In February of this year, the world witnessed a group of countries carry out economic sanctions against Russia by removing select Russian banks from the SWIFT messaging system, including the United States, Canada, and the United Kingdom… over time, more have followed suit. And just like that, SWIFT has been thrust into public discourse. Suddenly, tens of millions of people are exposed to the underpinnings of our global financial system… and they are curious.
The conflict has pointed a bright, shining spotlight on the interconnectedness of the global monetary landscape. But hold on… this is a crypto piece… what does SWIFT have to do with crypto, why are you reading about this here and now? Well, the answer may be that this is the perfect time and the perfect place, because SWIFT may have everything to do with crypto.
That’s because SWIFT is poised to play a pivotal role in the plan for an upcoming, unified, cross-border, global payment network based on a messaging standard called ISO 20022. Sounds complicated, and it kind of is, but all we need to understand what’s happening is to understand what SWIFT is, what ISO 20022 is, and what their partnership may mean for the implementation of global, interoperable digital currencies. See… piece of cake…
What It Is
SWIFT, which stands for Society for Worldwide Interbank Financial Telecommunications, has been around for 40 years and powers most international money and security transfers, connecting over 11 thousand global organizations and acting as the backbone of the financial services industry. It acts both as a standards body and a network provider and has become a crucial part of global financial infrastructure.
When SWIFT was first implemented, it was designed to facilitate communication Treasury and correspondent transactions only… however, it turns out that the design of the system was so robust that scalability wasn’t a problem. The system could expand beautifully to accommodate… and it did, eventually servicing banks, brokerages, asset management companies, exchanges, corporate business houses, trading houses, and many more.
But what was before SWIFT, and do we even care? A little… because history makes the future, right? Before SWIFT, the only avenue of message confirmation for international funds transfers was something called Telex. The only important thing to know about Telex is that it’s a station-to-station switched network of teleprinters… a sort of electromechanical typewriter. Then, in 1973, hundreds of banks in 15 countries got together and founded SWIFT… the rest is history, as they say.
When you have this tidbit of history to hang onto… it becomes very clear that we’re long overdue for a refresh of our system. A lot has changed since 1973, and the world must get on the moving train unless we want to be left at the gate… and here’s where ISO 20022 makes an entrance into the story. ISO 20022 is exactly that, the evolution that the monetary system has been waiting for… but more on that later, back to SWIFT for now.
How It Works
Let’s pull back the curtain a bit and have a peek at the way SWIFT works, that’ll help us understand how ISO 20022 plays into things further down the line. SWIFT went live, replacing telex machines, in 1977. Each bank that is part of the SWIFT system has an 8-to-11-character identification code assigned to them… when messages need to be sent, certain information needs to be known. Once this information is exchanged between banks, money is moved around accordingly.
So, the SWIFT system doesn’t do the transactions… it facilitates the communication between financial institutions. But that doesn’t mean the system isn’t pivotal in the transaction process… financial institutions need to know that their communications are secure, accurate, and actually between members of the SWIFT system. It’s a trust thing.
It’s also important to know that SWIFT isn’t the only messaging service available… there are others, others like Ripple (think XRP), Fedwire, and Clearing House Interbank Payments System (CHIPS). That being said… SWIFT absolutely dominates the space, no messaging service is as good as SWIFT when it comes to innovation and the evolution of the technology and its capabilities. And this fact is why SWIFT will likely be in the big leagues when it comes to global digital currencies… in fact, SWIFT operates the only worldwide value-added network designed specifically for ISO 20022.
Where We’re Headed
At its core, ISO 20022 will act as the common, standard language for global payments… or as SWIFT has put it in their own words, ISO 20022 will act as the “universal standard for financial messaging”. Earlier, we talked about how SWIFT connects a myriad of institutions for all kinds of financial transactions… and that’s true; however, there’s still a couple of glaring problems that need to be addressed and that just isn’t happening with SWIFT: unification, speed, and automation.
See, currently, financial institutions are all connecting to multiple market infrastructures… that means they need to plan, design, test, and do everything else for each one of these market infrastructures individually… that’s a problem. The best way to imagine it is to imagine a bunch of people in a room trying to communicate using different methods… one is writing, one is tapping their foot, and one is blinking in code. This sounds silly, but it illustrates the point… we need a unified messaging system with a single, consistent language… enter: ISO 20022.
Is your interest piqued? Good… this is a special two-part piece about the evolution of our global payments system, and we want to give it the attention it deserves… because it will literally change everything. While there have been no official announcements that our new messaging system will be the back upon which digital currencies will be built, there are details that strongly point to that being the case, and we’re going to lay it out for you in all it’s glory. Come back next week, the saga will continue… we’ll dig deeper into ISO 20022. See you then!