SWIFT: use and abuse of an alphanumeric code

The conflict in Ukraine is the latest example of the growing importance of economic sanctions as instruments of coercion in international geopolitical relations. We analyse how SWIFT, a communication protocol between banks, has become a strategic weapon of the West.

 

The origin of telecommunications between global banking networks dates back to the mid-19th century, when the newly developed electric telegraph enabled more agile communications between stock markets. The telegraph established a continuous, near real-time trading system that reduced the differences between the prices of securities in markets separated by large geographical distances.

In 1872, Western Union used its existing telegraph network to launch the first widely used wire transfer service. A sender paid money to a telegraph office, and the operator transmitted a message to allow the transfer of money to another office, which was verified by passwords and code books so that the funds were released to a recipient.

In the early 20th century, the telegraph was slowly replaced by teletype or telex machines, a system developed by Germany that took advantage of telegraph lines and allowed users to write a message somewhere and have it printed on the other side of the world. Although telex provided the banking sector with a basic platform for business, and an operational medium through which they could begin to expand, the need to ensure that messages were secure and accurate added much complexity to the system, which soon found itself unable to cope with the pressures of an increasingly globalised financial world.

As the increase in transactions made it clear that the limits of this communication system were a constraint on the expansion of the banking business, banks, especially European banks, decided to explore other options. A decision spurred by a subsidiary of the American bank, the First National City Bank (FNCB), which wanted to force other banks to use its proprietary telex system. This ultimatum horrified the European banks, which saw a change from a system based on cooperation between rivals to a monopoly at the hands of the American partner.

The banks of 15 countries created a private company, SWIFT, which stands for Society for Worldwide Interbank Telecommunication, based in Brussels and run as a global cooperative enterprise. SWIFT simplified procedures and minimised errors by using a standardised messaging format that was adopted globally.

 

Communication networks and state coercion

The tug-of-war between the new and old continents over control of a global interbank communications system highlighted a phenomenon that had already been seen with the emergence of the telegraph during colonial times. While these communication systems were not created with geopolitics in mind, it was inevitable that the big players in the global economy would use them as tools to control, spy on, and punish other states competing for the same interests.

A fact that is not without irony in the case of SWIFT, created by Europe to maintain its sovereignty vis-à-vis the United States, but which has ultimately been unable to resist obeying Washington’s orders, even when they run counter to European interests, as happened when President Donald Trump unilaterally abandoned the Iran nuclear deal.

Political scientists Henry Farrell and Abraham Newman define this as “weaponised interdependence“. As for SWIFT, they explain: “In this world, the networks that enable global interdependence no longer serve as neutral means of transmitting information or money. Instead, they are becoming the power projection tools of large states“.

The use of sanctions by the US government, against enemies and allies, purely for economic and geopolitical interests, did not begin with the administration of President Donald Trump, but it is true that Trump made an unprecedented expansion of punitive economic measures to promote his administration’s agenda. An abuse of a position of privilege that initially yields good results, but is counterproductive in the long run when other states question alliances with the United States, and seek alternatives to monetary tools linked to the hegemonic power of this country.

 

Alternative systems and cryptocurrencies

The latest economic sanctions against Russia, and the exclusion of some of its banks from the SWIFT system, follow the same trend of recent years, and only consolidate the efforts of China, Russia, and even the European Union, to seek alternative systems that can shield their economies. A new blow to the system that could trigger a chain reaction of change.

In 2017, Russia launched the Financial Messaging System of the Bank of Russia (SPFS), equivalent to SWIFT, and in 2015, China launched a similar system called The Cross-Border Interbank Payment System (CIPS). Two alternative systems that are still far from being able to fully replace SWIFT, but which at least help to reduce the effectiveness of the possible sanctions imposed on banks in these two countries to exclude them from the interbank communication protocol established by Western banks.

On the other hand, the blockchain-based cryptocurrency revolution is another tool that countries such as North Korea and Iran have already used to circumvent economic sanctions, and the exclusion of their banks from the SWIFT ecosystem. The digital rouble is just one of several digital tools through which the Russian government can boost bilateral trade with allied countries, as China has already done with the digital yuan.

Nevertheless, the use of economic sanctions will undoubtedly have a significant impact on Russia’s economy, and to a lesser extent on that of the European Union. Even so, it is also clear that the abuse of this tool of persuasion or punishment is reducing its effectiveness and promoting the creation of alternative systems, which are ultimately inevitable in a multipolar global geopolitical scenario, which is no longer content to be subject to the impositions and interests of a single country.

 

11Onze is the fintech community of Catalonia. Open an account by downloading the super app El Canut on Android and Apple and join the revolution!

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  1. Pere SorianoPere Soriano says:
    Pere

    Bon article. Bona presentació. Gràcies.

  2. Santiago VázquezSantiago Vázquez says:
    Santiago

    Renoi!!!

  3. alicia Coiduras Charlesalicia Coiduras Charles says:
    alicia

    Es trenca la guerra freda com bé diu l’article un mom multipolar
    Bon article Gràcies

  4. Joan Santacruz CarlúsJoan Santacruz Carlús says:
  5. Daniela SimónDaniela Simón says:
  6. Manuel Bullich BuenoManuel Bullich Bueno says:
  7. Mercè ComasMercè Comas says:
    Mercè

    El primer que ve al cap al sentir parlar de sancions i embargaments comercials són imatges de vaixells que no deixen descarregar, duanes tancades o aranzels desorbitats, quan realment qui té la clau és el sistema financer. Com acostuma a passar, quan sorgeixen els problemes es desvetlla la imaginació. Sembla mentida però potser els sistemes financers alternatius impediran que el món es divideixi en els temibles dos únics blocs. Veurem.

    • AlbertAlbert says:
      Albert

      Comparteixo la teva reflexió, Mercè. Les sancions SWIFT, de retruc, esperonen la multipolaritat financera. Veurem on ens porta tot plegat …

      5 months ago
  8. Carles MarsalCarles Marsal says:

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