SWIFT: Why is blockchain revolutionizing the payments industry?

Initially, blockchain technology was inaugurated to operate bitcoin (BTC). However, companies are gradually realizing that this innovation can completely revolutionize many sectors. It is not limited to the functioning of cryptocurrencies. To sum up very simply, the blockchain makes it possible to share information without intermediaries (disintermediation), in a secure and transparent way, without modifying it. As a result, blockchain enables very different use cases for many industries. Regularly, we cite the example of the Supply Chain (the different stages 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 blockchain. This industry is booming! In summary, we can distinguish three major innovations revolutionizing this sector: mobile payment (widely used in developing countries), the appearance of payment service providers (a PSP allows third-party companies to accept payments in line) and the blockchain. Today, based on the concrete example of SWIFT, we will look at the potential of blockchain in this fundamental industry 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, abbreviation of Society for Worldwide Interbank Financial Telecommunication, is a Belgian company created in 1973. This company has established itself as a juggernaut 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 bank transfers. SWIFT is the intermediary for the transmission of payment instructions between financial institutions linked to a transaction. To caricature, it is the “WhatsApp” used by a bank A to communicate with a bank B when the customer of A (individual or company) makes a transfer to a customer of B. This network has no competitor. It is used by the majority of financial institutions. SWIFT registers more than 11,000 financial institutions as customers. In 2021, the SWFT network transmitted 10 billion payment orders!

The network cuts its activities in Russia

Due to its Belgian nationality, SWIFT must apply European sanctions against Russia. Although the latest studies show very clearly that European sanctions penalize EU countries more than Russia, the shutdown of SWIFT in Russia is one of the rare sanctions (if not the only one) which clearly annoys the Russians. Moreover, several bankers fear Russian cyber-retaliations against the SWIFT network that 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 works only within the country. However, the SPFS network cuts them off from foreign payment infrastructures. It simply allows banking to operate within Russia.

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

To overcome this problem, on paper, the blockchain seems to be the best solution. Indeed, a blockchain solution would do without SWIFT (disintermediation), guarantee a high level of security and process a large number of messages per second (25,000 according to the project researchers). In order to avoid the disconnection of Russians from banks and other countries, many experts have been working for several months on an interbank financial messaging system based on blockchain. The objective of these Russian researchers is to create a SWIFT in which it would be impossible to disconnect a State or a financial institution. Indeed, each client of this messaging system would have the same rights and access as the others. Russia could then easily. fun factsto clearly announce the color, the Russian project has also been named “Domestic SWIFT”. Although it is difficult to get information, 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 potentially letting its network be challenged by the emergence of blockchain as a tool for messaging between financial institutions, SWIFT sees blockchain as an opportunity. Indeed, SWIFT is collaborating 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 aim is to improve the effectiveness and communication of important events for listed companies “. Thus, SWIFT wants to use the Symbiont platform, which uses blockchain to solve problems relating to financial institutions, in order to quickly transmit important information when an event occurs in a listed company. These events may be a payment of dividends, mergers, dutch auctions or other stock transactions. Thus, this partnership wants to associate Symbiont Assembly (the blockchain platform) and severalsmart contracts to SWIFT’s vast network of financial institutions (more than 11,000).

Why does SWIFT want to use blockchain?

According to the company’s Chief Strategy Officer, “S WIFT uses blockchain technology to offer a solution that provides accurate company 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. Instantaneity : the blockchain makes it possible to quickly share information. Decision-making would then be much faster.
  2. Automation : By using the Symbiont platform, manual processes will be eliminated. The error being human, some data entered manually may be erroneous. Tiny errors on transactions of several million or billion 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 several sources. This information is often incomplete or partially inaccurate.
  5. Reduction of operational cost : according to a study carried out by SWIFT, 30% of the operational cost during the transmission of information on an important event happening to a listed company is explained by manual activities. Removing them therefore reduces the operational cost.
  6. Transparency : the Assembly blockchain allows more transparency with the creation of a unique and unalterable record of data. This would then greatly facilitate the digital audit.

In concrete terms, how does that work ?

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

We were interested in the messaging network transmitting the information necessary for financial operations. However, other industry segments can benefit from blockchain. To name a few: traceability (who funded what?), identification, payment security and cross-border payments (to circumvent exchange rates between currencies). Either way, despite its apparent complexity, the payment industry is both fascinating and central to economic functioning. And, this industry will (and is) experiencing drastic improvements thanks to blockchain. We analyzed the project of using the blockchain by the giant SWIFT. It is also good 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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