If Putin’s war upends SWIFT, world could move to cryptos

Wars often have unanticipated fallouts. The ongoing conflict in Ukraine is likely to be no exception, with the fallouts being also in areas far removed from diplomatic or military matters. A till-now unobtrusive yet ubiquitous cooperative partnership of banks and financial institutions known as SWIFT could be a loser while the often-controversial blockchain technology and its accompanying cryptos could benefit.

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, was set up in the early 1970s, with 500 member institutions in 22 countries, for a somewhat innocuous purpose -- to establish an advanced, secure, messaging system for facilitating cross-border financial transactions. Till then, the prevailing method was that banks exchanged financial messages (remittance advices, letters of credit, bill payment advice, etc.) bearing manually computed check signals or testing codes on telex/teleprinter machines. The processes were labour-intensive and slow. The SWIFT system concerned itself purely with securely relaying messages, formatted on standardised proprietary platforms, containing specified codes for conveying details of a transaction to member-institutions and did not involve itself with the financial accounting aspects. It now has over 11,000 member-institutions worldwide. Till recently, it was a somewhat unobtrusive but ubiquitous part of the inter-bank relationship management infrastructure.

This unobtrusive ubiquity has now undergone a change with the western powers deciding to retaliate against the Russian military invasion of Ukraine through somewhat unconventional methods.

Russia has the fourth largest forex reserves, aggregating about $643 billion, and while not being overly dependent on any particularly critical import item, it is amongst the largest exporters of crude oil and natural gas, wheat, etc. However, as disruption in the supply of such essential export items may have caused economic inconvenience and loss to the very same western countries, a more finetuned and micro-detailed strategy of attempting to unbalance Russian economic activity without reducing its ability to supply critical items was put in place.

This included, among other things, what is now often called the weaponisation of SWIFT by expelling seven large Russian Banks (but not the two largest, presumably because these two were primarily used for crude oil/gas trade payments) from the SWIFT system.

As on date, it is still not very clear whether this micro-tuned strategy will have any significant impact as the Russian central bank has been developing its own financial messaging system, called SPFS (Sistema peredachi finansovykh soobscheniy), as an alternative to SWIFT and had started deploying the same in the last two-three years both domestically and in friendly countries like Armenia, Belarus, Kazakhstan and Kyrgyzstan. Reportedly about 20% of their transactions was already being routed through this system before the start of the Ukraine conflict. China has also been developing its own financial messaging platform called CIPS (China Inter-Bank Payment System).

The tendency to weaponise commercial activities of non-State organisations is somewhat disconcerting. In India, we have not so far focused on developing parallel financial messaging systems, though otherwise the Reserve Bank of India (RBI) has been quite proactive in developing financial payment mechanisms in pursuance of its obligations under the provisions of the Payments and Settlement Systems Act, 2007. The retail payment systems are quite robust. A number of initiatives, such as RuPay (an indigenous counter to the Visa/Mastercard payment systems), NACH (National Automated Clearing House for facilitating paperless collection processes for corporates and banks), IMPS (Immediate Payment Service) and UPI (United Payment Interface) have been rolled out by the National Payments Corporation of India, set up in 2008 jointly by the Indian Banks Association and the RBI. These are regarded as pathbreaking initiatives globally.

The lack of focus on creating domestic messaging systems may have been because a domestic 55:45 joint venture of SWIFT central and a group of major Indian banks called ‘SWIFT India Domestic Services Pvt Ltd’ had already been set up to handle domestic messaging services. However, we are living in an increasingly prickly world and in a complicated neighbourhood. A potential disagreement at some point in time with the western powers about what constitutes a reasonable response to an unsolicited provocation by an unfriendly neighbour now seems to carry the risk that our own banks doing normal business in our own hinterland could find themselves suddenly and unwarrantedly disabled by an irritated power. Other countries could also start experiencing similar misgivings and the SWIFT systems may not be able to retain their ubiquitous usefulness.

While it is possible that India and some other countries may start developing their own financial messaging systems, blockchain technology, with its decentralised system of authenticating a shared database and an inbuilt payment settlement system via its self-generated/mined crypto coins, could offer an even more alluring alternative as it could provide, under one roof, both messaging and account settlement. This technology, though still in its infancy, has started to be used internally within large organisations like JP Morgan for similar purposes because of the convenience of speed and the ease that it offers in contrast to centralised messaging systems.

If a group of banking institutions start collaborating to promote its external usage, this technology has the potential to substitute not only SWIFT messages but also the need for US Dollar settlements as the inbuilt crypto coin could become a settling medium. If this starts to happen, crypto-coins may start to be seen as more credible than their current suspect standing as purely gambling-focused
instruments.

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