SWIFT: Time to Break Free from Centralized Oversight of the West?

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is the most widely used messaging network today to facilitate financial transactions between banks and other financial institutions. A smoothly working network is critical for today’s rapidly globalizing economies, which are becoming increasingly interconnected and interdependent.

Although SWIFT claims to be a “neutral organization,” this is far from reality. The inherent flaw lies in the fact that it is heavily influenced by the US Federal Reserve (Fed) and European Central Bank (ECB). This gives these regions an opportunity to “weaponize” the system to gain undue control over global money movement and, therefore, exert their dominance over other countries.

Financial Controls Work Against Free Trade

For countries and communities to flourish globally, money and trade need to be free, while the government needs to be controlled. Not the other way around. But, if you allow a few countries to create and control the hub of electronic financial transactions, they will use it to their advantage.

We have seen many instances of this for decades. For instance, SWIFT eliminated 30 Iranian banks from the network, in response to Western sanctions due to Iran’s disputed nuclear program. The throttling of cross-border transactions disrupted 30% of the country’s international trade and cost it about 50% of its oil revenues. Services were restored after the 2015 nuclear deal, only to be severed again in 2018 when Donald Trump decided to withdraw from the pact and reimposed sanctions.

We saw this again in 2014, when Russia was threatened by a SWIFT ban after it annexed Crimea. At that time, Russia said that it would consider such a move as an act of war, which deterred the Western allies from going ahead with their threat.

In 2022, SWIFT finally banned 10 Russian banks, after the US and EU imposed sanctions against the nation due to its incursion into Ukraine. The result was that Russian businesses lost access to their own funds, while payments for agricultural and energy exports were disrupted.

The reality is that the Western control of SWIFT robs emerging economies and non-G10 members of an equitable playing field. But that is not the only disadvantage of centralized oversight.

• Operational complexity: Financial institutions need to train staff to handle SWIFT-related processes, which can be costly.
• Dependency on intermediaries: The network relies on intermediaries, which can add costs and delay payments.
• Limited transaction visibility: The messaging system may not provide real-time transaction tracking or detailed payment status updates.
• Security and fraud risks: A centralized system is more prone to cyberattacks, as the bad actors know exactly where to look for vulnerabilities.
• Transaction processing delays: Payments can take days to reach the recipient.

The BRICS Challenger to SWIFT

Frustrated with the dominance of the Western allies, Russia and China have been working to free themselves from SWIFT dependency for a decade now. The Central Bank of the Russian Federation developed the System for Transfer of Financial Messages (SPFS) as an alternative to SWIFT. The SPFS network consists of 557 banks and businesses, including 160 international banks. Similarly, China developed its own alternative with the Cross-Border Interbank Payment System (CIPS), launched in 2015. As of July 2024, the network consists of 150 direct participants and 1,401 indirect participants from 117 regions and countries worldwide. The CIPS processed 6.6133 million transactions in 2023, with RMB 123.06 trillion ($17.09 trillion), a 27.27% y-o-y increase.

In recent times, the seizure of reserve funds from Afghanistan by the US and the freezing of Russian assets have underscored the risks of dollar dominance. Central bank reserves are still denominated in US dollars, but such incidents erode trust in the currency. As a result, the BRICS nations have been working on developing an alternative to SWIFT.

• BRICS Pay: A decentralized payment system that aims to allow BRICS countries to make cross-border payments using their own currencies. BRICS Pay is designed to reduce the dominance of the US dollar and give BRICS countries more financial autonomy.
• BRICS Clear: A system that uses a BRICS stablecoin (crypto) as the unit of account for pricing trading goods. This system aims to integrate bilateral trade across BRICS member nations into a single financial system.
• BRICS Bridge: An initiative that aims to improve the efficiency of transactions and enhance economic autonomy.

Of course, Uncle Sam is unhappy. Is the US government wondering why other countries want to break free from US dollar dominance? Does the US trust its own currency? After all, it is trying to pass the Bitcoin Act, which will see bitcoin as part of its national reserves.

The Answer Lies in True Decentralization

While alternatives to SWIFT aim at “de-weaponizing” international transactions and reducing the dependence on the US dollar, they are still under the control of a specific government or group of governments. This is also true of BRICS Pay, which has been designed as a decentralized platform, as well as BRICS Bridge, which is based on distributed ledger technology (blockchain).

While the BRICS system comes closer to the idea of decentralization than SWIFT ever will, what is needed is a system that is completely independent of the influences of geopolitics and the economic supremacy of a nation.

A decentralized hub of networks will significantly reduce transaction costs and promote financial inclusion. Plus, it will increase transparency and security, both of which are meaningful for all business decision making.

Such a system will counter the dominance of the US dollar by allowing transactions to occur in cryptocurrencies. Most importantly, no government can use the system to serve its own purpose. It will be exploited or restricted purely from a business standpoint. That is the only way to create an efficient system.

Does Centralized Control Even Work?

Faced with a loss of control, governments will oppose such a decentralized system. But the bottom line is: Does a centralized system really give governments power or just an illusion of being in control. The SWIFT ban on Russia has not stopped oil exports from the country. It has merely shifted oil purchases from US dollars to the Chinese yuan. Even today, massive quantities of Russian gas continue to flow into the EU. Also, the Western sanctions have done little to stop the conflict with Ukraine.

Decentralization is also the answer to mitigating the risk of currency manipulation by governments, since the value of decentralized currencies is determined purely by demand-supply dynamics and not central bank decisions. Decentralization can ensure that all participants have equal access to the system. This will help create a more resilient and stable global financial ecosystem.