No, Russia won’t replace Swift with the blockchain
Have you heard that Russia’s developing a blockchain platform for international payments to replace the current Swift system?
There’s a good chance you have, but if you haven’t you soon will, because the story has been stuck in a holding pattern above the news agenda for weeks. It loomed back into view this morning via coinbro churnalism and tweets such as this one, from Watcher.Guru to its 1.1mn followers:
JUST IN: Russian government organization has created a blockchain platform for international payments to replace the current Swift system.
— Watcher.Guru (@WatcherGuru) June 20, 2022
It all stems from an appearance by Rostec, Russia’s state-owned military technology developer, at a digitization conference in Nizhny Novgorod that ran on the first three days of June.
Rostec’s software battalion, Novosibirsk Institute of Software Systems (NIPS), used the event to announce “the CELLS industrial blockchain platform”. Here’s the press release fed through Google translate:
One of the central elements of the [CELLS] platform has become a digital system for making payments in national currencies, which can provide a real alternative to SWIFT in international settlements. The multifunctional system provides international payments, multicurrency transactions, user identification and storage of digital currency. Blockchain technology in combination with certified cryptographic information protection tools provide a high level of IT solution reliability.
“The digital payment system on the blockchain platform can be used as a full-fledged replacement for SWIFT, providing high speed, security and irrevocable transactions. The system will make it possible to switch to settlements in national currencies, eliminate the risk of sanctions and ensure the independence of the national financial policy for clearing participants ,” said Oleg Yevtushenko, Executive Director of Rostec Group.
NIPS has some form with bold predictions. In 2019 it presented to the same conference a “roadmap for the development of blockchain technology in Russia” that involved chaining the entire machinery of state at a cost of up to 85bn rubles ($1.5bn). Council budgets, transport infrastructure, the industrial complex and municipal elections would all be put on distributed ledgers to somehow deliver an estimated economic benefit of up to 1.64tn rubles within five years.
Deploying a platform such as Ethereum in the Kremlin “is not a sign of dependence on foreign solutions”, since access to the source code cannot be limited for political reasons, Kommersant quoted NIPS as saying in May 2019. Between that date and now, for perhaps obvious reasons, the focus has switched to a proprietary system.
Not much information is in the public domain about the CELLS blockchain other than what’s on a product website. From that we learn it uses uses proof of authority mining, which does away with the whole competitive mining thing and relies on a small fleet of validators.
There are benefits to this approach, including that transactions are nearly as quick, secure and power efficient as in a conventional database. The downside is a degree of centralization that’s the opposite of blockchain’s theoretical USP, in return for a system that’s slightly worse than the one it replaces.
The Swift cross-border money transfer network routes 42mn financial messages a day to connect more than 11,000 institutions and 4bn account holders in at least 200 countries. NIPS’s proposed replacement is arguably over-specified, reportedly handling up to 100,000 transactions per second, though capacity is really not the problem here. None of the hurdles is technical. It’s all about the Benjamins, as Claire Jones explains:
About half of all global payments are made in dollars. Along with about 90 per cent of trade finance. When instructions are sent via networks such as Swift, many of those dollar payments need to be made between institutions that do not have accounts with one another. What that means is that a correspondent bank — probably with operations in the US, policed by the American authorities — will act as an intermediary…. Even for transactions that are legal, parties are unwilling to take the risk of alienating the US authorities by processing payments for businesses based in countries that have fallen foul of Washington.
Which is the bottom line. And what are the chances that any non-Russian counterparty would adopt a mystery meat ledger that’s centrally controlled by a company that parades its tanks through Red Square every May 9? оль.
The impact of throwing Russia out of Swift – FT Alphaville