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Will the Blockchain Replace Swift?

Editor's Note: This article is adapted from the forthcoming book "ValueWeb: How Fintech Firms are Using Bitcoin Blockchain and Mobile Technologies to Create the Internet of Value."

I made a provocative comment, as it turned out, during my keynote at a recent conference. The comment was picked up in a press article that reported I said "the coding behind virtual currency bitcoin could also prove to be enormously transformational, potentially even replacing the Swift network for interbank payments."

This remark created a lot of debate as Swift is the backbone of the banking industry worldwide. Built in the 1970s to replace telex machines with electronic transfers, Swift is a co-operatively funded network by the global banking system to let them send funds with confidence. Its very name shows its cooperative nature: the Society for Worldwide Interbank Financial Telecommunication.

Swift provides a network that enables financial institutions to send and receive information about financial transactions in a secure, standardized and reliable environment. The majority of banks use the Swift network to send money. As of September 2010, more than 9,000 financial institutions in 209 countries, were sending and receiving an average of over 15 million messages per day, compared with just 2.4 million a day in 1995. Furthermore, banks trade something like $5 trillion a day in currencies alone, and most of that is handled by message exchanges to and from the Swift network.

Therefore to say that a new technology, the blockchain, could eradicate a 50-year-old, bank-owned network overnight is provocative. But then, many countering my view showed a complete lack of understanding of what the technology is. Sure, banks are waking up to bitcoin and, more important, the blockchain and its ability to transform banking. But not quickly enough.

Blockchain, a technology that has more compute power behind it on a decentralized basis than any open source project in history, could fundamentally reinvent the banking system. And yet, few bankers understand it. They made this known by expressing views that were clearly incorrect after they read my keynote comment.

First, there was the view that bitcoin is purely for payments. No. Bitcoin, the protocol, and other cryptocurrencies are for the recording of digital value exchanges that can take any form from a payment to a marriage vow.

Second, that bitcoin cannot threaten something like Swift, as Swift is more than just payments. Half of Swift's activities are in securities settlement, for example. Wrong. Bitcoin's technology can record securities settlements as easily as a marriage contract or a payment. This is evidenced by the newly launched investment markets service, Colored Coins, a company that records investment activity on the blockchain.

Third, that the upstart cryptocurrencies could not threaten Swift since Swift has the scalability, security, resilience and history that provide the trust in the network. Wrong. Bitcoin is now using more scalable and capable networking compute power than SETI, the Search for Extraterrestrial Intelligence, which was the world's previously largest networked system.

Fourth, that the bitcoin blockchain is of interest, but not the currency. Some people believe this is wrong, too. They state that you cannot have a blockchain in banking without a native currency—and why would you replace bitcoin as the native currency when it's had five years and thousands of man hours of development effort invested? It's an interesting discussion, and one I disagree with personally as you can have a dollarchain or eurochain, rather than a bitcoin blockchain, but only time will tell on this one.

Fifth, that Mt. Gox's collapse has destroyed all trust in bitcoins and its ecosystem. No. Just because a flaky trading system collapsed does not remove the robustness of the bitcoin protocol. It's similar to Northern Rock collapsing. Does that mean you no longer buy Pounds Sterling?

Sixth, that it is difficult to use. Yes, but that's changing fast thanks to the bitcoin ecosystem. Companies such as Circle and Ripple are changing the game. Bitcoin is like the Internet before Tim Berners-Lee gave us the World Wide Web. But it's becoming easier and faster, so keep watching this space.

Finally, that it's not relevant because it's just a cryptocurrency. Wrong. It's a protocol, a commodity, a technology, a smart contracts system, a general ledger, a secure exchange — a many splendored thing.

Now, I write about bitcoin all the time. Not because I'm promoting it but because it has the potential to reinvent banking, money and regulation as we know it. Its technology — the blockchain — is the core technology of the ValueWeb. That is why leading exponent and investor in bitcoin startups, Marc Andreessen, is regularly quoted as saying this is important. In February 2012, he told TechCrunch, "Every single smart computer science person I've had look into it has reached the same conclusion — blockchain is a fundamental breakthrough in technology."

Andreessen told Bloomberg in October 2014: "We have a chance to rebuild the system. Financial transactions are just numbers; it's just information."

And on Twitter in February 2014, he wrote, "I am dying to fund a disruptive bank."

In other words he, and many other highly intelligent investors, are betting the farm that this technology will succeed.

A final point of clarification. What I said was, "Bitcoin even has the potential to replace Swift for financial transaction processing." I didn't say it would. The fact that Swift is highly inclusive of Ripple, Colored Coins, the bitcoin community and more in its internal and external discussions shows that Swift is just as keen as I to highlight the importance of these developments to its financial community.

Chris Skinner is an author, expert and speaker on banking, finance and fintech. He can be reached @Chris_Skinner.

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Comments (3)
Chris,
Always good to read your work.

I know Marc Andreessen is a great visionary but I really find it hard to see how the blockchain is much more than the latest feeding frenzy for marketing people.

I've just come back from several weeks of giving blockchain talks at large banks and the world's largest Java group in New York were we sold out 225 places in 24 hours on the weekend. My talk was probably more technical than the average Gartner-esque talk but being that blockchain is a technical "solution" perhaps more relevant.

I'm sure you remember GSTPA and more recently SEPA, both pegged as massive changes to the banking world that would save billions. GSTPA was killed and SEPA delayed because of the sluggishness and bureaucracy of the banks involved. Do you really believe that we can wade through the legal and banking bureaucracy to implement another new and possibly risky solution?

Donít get me wrong, blockchain and more so smart contracts do have a bright future but I find it hard to believe investment banks will be at the forefront, theyíre just too slow.

Blockchain is basically a linked list with a hash so not exactly a technology revolution. A smart contract is basically an object (in the programming sense) but thereís no specification, no accepted standard and no legal foundation at this point. Almost every bank is spending money on blockchain R&D and R3 have amassed a healthy sum of money but their web site is still mostly "we're recruiting". For a company with healthy start up money that have no product, no architect and just a few developers. Those latter facts will of course change but it demonstrates that this is lead by hype and not pragmatism. I mentioned above that there is some risk, I should remind people that the hash is currently the strongest link in the chain but if someone cracks that link it instantly becomes the weakest and the blockchain unravels. Do the European banks really trust their transactions to PKI and hashes that the NSA may already be able to "crack". I don't personally believe they can but GCHQ discovered PKI (RSA) long before the Americans and kept quiet about it for years. I still think Iíd trust the physical security of SWIFT over a new blockchain implementation and itís not the speed of the SWIFT network or the technology that makes it expensive just the bureaucracy behind it. We could do T0 today without touching a blockchain, the blockchain wonít change the barriers itís just an implementation of a store.

Bitcoin is already riddled with issues and it now seems clear that the goal of being independent of the banks has just left it dependent on handful of programmers, which would you trust? I should also point out that the computing resources dedicated to the Bitcoin's open source is simply because it pays out $10k (equivalent in BTC) every 10 minutes for mining. If Red Hat did the same they'd completely wipe out their competition.

So to conclude, blockchain is an interesting but simple technology, smart contracts are probably where the future of innovation lies in this area. However I fail to see how either will magic away the bureaucracy that infects the banking world. I hope Iím wrong and already working with a few customers on some interesting project but like Marc Andreessen, thatís just because thereís money behind it.

-John Davies-
Posted by jtdavies | Monday, March 14 2016 at 8:10AM ET
Appears to have promising future in settlements.
Posted by maheshchourushi | Wednesday, March 09 2016 at 8:46AM ET
Many declarative statements. Call us when you find a viable business model that all consumers can 1) understand and 2) trust. Till then....
Posted by r.c. whalen | Tuesday, March 08 2016 at 12:34PM ET
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