Bitcoin is revolutionizing global financial management
Technologies that were state-of-the-art 50 years ago will be usurped by Bitcoin as superior technology makes itself felt.
Barriers to entry into global financial markets are archaic. Too long processing times, high transaction fees, deadweight loss due to exchange rates, the list goes on. While these may be excusable in a settlement system still in its infancy, I am describing the SWIFT system, our global international banking network, established in 1973. For a service celebrating its 50th anniversary, you would expect the Modern technology has made its way into the mechanisms by which SWIFT enables international financial messaging. Yet it remains largely unchanged.
Surprisingly enough, SWIFT still retains most of its features that could be found in its 1973 iteration, just with a thicker layer of dust today. Cross-border payments were an obstacle that SWIFT brilliantly solved in its day. The standardization of sending, receiving, and processing payments globally has made it easier for those conducting business abroad to transact with minimal friction. But, with daily transactions increasing as we live through the personalization of finance, the SWIFT messaging system has run out of notches in its belt – and it’s about to explode.
Moving your money between hundreds of intermediary banks, each taking a portion of your transfer for processing fees, resulting in a multi-day trip, is old news. What I just described might have sounded like science fiction written in 1922, not the global standard for wire transfers in 2022.
Inefficiencies impact business, inefficiencies impact citizens, and the pervasive nature of the only real alternative means those inefficiencies will soon be no more. The Bitcoin network is the latest pin that will shatter the overextended and underdeveloped SWIFT system and transform the global monetary exchange as we know it.
An increasingly fragile security
Every business and every individual, whether they like it or not, is exposed to a variety of risks when transacting globally. In the antiquated SWIFT system, how does its network lend itself to security, and are wire transfers still safe?
With the SWIFT system, wire transfers are processed through a series of intermediary banks located around the world. SWIFT does not transfer money, but rather transmits messages between banks, each of which is assigned a unique identifier when money is credited and debited on statements. So, like Bitcoin, SWIFT uses a ledger system to record balances on its network – SWIFT simply forwards the messages.
This means that SWIFT is a lightweight system, however, 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, where culprits grabbed an estimated $2 billion. All told, SWIFT has gaping holes in its security protocol, and anyone transacting on the network bears the risk of their transfer being redirected, vaporizing their money.
The frequency and size of these attacks are only increasing as technology advances, but with untraceable SWIFT security innovation. You can see why this is not an airtight network for sending large sums of money.
Currency exposure (FX)
Beyond the propensity of the SWIFT system to be a target of international crime, any transaction between two currencies introduces exposure to exchange rate fluctuations. This is an ever-present risk and mitigating this risk for international wire transfers can be very painful.
When transacting with any gone, everyone experiences a non-zero sensitivity to risk; this is measured simply as exposure. In the truest terms of international finance, there are three types of exposure – transaction, economic and conversion – each with a slightly different definition, all revolving around the fluctuation of exchange rates introducing risk. For the sake of simplicity, we’ll call this trade exposure.
Limiting your trading exposure is an exercise that most should pursue by hedging with futures contracts. Let’s say that as a business, I have claims of CNY 10 million which are payable in three months. Tomorrow’s exchange rate will be different from today’s, so to minimize my downside loss if my issue currency depreciates, I will forward sell 10 million CNY at today’s exchange rate. today in case it changes unfavorably over the next three months. This is a surface example, but it’s clear that the time and energy spent developing this hedging strategy goes against it – mistakes 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 rate between the US dollar and the British pound 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 necessary. Fluctuating exchange rates introduce a burden on retail and institutions – large or small, enduring these headaches is tumultuous.
You can understand how desirable it would be to avoid FX exposure altogether.
Incentive structures rule the world. It is a base held by almost everyone with a basic understanding of economics, with the possible exception of Keynesians.
Whether it’s through economic opportunity or something as simple as a Christmas bonus, we go above and beyond to move our world forward because there’s a carrot at the end of the stick for us.
In one of my previous articles, “The American Dream is Dying – Bitcoin’s Monetary Policy Can Save It”, I explained the lopsided incentive structure of the US government, and I think it extends to most other global institutions. Central banks supporting the SWIFT network in countries like Japan, Germany, India and Russia also operate alongside this lopsided incentive scheme.
Essentially, governments that oversee fiat money can eliminate inefficiencies by conducting monetary policy, of which they are the sole controllers. One of their favorite tools is increasing the money supply, which is a fantastic solution on paper that ends up expanding the polarity of wealth and distributing more gains to those who own capital goods and deprive the less fortunate working class of real wealth. This is called the Cantillon effect.
This happens in every nation with fiat currency, which encompasses every nation operating under the SWIFT messaging standard. What incentive do these nations have to iron out major inefficiencies in their network? None, the Cantillon effect bets the opposite. These nations control their respective money supply, if the SWIFT network is clogged with floods of wire transfers for example, the first step is to ignore the problem until it poses a problem for their own business. Following this, they can point the finger at “big business”, an unnamed entity that governments often like to use as a scapegoat, and introduce some bill of some sort that will get them out of trouble. If this was an ad hominem attack, the SWIFT system would have been iterated many times over the past five decades. Alas, we do international money transfers here which can take up to three days.
When your incentive structure doesn’t revolve around improving efficiency, why deliver 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 monetary messaging system. It is a network that cannot be mixed up with people who have a vested interest in manipulating its rules – the nature of the Bitcoin network is immutable.
On the bitcoin payment network, governance rules are ordered to the people who run the miners and operate the nodes. Miners process payments by solving complex math problems and are rewarded with new currencies and transaction fees
Each new ASIC miner that is plugged in and each new node that is activated adds to the security layer of the network, building on its anti-fragility.
A good example of this would be the Bitcoin ban in China and the ensuing mass exodus of miners, causing the network’s hash rate to drop by more than 50%. As of today, the hash rate has fully recovered and reached new all-time highs as the mining power is distributed and absorbed by other enthusiastic people around the world. This demonstrates the resilience of the network to attacks. Even with one of the largest countries banning the use of this global monetary network, the network has rebounded and is operating to new heights, the same cannot be said for the SWIFT network. A mass exodus from national banks would certainly spell the end of the SWIFT messaging system, as has been endlessly described with various scares over the years, such as Russia and China.
The Bitcoin network has a talented set of programming teams working tirelessly to build applications on top of its base layer protocol. One such innovation is the Lightning Network – a high-speed rail that runs on side chains to the main blockchain, which allows for peer-to-peer channels and confirmation on the blockchain upon setup. In short, near-instantaneous and increasingly cheap transactions using the Bitcoin monetary network.
A killer app that brilliantly exploits the Lightning Network is that of Jack Mallers To hit. It is an API that allows users to transact globally between any currency of their choice via spot purchase of BTC, pass it to the recipient via the Lightning Network and buy the recipient’s currency in cash. Essentially, this is the fundamental thesis for SWIFT unfolding in the 21st century, without the need for custodians and intermediaries with bad intentions – and it will change the world.
Protocols built on top of the Bitcoin network like Lightning eliminate the need for centralized control over the global currency Communication.
Not only is there a deeper layer of security on bitcoin, not only Bitcoin does provide Layer 2 technology like the Lighting Network enabling near-instantaneous, sensationless payments, but it solves the age-old conundrum of whether a return to a global hard-money norm is possible.
He answers this riddle with a resounding Yes.
The question is whether competition, namely governments with a vested interest in their fiat currency, will allow it?
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This is a guest post by Joe Consorti. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.