SWIFT International Payment System

 

Context:

  • The United States and its allies on Saturday moved to block certain Russian banks’ access to the SWIFT international payment system in further punishment of Moscow as it continues its military assault against Ukraine.
  • The measures, which will also include restrictions on the Russian central bank’s international reserves, will be implemented in the coming days, the nations said in a joint statement that also vowed further action to come.

 

About:

  • The Society for Worldwide Interbank Financial Telecommunication(SWIFT), legally W.I.F.T. SC, is a Belgian cooperative society providing services related to the execution of financial transactions and payments between banks worldwide.
  • Its principal function is to serve as the main messaging network through which international payments are initiated.
  • It also sells software and services to financial institutions, mostly for use on its proprietary “SWIFTNet”, and ISO 9362Business Identifier Codes (BICs), popularly known as “SWIFT codes”.
  • The SWIFT messaging network is a component of the global payments system. SWIFT acts as a carrier of the “messages containing the payment instructions between financial institutions involved in a transaction.
  • ” However, the organization does not manage accounts on behalf of individuals or financial institutions, and it does not hold funds from third parties.
  • It also does not perform clearing or settlement After a payment has been initiated, it must be settled through a payment system, such as TARGET2 in Europe.
  • In the context of cross-border transactions, this step often takes place through correspondent banking accounts that financial institutions have with each other.

 

How it affects other countries?

 

  • North Korea and Iran are the other countries that have already been cut off from SWIFT.
  • Russia is internally using the SPFS system, developed after the West threatened to cut it off from the SWIFT system in 2015.
  • For international financial information flow, China will also be planning to use the CIPS system which is its cross-border payment system in its local currency.
  • The key pillars of U.S. economic hegemony are SWIFT, CHIPS, and the dollar. Weaponizing any one of them against the banking system of Russia, the 11th largest economy, will convince China that it needs an alternative to the trifecta to escape the ambit of American power.
  • The Clearing House Interbank Payments System, or CHIPS, is a private club of financial institutions. Its 43 members settle $1.8 trillion in claims every day using a pre-funded account at the Federal Reserve. They all maintain U.S offices, and are subject to U.S. law, which makes it easier for authorities to catch and punish. Millions of dollars in fees aren’t really worth the nearly $13 billion that CHIPS members like BNP Paribas SA, Standard Chartered Plc and others have paid in fines over nearly two decades of Iran-related sanction violations.

 

 

Other Dimensions:

 

  • SWIFT will never see the transaction, CHIPS won’t have to clear it. Indeed, no Western bank may be needed to move funds across borders.
  • Even if the U.S. bars stablecoin firms from doing business with Chinese residents, it will not be able to prevent entities in a third country from buying dollar tokens on a cryptocurrency exchange to pay U.S.-regulated businesses.
  • The sphere of American economic dominance could shrink — not in a year or two, but perhaps over a decade or longer.

Source: THE HINDU.

 

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