With blockchain technologies still developing,  rerouting the globe's financial transactions  

through smaller messaging  networks, remains unlikely for now.

However, in the long-term,  these networks could mature,  

and the way money moves  around the world could change.

You don't detach from a legacy  technology or legacy system like  

SWIFT overnight. There's been huge  amounts of investments in that.

But there are certain capabilities and  features which blockchain based systems  

have that can't be matched by traditional systems.

One of the more interesting developments is  what's known as central bank digital currency.

It's certainly possible that in 10-15  years' time that businesses and individuals  

will get quite used to exchanging digital  currencies, perhaps directly with each other.

Now, in that case, the role of SWIFT  would begin to change. It will still be  

the messaging to support international payments,  

but they would have to adapt to take  account of that new type of payment.

That's certainly a possibility for the future.