1973, 239 banks from 15 countries got together to solve a common problem: how to communicate about cross-border payments. The banks formed a cooperative utility, the Society for Worldwide Interbank Financial Telecommunication, headquartered in Belgium.
SWIFT went live with its messaging services in 1977, replacing the Telex technology that was then in widespread use, and rapidly became the reliable, trusted global partner for institutions all around the world. The main components of the original services included a messaging platform, a computer system to validate and route messages, and a set of message standards. The standards were developed to allow for a common understanding of the data across linguistic and systems boundaries and to permit the seamless, automated transmission, receipt and processing of communications exchanged between users.
https://www.swift.com/about-us/history
2015-, when the 100-billion dollar BRICS-funded New Development Bank (NDB)was launched, a move widely recognized as a direct challenge to the supremacy of the U.S. dollar as an international reserve currency. This was heightened just months later, when China launched the China International Payment System (CIPS), which aimed to reduce the nation’s reliance on SWIFT while also propelling its own currency into greater international prominence.
Iran’s prohibition from using the SWIFT system from 2012 to 2015 made it clear that the West, and particularly the U.S., could and would use its influence within international banking institutions to cripple a nation’s economy for geopolitical reasons.
2017-During a meeting with Russian President Vladimir Putin last Wednesday,Central Bank governor Elvira Nabiullina stated that:
“There were threats that we can be disconnected from SWIFT. We have finished working on our own payment system, and if something happens, all operations in SWIFT format will work inside the country. We have created an alternative.”
The alternative system, known by its abbreviation SPFS, is analogous to SWIFT for financial transactions taking place in Russia and has been in the works for years, with 330 Russian banks connected over a year ago. This number will likely increase now that it has been successfully developed and implemented.Nabiullina also added during the meeting that 90 percent of ATMs in Russia are now compatible with Mir, a Russian version of the Visa and Mastercard payment systems that is used domestically. However, the SPFS is still far from perfect, not operating from 9 pm to 5 am Moscow time and with a transfer cost of 5 cents per transaction.
2021-The Foreign Ministry said Russia needed to create its own blockchain-based alternative. The head of Russia’s banking association warned SWIFT against disconnecting Russian lenders, saying it would be an act of “self-castration,” while the Director General of the Kremlin-aligned Russian International Affairs Council (RIAC) compared the potential move to detonating a financial “nuclear bomb.”
The system, which facilitates secure and fast communications between financial institutions is often mislabeled a “payments system,” but it is actually a notification and communications network.
“SWIFT is a messaging service, essentially. Money doesn’t actually flow over the SWIFT network, which is what many people don’t realize,” O’Toole said.
“If Russia was disconnected from SWIFT today, there would be a big impact, let’s not minimize that. But taking them off doesn’t cut them off from U.S. banks, because Russian institutions can use Telex or another form of financial messaging. There’s too much economic activity at stake for those banks not to fall back on other methods,” he added.
By itself, disconnecting Russian banks from SWIFT means only increasing the cost and slowing down financial transactions,”said Oleg Bogdanov, lead analyst at investment company QBF. “The traditional connections will be broken, and it will take some time to restore them. But it can be done in a week or two.”
SWIFT is headquartered in Belgium, and the U.S. has no jurisdiction over the organization — as the company itself states in an announcement about sanctions on its website. Any action would therefore require new steps by the EU, which is hostage to a potential veto by any one of its 27 members.
Russian banks would be forced to use alternatives, perhaps having to convince their counterparts to sign up to a Russian system just for them — a significant inconvenience — or incurring the cost of using friendly intermediaries. These could be banks in Belarus or other members of the Eurasian Economic Union, which are connected to both SWIFT and Russia’s home-made alternative, the Central Bank’s System for Transfer of Financial Messages (SPFS).
To date, SPFS has been heavily promoted at home but failed to receive much pick-up abroad. Developed in 2014, it has more than 400 domestic users — practically every licensed Russian lender — but only a handful abroad. Despite a shared desire to reduce the dominance of western systems in the global economy and their diplomatic friendship, China is notably cool on the idea — with only one Chinese bank signed up to SPFS — preferring its own Chinese alternative.
While Russia’s SPFS can be three times cheaper than SWIFT, the network itself also has serious limitations. It is only operational during weekday working hours, unlike SWIFT which works 24/7. Messages are also limited to 20kb in size, while SWIFT allows 10mb to be transmitted across its network.
Despite traffic doubling in 2020 to two million messages a month, the domestic system accounts for only a fifth of all financial messages, the Central Bank said. It wants to boost its share to a third by the end of 2023. Meanwhile, Russian banks remain among the world’s most active users of SWIFT.
“While painful in the short-run for the Russian economy, [disconnection] could accelerate the government’s steps to promote a more multipolar, less dollar-centric global order,” Kameryan said.
But O’Toole, a former sanctions advisor to the U.S. government, says talk of a cut off is premature.
“Disconnecting from SWIFT is the last thing you do — or the last thing you try to do — from a sanctions perspective. In the case of Iran, disconnection took them from 92% to 97% on the pain meter.”
On the same scale he would put Russia at around 10% — leaving lots of ground to cover, such as a full ban on owning Russian government debt, more restrictions on state-owned companies, and then “working up to actually blocking transactions with a Russian bank or two” before Western governments would move to block SWIFT.
“That’s what gets you to 60 or 70% on the pain meter. Blocking Sberbank, for instance, would be a much bigger deal than SWIFT. That would be real financial warfare.”
2022-JPMorgan CEO Jamie Dimon explained not only why this harsh escalation may be futile but why it could backfire spectacularly in the years to come.
In an interview with Bloomberg TV, the CEO of the world's largest bank said that "there are a lot of workarounds for SWIFT, so there are different tools we use for different reasons" adding that “the banks are talking with the government so everyone understands the issues, not because they’re for or against any particular thing."
While SWIFT sanctions mean companies can’t use the messaging system to do business with the Russian entities affected, they can still do business with them, Dimon said. In fact it's as simple as sending an email with payment instructions, because what SWIFT really is, is a messaging remnant from a bygone era, before emails, even before the fax machine.
Dimon also said that disconnecting Russian banks from the SWIFT messaging system may bring “unintended consequences” that include third parties finding ways around the penalty.
Whether Putin will interpret the Western expulsion from SWIFT as an acto of war remains to be seen, but one thing is clear: on Monday morning, stocks linked to China's version of SWIFT - the Cross-Border Inter-Bank Payments System (CIPS) - exploded limit up.
The reason: at least some in the market are betting that the glory days of SWIFT are coming to an end thanks to the West's own actions, and its replacement is an acronym that very few have heard... for now.