The True Strength of Private International Payments Systems
Boaz Goldwater - Cornell University Law School
-- On a micro scale, a single payment is the transfer of currency from one party to another. On a macro scale, these fund flows create a payments system of critical importance—the glue that holds together the global economy (Badi et al. 2018). The key player in this global payments system is the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Originally, SWIFT’s success was attributed to its technology: the SWIFT messaging platform. In my recent Note, “Incumbency or Innovation: Why a Collective Agency View of Cross-Border Payments Means Private Blockchains Cannot Prevail,” published in the Cornell International Law Journal, I take a new approach and argue that SWIFT’s success (and necessary continued success) must actually be attributed to its independence, legitimacy and effectiveness.
I argue that SWIFT is a collective agent. As the foundation on which the global payments system rests, banks from around the world remain part of the SWIFT infrastructure because they value SWIFT’s independence from government controls. This independence facilitates an interdependence between SWIFT and its users (the banks), as well as enhancing the existing interdependence between the banks themselves. Consequently, SWIFT has become legitimate and subsequently effective.
Importantly, the banks that own and use SWIFT are unique in that they both compete with, and depend on, each other. Bank competition is taken for granted. However, the importance of their interdependence may be counterintuitive, but it is even more decisive for the payments system. For each bank to facilitate a payment, they must know that the corresponding bank will want and be able to accept the payment. SWIFT’s preeminence ensures its effectiveness; each bank knows that 11,000 other banks in over 200 countries are able to communicate with them via the SWIFT messaging system and thus accept their payment (SWIFT). In the payments system, collaboration is necessary (Fed. Reserve 2015). Therefore, SWIFT’s independence and cooperative structure ensures its legitimacy; banks know that the system is secure, impartial, and reliable precisely because each bank knows that every other member of the system similarly has a stake in its continued performance. Technology such as encryption plays a role in ensuring the legitimacy and effectiveness of the system, but the speed and cost, on which challengers focus, play little role in these important traits.
That is not to say that technology plays no role at all. Technologically, private corporations are creating new products that appear to be challenging SWIFT’s dominance. Nonetheless, I argue that technology is the junior partner in the international payments sphere. While technology is necessary, it is not the be-all-and-end-all. SWIFT’s prolonged dominance despite technological imperfections is proof of that. Furthermore, it is relatively easy for SWIFT to adopt these new challenger technologies, specifically blockchain, in order to overcome its perceived weaknesses in both speed and cost. Meanwhile, private corporations, no matter how technologically advanced, simply cannot obtain SWIFT’s true advantages of independence from governments (specifically the U.S. government) and interdependence built on decades of being the central technology in the international payments system. It truly is a case of incumbency being able to innovate, but innovators on the outside not being able to turn back time and be the incumbent. In a global system built on interdependence and coordination, the incumbent will necessarily prevail.
Consequently, although the technological challengers may at first-glance appear to be bigger threats (in my Note I focus on the American company Ripple), it becomes apparent that the bigger threat to SWIFT comes from a perceived lack of independence and thus legitimacy. To this end, I argue that consistent attempts from the Trump administration to use SWIFT for purely political and non-financial reasons diminishes SWIFTs legitimacy. If banks from certain targeted countries fear being “de-SWIFTed” they may help a new, independent challenger institution to emerge. On the other hand, de-SWIFTing banks that endanger the international payments system is a role SWIFT itself must play to ensure the continued effectiveness of the system. That is to say, SWIFT must govern its own systems without bending to outside governance. Ultimately, I argue that its ability to evade such interference is what makes it stand apart from private corporations and will ensure its continued central role.