Will Bitcoin and Stablecoins Become an Alternative to the SWIFT System?
They have been trying to disconnect Russia from the global financial system for a long time. Starting from February 2022, the list of domestic banks disconnected from the SWIFT international money transfer system has gradually increased by several units in each package of anti-Russian sanctions. At the same time, secondary sanctions are being continuously introduced against foreign organizations that, according to Western financial regulators, help Russian banks conduct international financial transactions.
Of course, the West would like to turn off Russia one day, but, fortunately, the overhead costs of the Western countries themselves are in this case would be too large. Although the stranglehold of sanctions is tightening slowly and we can talk a lot about how sanctions do not have that much of an impact on our economic relations and that workarounds and countermeasures have already been found, it is obvious to all participants in international trade relations that financial transactions have become slower and significantly more expensive and riskier.
Nevertheless, the slow introduction of sanctions provides an opportunity to prepare retaliatory measures, establish new financial relations with trading partners, introduce new mechanisms of financial relations and even new financial technologies. In the end, it is no secret that SWIFT has long been technologically stuck in the 80s, and if not for its total dominance, the technology would have long been replaced by a faster and cheaper one. Let us postulate a fact — today we need a new technology for international money transfers with the following characteristics: it must be a fairly traditional technology that is understandable to financiers, it must be no worse in speed, reliability and cost than existing methods, it must be secure, and in such a way that transactions were in no way visible to hostile regulators, it should be such that all its participants have no doubts about the trust in the system. Implementing such a system at first glance is difficult, but quite possible. From a technological point of view, everything necessary for this has long existed. Moreover, there is even the opportunity to choose from a significant number of technological candidates, including traditional mechanisms, analogues of SWIFT, mechanisms using digital money, using open or closed distributed registries… In short, the choice is rich. However, it is obvious that, from a global perspective, the issue of creating a system lies on the political plane, and politics is a “delicate matter” and clearly not quick. Sooner or later, the desired system will be created either within the BRICS or some other alliance. Perhaps this platform will be the just announced “BRICS bridge”, a report on which, according to reports from the Duma, will soon be presented by the Ministry of Finance and the Central Bank. But this is a matter for the future. So the question is rather what we can do in the area of international financial transactions right now.
And the first candidate for replacing SWIFT seems obvious — cryptocurrencies! Bitcoin and Ethereum currently appear to have many of the required characteristics. They are largely recognized as a valuable asset, are traded and bought fairly freely for fiat money, and systems for buying and selling them are legal in a fairly large number of countries. Cryptocurrency systems are decentralized enough that regulatory oversight is limited, and reliable and secure enough for practical use. Although transactions in cryptocurrencies are not very fast and require certain qualifications to carry out them, these problems are eliminated by numerous intermediaries.
Unfortunately, there are also quite a lot of factors against the direct use of cryptocurrencies in international financial activities. Low transaction speed with high volatility are characteristics that make the practical use of cryptocurrency as a means of payment inconvenient and costly. Although the blockchain system itself is not controlled by regulators, the entry and exit of fiat money into the system is carried out to a large extent in the legal field, over which national regulators have power, so cryptocurrency transactions through legal exchanges in Western countries are as impossible as SWIFT transfers through Western countries. banks. Moreover, the openness of the blockchain allows you to see all transactions with each coin throughout its entire life from the moment of its appearance, which allows you to block transactions with “wrong” coins when they fall into the legal field. Moreover, this fact even leads to anecdotal situations. Recently, the German government decided to sell bitcoins confiscated from criminals on world-famous cryptocurrency exchanges to replenish the budget, but the exchanges were forced to return most of the bitcoins, since, according to European regulation, these coins could not pass the money laundering test — since they had previously participated in criminal activities. transactions. Therefore, under all the above conditions, using Bitcoin directly in international transactions seems to be extremely problematic.
In an attempt to develop a solution for international payments, connecting the potential benefits of cryptocurrency mining with domestic and international legislation in the field of digital assets, the Russian Union of Industrialists and Entrepreneurs at the beginning of this month put forward an initiative to create a fund of cryptocurrencies mined in Russia and issue bonds tied to this fund DFA (digital financial assets). According to the RSPP, the use of securities derived from cryptocurrency will allow the legal use of cryptocurrency in international transactions, without fear of sanctions and without introducing cryptocurrency into circulation. Here we need an explanation of what DFA is. In domestic legislation, this is a digital analogue of securities and traditional financial instruments (for example, bonds or obligations of third parties). Digital financial assets are regulated by two laws: the DFA Law, which defines the asset, and the Securities Market Law, amendments to which regulate the use of DFAs as securities and, since March this year, allow the use of DFAs in international trade. Thus, settlements in the RSPP proposal will be carried out not using cryptocurrency, but using the transfer of rights to it.
At first glance, the scheme looks simple and logical. But upon mature reflection, many questions arise for her. How will miners transfer cryptocurrency to the fund and what will they receive for it? In addition, for foreign trade activities, the fund will still need to be legalized in international jurisdictions, and this entails the same problems of direct and secondary sanctions.
Perhaps the outlet for cross-border transactions is the DFAs themselves, no matter what asset they are linked to. Russia is full of interesting assets, including the undeniably eternally valuable oil and gold. Deputy Chairman of the Central Bank of the Russian Federation Vladimir Chistyukhin said at the beginning of July that DFAs are already actively used in foreign economic activity — both by professional participants in the financial market and by corporations. Despite the rapid introduction of digital financial assets into the domestic practice of international payments, DFAs are unlikely to become a universal way to support international transactions. DFAs are not, by definition, a means of payment. They reflect only the rights of claim on securities. Such rights can be exchanged for goods and services, but cannot be used to pay for them. They do not have the universal function of money. In addition, DFAs are issued and circulated only on Russian platforms, which also does not add versatility to the assets.
Deputy Chairman of the Central Bank of the Russian Federation Chistyukhin also stated that soon, in addition to the DFA, after amendments to the legislation, other cryptocurrency mechanisms will be able to be used in international activities. From an interview with another deputy chairman of the Central Bank of the Russian Federation, Alexei Guznov, it becomes clear that these mechanisms mean the use of so-called stablecoins — cryptocurrencies fixedly tied to traditional currencies — the dollar, euro or yuan. The use of stablecoins removes the main problem of traditional cryptocurrencies — volatility and solves problems with the material support of the crypt. Transactions with stablecoins are as lightly regulated as transactions with cryptocurrency, so there is hope to avoid secondary sanctions for participants in the transactions. Let us note, however, that the companies producing the most common stablecoins are within the legal framework of the United States and Europe, so which of the stablecoins are possible for transactions by Russian participants is not entirely clear. Perhaps it will be some kind of new stablecoin within the BRICS framework? But nothing has been heard about its development yet.
To summarize the above: all proposed schemes have a certain potential, and, at least for a short period, they will be in demand. How trouble-free and cost-effective they will be is largely an open question. Time will tell to what extent they will become a permanent mechanism for international transactions. In any case, all these schemes are only temporary solutions until an alternative international financial system is created.