Headline: What is SWIFT?

Date: 2/26/2022

Body:  OK, let’s start with just a little perspective.   Transactions can be EXTREMELY complex, with billions of dollars trading hands assuming that very technically demanding attributes are met.   This is made even more complex when considering transactions that occur between different nations with different monetary systems.    SWIFT is a messaging system that was set up to facilitate trade around the world and each day, billions of dollars of trade are executed each day.   All to say, this is a VERY important organization.   (Interestingly, my aunt has a nephew, not me, who had taken a job at SWIFT, near D.C.   They drove by a building that had a substantial fence around it AND had a substantial earthen berm around the building itself.  The address checked out, and they asked the deadly serious armed guards (Armed with AR-15s) if they were at the correct address for SWIFT.   The guards would not even confirm or deny that they had gotten the address right, and the German Shepherds weren’t saying anything either.   This is a VERY serious institution.)  Since Russia’s incursion into Ukraine, this organization is being placed into a spotlight.

Having mentioned that spotlight, this is not an article about Russia or politics.    It is an article to look at a very important international institution that is central to international trade.   That said, let’s continue.

What is Swift?

SWIFT is an acronym that stands for “Society for Worldwide Interbank Financial Telecommunication” and has become central to international trade.   SWIFT was started in 1973 as a facilitator for its’ members, as the engage in international trade.    In 2020, about 38,000,000 transactions were sent daily over the SWIFT platform, leading to Trillions of dollars of commerce.   In 2021, there were 42,000,000 messages daily.  But, it is not a payment processing platform, rather it facilitates the communication about deals, instead of the deals themselves.  (The Washington Post compared SWIFT to Gmail for international commerce.)

How secure is the Swift system?

Over the broad scope of decades, SWIFT has actually been surprisingly secure.  Having said that, there have been embarrassing breaches, the best known one in 2016.  In this attack, the  central bank in Bangladesh was breached.  Hackers installed a message that tricked the Federal Reserve Bank of New York to send $81 Million in cash.  In response, SWIFT issued several new measures designed to beef up their security and encryption standards.

Who regulates Swift and is Swift bound by economic sanctions?

Since it doesn’t hold deposits, Swift isn’t regulated the way a bank is. It’s overseen by the National Bank of Belgium and representatives from the U.S. Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan and other major central banks. Generally speaking, Swift would cut off access only if the European Union passed sanctions against a particular entity or country. In the past, Swift has resisted calls to impose bans on certain countries, describing itself as neutral.   But, there were a few exceptions to this neutrality.    The first one was in 2012 when Iran was kicked off.  Vacroux told NPR that when Iran was kicked off, “they lost half of their oil export revenues and 30% of their foreign trade.”  Please note that in 2016, the Iranian banks were reconnected to SWIFT.  Swift suspended certain Iranian lenders in 2018 after the U.S. imposed a new round of sanctions, although it says that was “an isolated event” that was “taken in the interest of the stability and integrity of the wider global financial system.”  Recently, the Ukraine’s minister of Foreign Affairs  called for international officials to remove Russia from SWIFT, to punish them for invading the Ukraine. (There appear to be a few European countries that appear averse to this sanction, though, they are careful to pronounce that it might be a step taken in the future.)  The boil-out seems to be that Western nations do most of the regulation of SWIFT and they don’t want to be bound by economic sanctions, but effectively are.

Are there alternatives that are akin to SWIFT?

The answer is yes, and no (do you see a pattern here?   Sorry, I went to a Liberal Arts School.)   In simple terms, both Russia and China have systems analogous to SWIFT.   The Russian equivalent has only about 400 users and not much appears to be known about it.  There is a Chinese system (CIPS) but it is unclear how many participants are involved with this system.   In 2021, the Bank of China announced a joint venture with SWIFT, but it is unclear how far things have progressed.  But, the combination of these networks and the easy usage of cryptocurrency could conspire to endanger the USD status as the global reserve currency.

All this being said, none of these players can lay a glove on SWIFT.  Its reach is just too great.

The Verdict

Just like the very serious earthen berm around its building in D.C., SWIFT has quite a moat around it.   It started first and has the backing of the developed countries of the world.   Never discount the behemoth represented by China, but, they are starting from a distinct disadvantage.  Given these realities, being removed from SWIFT would seem to be a pretty terrible consequence of behavior for a nation.  More important still, it allows more developed and stable nations to economically encourage stability in smaller nations, and stability is better for everybody.  SWIFT might have its faults, but without it, the world would be a much less profitable place.


What is Swift and what would shutting Russia out of it achieve? | E-commerce | The Guardian

What is SWIFT? Here’s why Russia could be removed from the system (usatoday.com)

What Is SWIFT? Here’s How This Banking System Could Be Used To Punish Russia For Invading Ukraine (forbes.com)

U.S., EU unlikely to cut Russia off SWIFT for now -Biden | Reuters

What is Swift? Inside the Major Sanctions Russia Could Face Over Ukraine – Bloomberg

What is SWIFT and why is the banking system a ‘nuclear option’ regarding Russia’s invasion of Ukraine? | Fortune

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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