Good Morning Everyone,
UK Prime Minister Boris Johnson, said recently that the UK are in discussions with the US administration about banning Russia from the SWIFT system, in response to the possibility of Russia invading Ukraine. Russia stated the European countries will not be able to receive gas, oil and metals from Russia in the event they were disconnected from using the SWIFT system.
SWIFT stands for ‘Society for Worldwide Interbank Financial Telecommunication’ and acts as an intermediary and executor of financial transactions between banks worldwide. SWIFT is legally a Belgian entity, which was established in 1973.
The cooperative is owned by member banks and governed by a 25-member board of directors. The organization is overseen by the G10 central banks which includes:
The European Central Bank (ECB), Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Great Britain, the United States, Switzerland, and Sweden.
The entire SWIFT system is run off 3 data centers, located in the US, The Netherlands & Switzerland along with a “command and control” center in Hong Kong, now considered mainland China.
So the SWIFT system, is essentially a closed, centralized communications protocol operated by central banks with a democratic like governance structure to enable a cooperative payment network (in an adversarial environment) and (presumably) to prevent the system from being corrupted from any individual having ultimate power over it.
What we are seeing however, is the weaponizing of this payments system with threats being made to exclude certain network participants, and demonstrating a lack of neutrality at the SWIFT protocol layer.
Given SWIFT is a Belgian company, it complies to Belgian and European law - not that of the US, so the US don’t have any legal power over the company.
So far Iran is the only country to have been cut off from the system (that we know of), which happened back in 2012 after they were blacklisted by the European Union and amid pressure from the United States.
While the US have no exclusive or over-riding power over SWIFT, they could employ similar tactics like the threat of sanctions against the platform directly, as in the case of Iran, to pressure SWIFT to cut-off Russia’s access.
Regardless of the fact, what this highlights to me, is the vulnerabilities of the current system and while best efforts were likely made to prevent the system corrupting, the technology to do so did not yet exist.
Even without Russia being cut-off from this global payments standard, the mere threat of such an action would likely motivate any player to seek alternatives. In my opinion this kind of a move is likely to backfire against the US and only further motivate the existing trends - specifically that of de-dollarization.
This is a powerful real world example highlighting the vulnerabilities of centralized systems, where network participants must trust a 3rd party, and political power can be wielded to influence the rules of the network.
The world of central banks and nation states is an adversarial environment, and in such an environment, a system that requires trust in a centralized entity is always destined to fail in the fullness of time.
This makes the SWIFT system inherently flawed as a global standard, and sooner or later we are going to see this system be made obsolete. No country will actively choose a system requiring trust, when they know full well, they are operating in an environment where it cannot exist.
One by one, countries will make a move to adopt a protocol that is truly decentralized and requires no trust in any 3rd party intermediary. One that cannot be controlled or influenced by an individual entity. Where no network participant has any power to censor or exclude another. A truly neutral protocol that simply processes transaction after transaction. That is completely a-political and cannot be weaponized to attack a network participant for individual gain at the expense of the network. A system that incentivizes cooperation and humans to play win/win games instead of zero-sum games, despite operating within an adversarial environment.
This transition couldn’t come soon enough.
I hope you have a great finish to your week, and I will talk to everyone Monday.
AK
