SWIFT's authority has been repeatedly challenged. Does blockchain technology pose a threat to it?

Recently, the blockchain and payment industries have announced some important news. It is particularly noteworthy that at the same time, SWIFT also held the SIBOS conference in Geneva.

First, SWIFT announced that it has successfully completed the first phase of the Global Payment Innovation (GPI) project with 15 banks. This project aims to improve the speed, transparency and end-to-end tracking capabilities of cross-border payments, and has attracted the attention of more than 80 international banks around the world. SWIFT plans to officially launch this service in early 2017.

Ripple then questioned the value of GPI. Ripple said:

GPI does not address the aging issues of traditional banking architecture, so real-time settlement remains a challenge. GPI does not change the underlying architecture at all, but only slightly adjusts the existing settlement rules.

Then, seven major banks, including Bank of America, Santander and Royal Bank of Canada, announced the formation of a global blockchain payments network that would use Ripple’s distributed ledger technology. Some even said the network could replace SWIFT.

Blockchain replaces SWIFT

Recently, an article was published in American Banker. The article mainly studies whether blockchain technology can replace SWIFT, an "outdated payment settlement and communication technology". The conclusion is that blockchain has great reform potential and can even replace the bank payment network SWIFT. Not only that, the article also stated that blockchain can improve the security of the payment network, making it more convenient and accurate.

Should SWIFT be worried?

The first question: SWIFT connects more than 8,000 financial institutions around the world. Will blockchain really threaten its position? After all, this payment network has been running well for more than 40 years. SWIFT was born even before the digital age and can be said to be the best cross-border communication and transaction system currently available, but it does need to keep up with the times.

Second question: What will happen in the next few years? Will SWIFT be replaced by a blockchain network (such as Ripple)? Will SWIFT and Ripple "make peace"? Or will it build its own blockchain network?

Credit Suisse Report: Bitcoin - The Trust Disruptor

Recently, Credit Suisse mentioned in its report “Bitcoin: The Trust Disruptor” that SWIFT should be careful about Bitcoin’s derivative technology blockchain. Because blockchain can deprive SWIFT of its reason and right to exist. Blockchain is seen as a low-cost, fast and secure automatic transaction system that can create a more complete distributed security architecture for banks. The report pointed out that cross-border transactions are currently expensive, so the blockchain system is likely to become a strong competitor.

The report said the SWIFT network was slow, expensive and outdated. Transactions processed by SWIFT were not received in real time, settlement of cross-border transactions took several days and the fees were more than 10% of the transaction amount.

In addition, the existing banking system lacks innovation. Recent attacks on banks in Bangladesh, Vietnam and Ecuador have demonstrated the vulnerability of banks' cross-border transaction networks, especially the SWIFT network. After several attacks, SWIFT has promised to update its system and plans to launch new projects to improve system control, review and fraud detection capabilities.

Ripple

Perhaps Ripple, a cross-border payment solution based on a distributed ledger, is what SWIFT should be worried about. Most people agree, and here are the reasons.

1. More and more banks are using Ripple

In June this year, Ripple joined forces with seven banks to plan to use its blockchain technology to realize cross-border payments in fiat currency. The participating banks are Santander, UBS, UniCredit, ReiseBank, CIBC, NBAD and ATB Financial. Ripple said that there are another 90 banks interested in using its technology. It has completed more than 30 pilot projects and is negotiating commercial products with 10 banks. Some people believe that as the Ripple banking network grows, it can even become a strong competitor to R3CEV. In fact, the two networks can complement each other. Therefore, it is time to rethink the future of cross-border payments.

2. Global Payment Management System

Ripple announced last week that it has formed a Global Payment Management System (GPSG) with seven large banks. The seven banks are Bank of America, Merrill Lynch, Santander, UniCredit, Standard Chartered, Westpac Banking Corporation and Royal Bank of Canada. As the foundation of a global network, GPSG aims to provide cross-border communication services similar to the SWIFT network, but its payment settlement is almost instant. In addition, GPSG also hopes to establish and maintain transaction payment rules and standards, and ultimately reach an international level.

Don Donahue, President of GPSG, said:

The formation of GPSG is critical because it represents the first time that major banks have come together to plan for cross-border transfers using blockchain. I am excited to be a part of this organization because GPSG is a group of strategic and visionary leaders who are committed to creating the next generation payment network.

The goal of the first phase of the project is to set terms for a standardized protocol that details the process of processing transactions and exchanging information. Any bank joining the GPSG network must agree to these terms. The next step is to create "functional standard instruments" that allow individual banks to connect with multiple currency systems and countries.

3. Multi-signature function

The SWIFT network has been under constant attack, so Ripple's consensus ledger has launched a multi-signature feature. Account holders can require multiple transaction participants to sign to authorize a transaction. With this feature, users can request signatures from other users, devices, or the institution itself, making it difficult for attackers to attack. Ripple plans to open a similar feature for its Interledger Protocol (ILP). The above new solutions of distributed financial technology are impossible for traditional systems such as SWIFT.

Will GPSG be SWIFT 2.0?

Ripple's GPSG is a product of modern payment networks. It is the only blockchain banking network with an international scale and is accompanied by a complete rules and management system. Therefore, in the future, it is likely to become a competitor to SWIFT. Although Ripple has stated that GPSG has no intention of replacing SWIFT, in comparison, the two concepts are similar, and GPSG is more efficient in operation. A simple cooperation will allow major banks to use the global real-time transaction network. With payment rules and standards, process support and a fixed community, GPSG can provide banks with a low-risk method to achieve their payment goals using blockchain technology.

Will SWIFT and Ripple form a partnership?

In the future, Ripple may cooperate with SWIFT's communication network and become part of the SWIFT architecture. It does sound reasonable. First of all, SWIFT is undoubtedly the world's largest payment system. Secondly, there are more than 8,000 banks cooperating with the SWIFT network, and the community building is relatively complete, not to mention the regulatory system. All banks with cross-border transfer business have joined the SWIFT network. SWIFT's unique communication language can make Ripple's messaging system RippleConnect more complete. Moreover, SWIFT has already run the Ripple network in its own laboratory and is very familiar with the specific situation.

Or will SWIFT create its own blockchain network?

The third possibility is that SWIFT creates a new blockchain network. There is a saying that only SWIFT can achieve a high degree of compatibility with the blockchain payment network. Moreover, like Ripple, SWIFT has long been a member of the Hyperledger Project, which means that it is also paying attention to blockchain technology and its applications.

SWIFT's advantage lies in its perfect corporate structure. With the support of more than 8,000 banks, SWIFT is highly compatible with the blockchain cross-border payment system. In addition, SWIFT is originally jointly owned by banks, so banks trust it. SWIFT also holds the SIBOS meeting every year to maintain relations with banks. The disadvantage is that SWIFT's existing system is more suitable for integrating public chains. It takes a long time and is very costly to achieve this goal.

What is most likely to happen?

First, the recent multiple attacks on SWIFT will certainly accelerate the transition of cross-border payment systems to blockchain. Ripple will continue to attract more new members and accelerate the payment process. However, the popularization of blockchain technology requires the participation of large banking networks. Therefore, the cooperation between Ripple and SWIFT is the most likely to happen.