SWIFT Economy: Understanding its Nuances & Need for Alternative

• The SWIFT economy facilitates world trade and is overseen by G10 nations.
• Many world nations are looking for alternatives to the SWIFT economy.  

SWIFT emerged as a way facilitating world trade, strengthening a global financial system & a mode for cross-border transactions. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a code that provides guidelines for banks and financial organisations for international transactions. 

SWIFT Economy: Facilitating World Economy

SWIFT is supervised by the central banks of the G-10 Countries, including Canada, Belgium, Japan, France, Italy, United Kingdom, United States, Sweden, Netherlands, & Switzerland. It should be known that the National Bank of Belgium also serves as the primary overseer for the European Central Bank.  

The code facilitates information exchange, especially surrounding the financial transactions, ensuring that it is swift & secure. SWIFT functions as a global payment system used by over 11,000 financial institutions & 200 countries. Although it does not provide any financial aid when required it enables cross-border transactions through many ways. 

For instance it facilitates cross-border transactions, enhancing the global trade and ways of financial transactions. Nations involved in this scenario greatly benefit from it as it makes it simple for goods and services to traverse across international borders. Basically it provides a standardised and secure platform for communication, enabling activities like trades with respect to foreign exchange and enhances secure transactions. 

USD: The Major League Player of the SWIFT Economy

Throughout the SWIFT ecosystem the United States Dollar is believed to be the main player. USD is also referred to as reserve currency, & every nation keeps a significant amount of dollars in reserve. Moreover the US Federal reserve’s monetary policy, USD’s value in global trade and America’s political stability and its world power status are believed to be the reasons. 

Apart from facilitating global trade, the SWIFT system is also used as a tool to stabilise geo-political unrests. Nations use it to levy sanctions on non-cooperative states or on countries that, due to some reasons, failed to abide by the bylaws.  

SWIFT Economy: A Double Edged Sword

Sanctioned nations are cut from the SWIFT network hampering their international trade. Meaning that it can no longer continue to trade with the world, the financial institute does not allow the transitions to go through. This helps in pressurising the nations through economy to either abide by the rules or get its affairs in order. 

Recently, when Russia attacked Ukraine in 2022, the Russian banks were banned from the SWIFT economy. Data suggests that the sanction was imposed by the European Union and other Western countries. The aim of this ban was to weaken the Russian economy so that it can be forced to end the invasion of Ukraine, like a financial arsenal fired at Russia. 

Why is the World Looking for Options for SWIFT?

For long the nations across the world were doing their business through SWIFT, and the USD being the primary currency, it immensely helped America. Not to weaken the United States, but due to some underlying flaws or  reasons the nations are looking for a viable alternative. 

China emerged as one of the fastest growing economies of the world. Riding on rapid industrialisation, urbanisation and buzzing export scenarios, it is believed to have shaken the manufacturing sector. India also emerged economically leveraging its service sector. These two nations are among the nations looking for an option for the SWIFT economy. 

Viable Options for the SWIFT Economy

Major economies of the world are looking for viable options for the SWIFT economy. Reasons could be to weaken the power of USD, or to create an alternative for the existing system. Another reason being, as the Chinese economy gains power, its currency the Chinese Yuan (CNY or RMB) is gaining significant traction. 

Leveraging this, China is promoting the use of CNY in international trade. Also, it should be noted that the Indian Rupee (INR) is widely used in the South Asian trade circuit. Apart from China & India, other nations are also slowly diversifying their foreign currency reserves. 

They are switching away from the USD & Euro, and including Yuan and INR in their reserves. Maybe because they find these currencies to come out as viable alternatives.  

India leveraging the status of being the world’s most populated country, and growing economic prowess. Also, many Indians are living across the world in countries like the USA, Canada, Saudi  Arabia, Australia, South Africa etc. Many big companies around the world have CEOs of Indian Origin, even U.K. ‘s Prime Minister Rishi Sunak is of Indian origin. Overall it can be said that India is emerging as a powerful nation.

Underlying Disadvantages of SWIFT Economy Model

The current SWIFT network is marred by complications surrounding protocols. It is believed to be difficult and expensive to implement and maintain the required infrastructure and technologies. SWIFT relies heavily on the network of financial institutions worldwide, and having too many variables slows the speed and could be a liability during transactions. 

Russian invasion of Ukraine that garnered sanctions, any significant geopolitical scenario can hamper the flow of SWIFT. There is a possibility that powerful nations might try to suppress smaller nations with SWIFT. Apart from these there are a few reasons that led the nations to look for viable alternatives. 

Also, nations are actively looking for alternatives to lessen their reliance on the SWIFT. Banks and other financial institutions are main users of SWIFT, hence smaller companies & individuals could face difficulties in directly using the system, instead they need to rely upon middlemen for global  transactions. 

Although there are some underlying drawbacks in the SWIFT economy, it is currently playing a vital role in the global trade infrastructure. It supports transactions worth trillions of dollars daily. Experts are trying to upgrade the system and include new and innovative technologies in the mix, in order to fix the issues. 

World nations are not wrong at looking for an alternative, and many are actively looking for or already using an alternate system. But in order to make it a viable solution of the current system, also it should be able to address the underlying flaws. Until the world comes up with an optimal solution, SWIFT will continue to dominate the scenario.