Blockchain instead of SWIFT?

Introduction

The modern world of finance is increasingly resembling a battlefield, where sanctions are used instead of tanks and control over payment systems instead of cannons. The US-China trade war and other geopolitical scuffles clearly show that global mechanisms such as SWIFT have become a tool in the hands of those who pull the strings. The dependence on centralised systems, which are de facto controlled by Washington, is becoming increasingly risky – a bit like building a house on a tectonic fault line. In this situation, can blockchain technology, which is mainly associated with the speculative frenzy of cryptocurrencies, become a sensible alternative? Can it offer more than just digital gold for libertarians?

Some technological background

Before we answer this question, however, it is worth taking a moment to consider how blockchain actually works, without any marketing slogans. Imagine a digital ledger that is not stored on a single server in a bank, but is copied and distributed across thousands of computers around the world. Transactions are not entered there just like that – they are grouped into so-called blocks. Each new block contains not only a batch of fresh transactions, but also a unique cryptographic ‘fingerprint’ (technically called a hash) of the previous block. This creates an unbreakable chain – hence the name ‘blockchain’. Changing anything in an older block would require recalculating all subsequent blocks in the chain, which is practically impossible with the network distributed across multiple machines. What’s more, adding a new block to the chain requires the consent, or consensus, of the network participants. Various mechanisms are used here – the infamous Proof-of-Work (as in Bitcoin), where computers ‘mine’ by solving complex tasks, or the newer, potentially more ecological Proof-of-Stake, where the right to approve transactions lies with those who have ‘staked’ their digital coins.

Regardless of the method, the goal is to confirm transactions in a decentralised manner and ensure security without the need for a central supervisor. It is this combination of distribution, cryptography and consensus mechanisms that makes it impossible to easily replace or delete data once it has been stored in the blockchain – we are talking about immutability. And it is precisely this resistance to censorship and manipulation, resulting from the lack of a central lord and ruler, that raises hopes in the context of geopolitical games.

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So maybe it is an alternative after all?

The idea of using this technology as a financial ‘safety net’ in turbulent times seems tempting, especially for those who do not want to be at the mercy of global players. It is a potential way to circumvent blockades – countries or companies suffocated by sanctions could try to use it for trade, bypassing traditional financial channels, as if finding a side gate when the main gate is closed. It is also an opportunity to create a viable alternative to the dollar, enabling settlements in other assets and weakening the ubiquitous dominance of the US currency – the dream of many capitals from Moscow to Beijing.

In the age of cyber warfare, a decentralised system may also be less vulnerable to a crippling attack than centralised bank servers, although it always depends on the specific implementation and its security features. In theory, blockchain could also reduce costs and speed up international transfers by eliminating the need for an entire army of intermediary banks.

Regulations everywhere

But before we hail blockchain as the saviour of the financial world, we need to face the reality that it is a bit like implementing sensible solutions in the European Union – it is full of problems and challenges. First of all, there is regulatory chaos. Governments either don’t know what to do with it or are trying to strangle it with regulations, often written by people who have no idea about technology. The law is inconsistent and uncertain, which creates enormous risks for companies and users. Sound familiar?

What’s more, even if the law were clear and user-friendly, many popular blockchain networks are simply too slow to handle global trade. A throughput of a few or several dozen transactions per second is a drop in the ocean of the global economy’s needs. Promises of ‘second-layer solutions’ to speed up the network are often just that: promises that have yet to prove their worth in practice.

Problems of a speculative nature

Added to this is the absurd price volatility of many cryptocurrencies. Who in their right mind wants to do business with something that is worth X on one day and X minus 30% on the next? An attempt to circumvent this problem is the so-called stablecoin – a digital asset designed to maintain a stable value, most often linked 1:1 to a traditional currency such as the dollar or euro. It’s a catchy idea, but the devil is in the details. The most popular stablecoins, such as USDC or Tether (USDT), claim to be fully backed by reserves (cash, bonds) held in banks. However, the transparency of these reserves and their regular, reliable audits have long been in doubt. Is the money really there?

Another type is stablecoins secured by other cryptocurrencies – here the risk is a drop in the value of the collateral itself, which requires complicated mechanisms and over-collateralisation. The riskiest category is algorithmic stablecoins, which try to maintain the exchange rate through complex algorithms and the issuance of related tokens. History is already familiar with the spectacular failures of such projects, which have resulted in billions of dollars in losses. Stablecoins therefore mitigate the problem of volatility, but introduce new risks related to trust, transparency and the spectre of increasingly likely, hard regulation.

We must also not forget about the often illusory security on the user’s side. The protocol itself may be secure, but so what if people lose millions through phishing, hacked exchanges or lost private keys? It’s like having a super-secure safe but leaving the key under the doormat. Add to this the fact that the technology is still complicated and unintuitive for the average person or company. Try explaining to an entrepreneur how to use a cryptocurrency wallet safely – it’s still a game for enthusiasts. And finally, the icing on the cake: some blockchains, such as Bitcoin’s with its proof-of-work mechanism, consume as much energy as an average country, which is a hard argument to ignore in the age of climate change.

Centralised ideas and problem-solving ideas

It is worth noting that China’s response to these challenges – the digital yuan (CBDC) – is a completely different story. It is not a decentralised alternative, but a centralised digital currency under the full control of the state. It is a tool to increase control over citizens and financial flows, not to hand it over. It is more like a digital Big Brother, dressed in technological robes, aimed at strengthening the position of the yuan and the Chinese state, rather than building an open, global system. Other countries are also working on their CBDCs, which could become a state counter-proposal to the idea of decentralised finance.

So is blockchain doomed to remain a technological curiosity for speculators and idealists?

Not necessarily, but the road to its wider and more stable use, especially in such a sensitive area as international payments, requires a solution to fundamental problems. What needs to be done? Instead of dreaming up grand visions of revolution, we need a method of taking small steps and concrete actions. Firstly, clear, predictable and relatively internationally harmonised regulations are needed. These should not be about prohibitions or creating barriers, but about rules written by people who understand the technology, which will ensure the protection of users and the stability of the system, without killing innovation. Secondly, the technology must mature. Solutions to improve scalability, such as the aforementioned layer-two networks, must become reliable, cheap and easy to use. Thirdly, the issue of volatility must be realistically addressed – perhaps through better designed, more transparent and robustly supervised stablecoins that gain the trust of the market and regulators.

Improving security and usability for the end user is also crucial. We need interfaces – wallets, exchanges – that are as simple and secure to use as modern banking applications, without the need to be a cryptography expert. Security standards and user education are an absolute must. The issue of ecology is also important – the industry must continue to move to more energy-efficient consensus mechanisms, such as Proof-of-Stake, to counter the argument that it is harmful to the environment. Finally, greater interoperability is needed – the ability of different blockchain systems to communicate with each other and, perhaps crucially, with existing financial infrastructure. Without these elements, blockchain will remain a promising but still immature technology.

Conclusions

So what are the final conclusions? Blockchain has the potential to become part of a more decentralised and politically pressure-resistant financial system. The theoretical advantages are tempting. However, as of today, it is more of a promising technology than a ready-made, secure and practical solution for global payments. The problems are real and serious. Will they be solved? Time will tell. But it is certainly worth watching it closely, without unnecessary excitement, but with healthy, pragmatic scepticism, remembering that technology is just a tool, and its use will ultimately be determined by interests, regulations and simple, human usability.