SWIFT Blockchain: Unique Opportunity
For a short period of time, SWIFT has the unique opportunity to lead the fast-evolving blockchain financial transformation by creating a blockchain solution platform focused on an innovative “smart integration” of existing blockchain projects with the powerful financial institutions and the corporate SWIFT network. The goal is to create a regulatory compliance proof platform that embraces the innovative blockchain ecosystem of solutions and business models under development.
This article sketches some guidelines and ways to achieve this goal. It also explains why and shows some threats to SWIFT’s uncontested leadership (even survival) related to the evolution of new financial business models based on decentralized ledgers or blockchains. This content is part of my final project of the Blockchain in Financial Services Specialization from INSEAD.
Why SWIFT could lead the Blockchain Revolution in Banking
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global cooperative Network among 11,000 financial institutions across 200 countries. This huge and powerful network exchanges messages and information for financial transactions among other applications. Half of the world’s high value transaction is managed by the SWIFT network.
One very distinctive characteristic of Blockchain technology is that it is a collaborative technology. If used correctly, it solves the trust problem among participants that naturally or systemically cannot trust one another. The main challenge of implementing a blockchain solution is not the technological complexity, but to ensure the solution is going to be trusted and widely adopted by the selected target market.
There are many projects and players trying to become a global blockchain network of payments and/or a blockchain platform for financial solutions. So far, no one has the trust and the capacity to reach this goal, however, there is no doubt that a future global leader will emerge over the rest.
SWIFT has the resources, the trust of the global financial community, the trust of governments around the world, and easy access to the top existing blockchain projects and players to either (a) coordinate the creation of a global blockchain interoperable and multipurpose platform fully in compliance with regulations by leveraging existing solutions, (b) create one from scratch, or © whatever solution that combines (a) and (b).
There is no other organization in the world better positioned to reach this goal today than SWIFT. However, missing this window of opportunity is giving the space to other players to fulfill this role in the future, either partially or completely. No one really knows yet how this will evolve.
Long-Term Threats to SWIFT and the life savers
History has proven that uncontested leaders could fall into obsolescence and disappear after new incumbents emerge with disrupting technologies. We remember names like Kodak, Blockbuster, Blackberry, and others that had the obsolescence fate. Today, we have new players in the international payments space with very innovative approaches using mainly blockchain/DLT technologies. Names as Ripple, Stellar, Onyx (by JPM), among others, are emerging challengers to that aim to become relevant global payments network players. These are emerging alternatives to the uncontended global swift network. Although they are not big enough yet, we see a clear evolution and growth.
There are other smaller contenders such as Strike, that use open-source technologies combined with Open API to make international payments with inexpensive fees and in a matter of seconds. This is a serious treat as almost anyone has access to this technology. It is just a matter of time before an army of fintech companies learns how to replicate the Strike model with open-source technologies.
In addition, there are other governments-sponsored international payment networks created to circumvent US influence over SWIFT, such as INSTEX (EU), CIPS (China), and SPFS (Russia). All see these contenders’ solutions could take significant portion of the existing international payment markets and potentially replace SWIFT leadership with other international payment system and make it a very fractionated market, as best scenario.
Despite these real threats, any alternative should pass the test of local regulators and mass adoptions by banks globally. This is the SWIFT safety net and unique competitive advantage. SWIFT already has earned the trust of regulators and banks worldwide. As long as SWIFT remains as a relevant, competitive and convenient solution for financial transactions, it has a privileged and advantaged position against any other competitor.
SWIFT Is Catching Up with their New Digital Transformation Strategy
The existing SWIFT network architecture based on IP infrastructure has been operating since 2001. It has chosen XML’s protocols for the changing messages. During 2020, this architecture is considered to have severe limitations compared to the new technologies that were providing better user experiences and raising the bar of end user expectations. Real-time transactions, full transparency in the information and low fees are becoming the norm in local payment systems. Many local ACH payment systems have become real time and capture rich data/information about the transaction.
During SIBOS 2020 conference, the SWIFT leadership reinforced the commitment for the ambitious Digital Transformation Strategy that aims to close gaps and set the foundation of a new digital era in international payments.
The new SWIFT strategy is focusing on these pillars:
- Instant Payments
- End to End Transactions Management with Real Time Analytics
- New Messaging Standards ISO 220020
Despite this impressive set of strategic initiatives, new emerging use cases and solutions are rising even more the user expectations and adding innovative business models that have not been fully covered yet by the SWIFT strategy. For example: micro-transactions, complete privacy, and free or ultra-low fees for international payments.
It is important to mention that SWIFT is a closed ecosystem serving three main market segments: banks, securities, and corporations. This article is focused on the banking industry. SWIFT for securities and corporates product offerings and strategic implications of blockchain/DTL technologies are out of scope of this article.
Drafting the SWIFT Blockchain Architecture
Designing a blockchain solution architecture involves a great number of variables. There are multiple combinations of alternatives to achieve the same result. A technical deep discussion of each feature of the architecture is beyond the scope of the purpose of this article. Instead, we will draw some guidelines to drive the detailed design discussion:
1.- Main Purpose of the SWIFT Blockchain
The objective of the SWIFT Blockchain is to be the global backbone and the bridge between the old legacy financial infrastructure and the new DLT/blockchain ecosystems. It will open the existing SWIFT ecosystem to new solutions that will complement existing capabilities. This SWIFT Blockchain will serve as either a protocol, gateway, and/or database (optional) to support new solutions and be more inclusive. There are many ways to achieve this objective and it is part of the technical discussion to have. The final architecture of a global blockchain multipurpose platform could be (a) a combination of top existing blockchain projects and player, (b) the creation of one from scratch, or © a mixed solution of (a) and (b).
2.- Multiple Ledgers Blockchain
Bitcoin and Ethereum, the most popular blockchains today, have only one public ledger where anybody (nodes) can write and read. Everything is stored in that single ledger. Since financial applications may have multiple purposes and do not require public access for privacy reasons, a multiple private ledger platform is more convenient for cost, efficiency, and privacy reasons. For more information about how a Multiple Ledger Blockchain works, review the documentation of the most popular private blockchain financial platforms: Hyperledger and Corda.
3.- Digital Identify, Data Privacy, and AML/KYC Built-In Features
Having built-in AML/KYC mechanisms and identification techniques to protect information are critical factors. As all participants will be institutions or corporate members of SWIFT, all nodes will be known in the network. A participant company’s digital identity is a key to have in place. The financial institution that makes transaction on behalf of their clients could choose (a) keep their confidentiality using public keys or zero knowledge proof protocols, or (b) disclose the party identities in the transaction. This may vary per application, use case and the regulations involved. The flexibility is important. In any case, AML/KYC regulations must be followed by combining digital identity and cryptographic data privacy mechanisms among the many alternatives available.
4.- Ensure Seamless Blockchains Intraoperatively Using API/SDK or Other Methods
One of the most critical factors for the success of a blockchain SWIFT platform is to ensure interoperability with other blockchains. SWIFT Blockchain should work as a gateway for different blockchains to communicate with one another sharing information and transactions. It is also critical to exchange different digital assets across different blockchains, not just fiat money and crypto currencies. SWIFT can coordinate the creation and adoption of a very robust API/SDK middle layer to serve as bridges to other blockchain.
Blockchain projects like Polkadot, Ethereum, Cardano, Cosmos, and Harmony, among others, already have interoperability features as part of their rollout. SWIFT could aim to be the global blockchain network aggregator for the banking, corporate, securities and Fintech industry. This is a major achievement that only SWIFT today can pursue in the short term. Of course, failing to do it will open the door for a new global aggregator leader to emerge.
Note that I don’t mention other specific intraoperatively potential solutions under discussion as they require consensus among blockchain governances. I propose to use API/SDK because it is the simplest and unilaterally way to be adopted by a centralized entity as SWIFT. Please, refer to these articles for more in-depth analysis of interoperability issues and approaches: Finextra and World Bank.
5.- Embrace Hybrid Models: Private and Closed Blockchain with Open readability as optional
For financial transactions where the privacy is critical, a private blockchain (like Hyperledger, Ripple, and Corda) is the best choice as it allows participants (permissioned nodes) to add transactions. They also should be closed blockchain, as only the members and/or selected participants can read the information in the ledger. However, there could some applications that may require public transparency. It is advisable to have the option to be an open blockchain so anyone can read and audit the ledger. A global financial blockchain platform must nurture a broad range of solutions and business models.
6.- Consensus Mechanism
Usually, blockchain platforms have only one consensus mechanism. The SWIFT Blockchain could also select only one consensus mechanism or a combination of many (like Solana). A private blockchain where DLT databases could be different and separated per application. Because this is a multi-layer blockchain, there is an opportunity to allow using different consensus mechanisms for different databases application. Each application could have its own set of nodes which allow to select different consensus mechanisms.
Here is a list of recommended these consensus mechanics that offer robust security and potentially high speed (depending on the implementation, which could be combined): Proof of Stake, Proof of History, Proof of Authority, Practical Byzantine Fault Tolerance, Proof of Importance, Proof of Elapsed Time.
7.- Global Backbone of Ecosystems (with Fintech and Reg Techs)
As extrapolation to the interoperability, SWIFT Blockchain could be the global backbone and the bridge of the old legacy financial infrastructure and the new DLT/blockchain ecosystems. This force to expand SWIFT target markets to Fintechs and Reg Techs as they have many companies working in different financial ecosystems for conventional banking and DeFi.
8.- Proactive Embrace the evolution of CBDC, Cryptocurrencies, and Nonfungible tokens
SWIFT is already the global backbone for fiat currencies and has expanded further to securities in recent years. The emerging cryptocurrencies, nonfungible tokens, and the coming Central Bank Digital Currencies (CBDC) will open infinite possibilities for new business models and use cases to appear. SWIFT Blockchain could be the main facilitator and highway for those new assets to operate.
This content is part of my final project of the in Blockchain in Financial Services Specialization from INSEAD.
Author: Antonio Ponte-Dávila Stolk (LinkedIn)
Disclaimer: Any views or opinions represented in this article are personal and do not represent those people, institutions, or organizations that the writer may or may not be associated with profession or personal capacity. Any views or opinion are not intended to malign any religion, ethnic group, club, organization, company or individual.
- Material of the Course “Blockchain in Financial Services Specialization” by INSEAD (Link)
- SIBOS 2020 Conference (Link)
- SWIFT Website (Link)
- “Private blockchain consensus mechanisms” Dulguun Batmunkh, Nov 22, 2018, medium.com (Link)
- “Blockchain and Interoperability: key to mass adoption” Finextra, Carlo R.W. de Meijer, 06 July 2020 (Link)
- “Blockchain Interoperability” World Bank, Technology and Innovation Lab (Link)