A SWIFT Way to Scale Blockchain

SWIFT’s latest experiment with building new solutions on blockchain technology could be just the thing that blockchain needs to finally gain widespread adoption within financial services, says C24’s CEO Craig Beddis.

Since it was founded in 1973, SWIFT has provided a network enabling financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment. The SWIFT network connects over 10,000 banks and companies in over 200 countries, and the majority of international interbank transactions use it.

SWIFT: The enthusiastic elder statesman

SWIFT may have been established over 4 decades ago, but while the financial services industry is often accused of being slow to adopt new technology, SWIFT has long been an enthusiastic champion of innovation. SWIFT supports FinTech startups through its Innotribe initiative, drives industry adoption of new standards such as ISO20022, and has been responsible for several projects to encouraging more efficient payment processes using experimental technologies.

The Global Payments Innovation Initiative

The most recent of these, the Global Payments Innovation Initiative, was launched in collaboration with the payments industry in December 2015. According to SWIFT, it promises to dramatically improve customer experience in correspondent banking by increasing the speed, transparency and predictability of cross-border payments.

The surprising thing about this initiative is that it is exploring the use of blockchain, the technology which powers projects such as Bitcoin. But while Bitcoin is, according to its inventor Satoshi Nakamoto, ‘a peer-to-peer version of electronic cash [that] allows online payments to be sent directly from one party to another without going through a financial institution’, the underlying distributed ledger technology, or “blockchain” has several characteristics which make it an extremely interesting technology for SWIFT and its member organisations to adopt.

Blockchain for settlements and reconciliation

Wim Raymaekers, Global Head of Banking Markets at SWIFT suggested that possible use cases would include cross-border payments, securities, and settlements. Settlement and reconciliation is a time consuming and often manual process which still involves spreadsheets and duplication of effort, and cross-border payments and remittances are a key product area where FinTech startups are eroding margins, so it makes sense that these would be the primary focus areas. Wim went as far as to describe the initiative as “Phase One” of a process which could eventually “look at changing correspondent banking settlements and maybe having blockchain technology rather than bilateral correspondent accounts.”

SWIFT and Blockchain: a mutually beneficial relationship

As new technologies and FinTech startups threaten to unseat the incumbent banks from their positions in the marketplace, it’s easy to see why SWIFT and its members are so keen to embrace new technologies. But the fact is,Blockchain needs SWIFT as much as SWIFT needs blockchain. The technology has suffered some reputational damage from early failed experiments around Bitcoin – most notably the collapse of the Mt Gox exchange, but also stemming from issues around regulation and the scaleability of blockchain-based technology.

In my conversations with financial services companies and blockchain startups, what I am finding is that a whole host of interesting POCs are taking place, but they are all in the early stages of development. Blockchain is perhaps the largest open-source technology in the world, but outside of Bitcoin and some initial prototypes in insurance and capital markets, it is difficult to point to commercial projects which are currently live in production. SWIFT’s adoption of Blockchain could be the thing that will finally change that.

Challenges and Obstacles

Raymaekers was keen to highlight that SWIFT are well aware of the hurdles they will have to overcome: regulatory compliance, identity management and verification are important issues for distributed blockchain systems which will require management and industry-agreed controls. It is difficult to overestimate how significant these challenges are, and how important it is that they are overcome.

Banks will simply not adopt a new open technology framework if those control mechanisms are not there. Addressing these issues and concerns will be no doubt raise many red flags with SWIFT members along the way, and resolving each of them will take time. But given that SWIFT is a cooperative led by many of the world’s biggest banks and financial institutions, this initiative seems more likely than any startup-driven project to produce a solution which will have the potential to entirely reinvent the back office of the world’s financial services industry. And that’s an exciting prospect indeed.