Bitcoin is revolutionizing international cash administration

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state of the system

The access barriers to the global financial markets are archaic. Long processing times, high transaction fees, deadweight losses due to exchange rates, the list goes on. While these may be excusable in a settlement system that is still in its infancy, here I describe the SWIFT system, our global international banking network, established in 1973. For a service that, at its 50th birthday, is making its way into the mechanisms by which SWIFT enables international financial messages. However, it remains largely unchanged.

Surprisingly, SWIFT still retains most of the functionality found in its 1973 iteration, only with a thicker dust layer today. Cross-border payments were a hurdle that SWIFT solved brilliantly in its day. The standardization of sending, receiving, and processing payments on a global scale made it easier for those doing business abroad to conduct transactions with minimal friction. But as daily transactions increase as we witness the personalization of finance, the SWIFT messaging system is out of nicks — and it’s about to explode.

That your money bounces between hundreds of intermediary banks, each taking a portion of your transfer for processing fees, culminating in a multi-day trip, is old news. What I just described may have sounded like sci-fi from 1922, not like the global standard for bank transfers in 2022.

Inefficiencies affect businesses, inefficiencies affect citizens, and the intrusive nature of the only true alternative means those inefficiencies will soon be gone. The Bitcoin network is the final pin that will burst the overstretched, underdeveloped SWIFT system and transform global money exchange as we know it.

Increasingly fragile security

Every company and every individual, whether they like it or not, is exposed to a multitude of risks in global transactions. How does the network within the legacy SWIFT system help keep it safe and are transfers always safe?

With the SWIFT system, transfers are processed through a number of intermediary banks around the world. SWIFT does not transfer money but transmits messages between banks, each of which is assigned a unique identifier as money is credited and debited via bank statements. So, like Bitcoin, SWIFT uses a ledger system to record balances on its network – SWIFT simply transmits messages.

This means that SWIFT is a lightweight system, but this messaging aspect makes it infinitely more vulnerable to hacking. Over the past decade, India, Taiwan, Russia and Nepal have all had their messaging platforms hacked, with perpetrators getting away with around $2 billion. All in all, SWIFT has gaping holes in its security protocol and anyone transacting on the network risks having their transfer redirected, effectively vaporizing their funds.

The frequency and magnitude of these attacks only increases as technology advances, yet SWIFT security innovations are nowhere to be found. You can see why this is not an airtight network for sending large sums of money.

Foreign exchange (FX) risk.

Aside from the SWIFT system’s propensity to become a target for international crime, any transaction involving two currencies carries the risk of exchange rate fluctuations. This is an ever-present risk and mitigating this risk for international money transfers can be a real pain.

In transactions with any party, everyone experiences non-zero risk sensitivity; This is simply measured as exposure. In the truest international financial terms, there are three types of exposure – transactional, economic and translational risk – each with a slightly different definition and all revolve around fluctuating exchange rates that entail risk. For the sake of simplicity, we refer to this as transaction risk.

Limiting your transaction risk is an exercise most need to pursue by hedging with futures contracts. Let’s say I have 10 million CNY accounts receivable as a company, payable in 3 months. Tomorrow’s exchange rate will be different from today’s, so to minimize my downside loss if my denomination currency depreciates, I will sell 10 million CNY forward at today’s exchange rate if it changes unfavorably in the next three months. That’s a superficial example, but it’s clear why the time and energy required to develop this hedging strategy is unfavorable — failures in this area often cost companies tens of millions of dollars a year in deadweight losses.

Even at the retail level, you can send money to a friend in the UK when the spot exchange rate between US dollars and British pounds is low. The next day the dollar strengthens against the pound and you regret sending money yesterday when the dollar was weaker – you lost more money than you needed to. Exchange rate fluctuations weigh on retail and institutional clients – big or small, it’s tumultuous to endure these headaches.

You can understand that it would be desirable to avoid FX exposure entirely.

Smothered innovation

Incentive structures move the world. This is a foundation held by almost everyone with a basic understanding of economics, save perhaps for Keynesians.

Whether it’s through economic opportunity or something as simple as a Christmas bonus, we do whatever it takes to move our world forward because we believe there’s a carrot at the end of the stick.

In one of my previous articles, “The American Dream Is Dying – Bitcoin’s Monetary Policy Can Save It,” I explained the US government’s unbalanced stimulus structure, and I believe it extends to most other global institutions. The central banks that support the SWIFT network in countries like Japan, Germany, India and Russia are also running in tandem with this unbalanced incentive scheme.

In essence, governments that oversee fiat currency can iron out inefficiencies by conducting monetary policy, which they have sole control over. One of their favorite tools is increasing the money supply, which on paper is a fantastic solution that will end up expanding the polarity of wealth, distributing more profits to those with capital goods and siphoning real wealth from the less fortunate working class. This is known as the Cantillon Effect.

This is playing out in any nation with fiat currency, which includes any nation operating on the SWIFT messaging standard. What incentive do these nations have to iron out major inefficiencies in their network? None, the cantillon effect assumes the opposite. These nations control their respective money supplies, so if the SWIFT network becomes overloaded with, say, floods of remittances, the first step is to ignore the problem until it becomes a problem in their own affairs. They may then point the finger at “big business,” an unnamed entity that governments often like to use as a scapegoat, and come up with some kind of bill that will allow them to get out of the problem. If this were an ad hominem attack, the SWIFT system would have been replicated repeatedly over the past five decades. Unfortunately, we do international bank transfers here, which can take up to three days.

If your incentive structure isn’t about improving efficiency, why would you provide a better product to the end user?

A network of people, by people, for people

With the rise of the Bitcoin network comes the rise of a global money messaging system. This is a network that cannot be interfered with by anyone with a vested interest in manipulating its rules – the nature of the Bitcoin network is immutable.

Through the bitcoin payment network, governance rules are delegated to the people running miners and running nodes. Miners process payments by solving complex math problems and are rewarded with newly minted currencies and transaction fees

Each new ASIC miner that is connected and each new node that is launched adds to the network’s security layer and builds on its anti-fragility.

A good example of this would be the bitcoin ban in China and the ensuing mass exodus of miners, which caused the network hash rate to drop by over 50%. To date, the hash rate has fully recovered and is reaching new all-time highs as the mining power is shared and absorbed by other eager people around the world. This shows the resilience of the network to attacks. Even if one of the largest countries bans the use of this global currency network, the network has recovered and is operating at newfound highs, which cannot be said of the SWIFT network. A mass exodus of national banks would certainly doom the SWIFT messaging system as it has been endlessly outlined with various horrors over the years, such as Russia and China.

The Bitcoin network has a number of talented programming teams working tirelessly to create applications based on its base layer protocol. One such innovation is the Lightning Network – a high-speed rail that operates on sidechains to the primary blockchain, enabling channels between peers and on-blockchain confirmation at setup. In short, near-instant and increasingly cheap transactions using the Bitcoin currency network.

One killer app that makes great use of the Lightning Network is Jack Mallers’s Strike. It’s an API that allows users to trade between any currency worldwide by buying BTC locally, sending it to the recipient via the Lightning network, and buying the recipient’s currency locally. Essentially, it’s the premise for SWIFT in the 21st century, devoid of administrators and ill-intentioned middlemen – and it’s going to change the world.

Protocols built on top of the Bitcoin network, such as Lightning, eliminate the need for centralized control over global monetary communications.

Final Thoughts

Not only is there a deeper layer of security over bitcoin, not only does bitcoin offer Layer 2 technology like the Lighting Network that enables near-instant and fee-free payments, but it also solves the age-old conundrum of whether a return to a global hard-money standard is possible is is possible.

It answers this riddle with a resounding yes.

The question is, will the competition, namely governments with a vested interest in their fiat currency, allow this to happen?

Thanks for reading, please share if you enjoyed this article! If you are interested in following me, I can be found here.

This is a guest post by Joe Consorti. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.


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