CEO and co-founder of Routefusion here, a cross-border bank to bank payment API. We use the SWIFT network regularly. I can 100% confirm that all money in the world is just literally numbers, and it is balanced by the different federal reserve systems around the world to ensure no one can "create" money without notifying everyone.
I guess if I was super cool I would do an AMA because this is the only thread that is really my time to shine hahaha.
>I can 100% confirm that all money in the world is just literally numbers, and it is balanced by the different federal reserve systems around the world to ensure no one can "create" money without notifying everyone.
How does the system guarantee that nobody's creating money without notifying everyone? Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence? Is it all just a trust-based system, or are there additional controls?
> How does the system guarantee that nobody's creating money without notifying everyone?
This is a comment that's not related to SWIFT in particular.
Every asset (including money) is generally someone else's liability. The money that we hold as an asset is the liability of a bank. Anyone can issue their own liabilities, but you can't create money that's a liability of someone else. For example, I can't go to my bank and tell them I have a million dollars more in my deposit account than I actually do. They're keeping track on their end.
Similarly, a bank can't pretend that it has more reserve deposits at the Fed than it really does. The Fed keeps track of everybody's reserve accounts on their end.
> Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence?
This isn't an issue. The books of central banks don't need to adjust when other banks issue money (i.e deposits).
> How does the system guarantee that nobody's creating money without notifying everyone?
Through a series of regulations regarding minimum liquidity/capital [1] and/or reserve [2] requirements.
> Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence?
By requiring them to periodically report on their assets and liabilities, checking for compliance with [1] and [2], and monitoring their reserve accounts.
> How does the system guarantee that nobody's creating money without notifying everyone?
Simple answer is balanced books. Longer answer is public reporting and reconciliation.
If a bank shows its Federal Reserve balance at X on its asset side and the Federal Reserve shows its bank balance at 0.9X on its liability side, that will raise issue on reconciliation. The system lazily evaluates, however, which makes it nimble but also corruptible--if that bank never tries to spend that money, it may not come to light until audit.
The system can’t do that. As a matter of fact I know someone who works for a French bank, and they fucked up and created a bunch of money. They had to work overnight with a bunch of accountants going through the books to make sure they reverted everything.
EDIT: apparently they use some old XML protocol, where twice a day a correspondant bank send them a list of accounts to debit or credit. They didn’t send something once, so my friend’s bank just replayed the previous settlement list.
I read the other responses to your question, and I feel like they're all using complicated language and are still ambiguous.
Can we have a simple "for dummies" answer that explains how does the system guarantee that nobody's creating money without notifying everyone in practice?
Is there some kind of a public ledger? Do banks automatically broadcast their money creation operation to other banks?
What would keep some entity that has its SWIFT access revoked from switching to China's CIPS or even crypto? Would it be merely an inconvenience, requiring the change of a few processes, or would it create hard problems?
When people say "revoking somebody's SWIFT access", I think they really mean putting them on national or international sanction/embargo lists that prohibit them from doing any kind of business with them (in particular, sending payments in their name or for their benefit), rather than actually, technically removing their SWIFT network access.
Since SWIFT is not the only, but certainly the largest financial/interbank messaging network, I suppose the effects are similar, but "disabling SWIFT" to me always sounds like an implementation detail.
The two systems aren’t mutually exclusive. You can be a SWIFT member or participant and also use CIPS or cryptocurrency, though I think switching to crypto for payments would create a ton of procedural issues for most financial institutions.
In the short term, both. Longer term yes, many countries would migrate to other systems which mitigates the value of SWIFT. Fear of that happening is part of the reluctance to use it as a political weapon.
It would come down to people would not be able to send money to them, I.e. they would say you can’t send money to Russia anymore, and if an institution went around SWIFT to send money and they get audited they could get into a lot of trouble.
Could you explain this to me like I am a complete moron? I understand that SWIFT allows for international payments, but I don't understand exactly how it differs from a normal bank account transfer within the same country.
When people say SWIFT, they usually mean "international payments via correspondent banking". SWIFT is just a messaging layer to enable that.
Look into correspondent banking if you're curious how all of that works – SWIFT is just one (very popular) way correspondent banks can communicate with each other and/or look up paths to facilitate international payments for their account holders.
How does one connect to the SWIFT network? Say, someone wants to start a company for providing some financial service like fund transfer across borders, then connecting to SWIFT will be very helpful. I was always fascinated by how all this works and what does it take to directly use the SWIFT network. Any insights on this will be really helpful.
You generally need to be a bank or regulated financial institution.
SWIFT is just a messaging layer for correspondent banking. If you're not a bank, SWIFT access is about as useful as suddenly learning your country's president's cell phone number: Definitely cool, but the two of you would probably not have much to talk about.
I used SWIFT messages as part of my first real job (finance rather than tech). The format itself is comically loose, ill defined and fugly by any reasonable measure.
When something really screwed up you resorted to sending MT599 messages around, free format text messages.
I believe it's all SWIFT over IP this century so probably not dissimilar to any other API you might use.
You can go online to swift and apply. Large corporates can actually be members. We access the SWIFT network through a myriad of different banking and financial institutions we have created partnerships with.
I.e. if you go and create a neobank through a baas provider you will inadvertently get access to SWIFT, it won’t be direct but you have access.
To get true access you have to go through and insane process and have a ton of controls and policies and create trust with the governing body of SWIFT.
I wouldn't call this consensus, as there is no global view and "total ordering" of transactions. Different parties have different views of who owns what, and extremely partial views at that.
I thought swift was just a protocol that banks used to talk to one another. If so how can it be used to cut russia? I’m guessing I’m missing a part where it is some centralized server somewhere?
not until they can successfully, secretly, launder money and hide money in shell companies and other fraudulent activities that a very large portion of the money flow in the world relies on.
Also. at a level above "money" what do the ultra wealthy (Rothschild, Rockefeller, etc) deal in as currency at their level. I believe they have another currency. These families have FAR greater wealth than Bezos and Zuck (Bill Gates is essentially family to the Rothschilds. through his father/grandfather)
> I can 100% confirm that all money in the world is just literally numbers, and it is balanced by the different federal reserve systems around the world to ensure no one can "create" money without notifying everyone.
So how does this stack up when the CIA are purportedly printing their own currency? Or are the CIA and others exploiting the lack of security measures built into cash?
https://en.wikipedia.org/wiki/Superdollar#CIA
My understanding of money creation aka FIAT currency is banks/lenders deposit a small % with the central bank and can then create circa 90%+ of money out of thin air when someone takes on a loan.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
With this being the case, then borrowing money not only demonstrates banks have more intelligence on people in order to decide whether to lend money or not, but it also benefits some in society more than others when considering credit rating agencies.
Edit: In other words, the amount of debt someone can take on is a sign of good behaviour and nothing more, a variation of monkeys being taught the concept of money and then scientists witnessing how monkeys traded their tokens, notably, females got cash for sex, males got cash for stuff the female wanted.
Basic.
It can't be just a number on a computer in a bank, right? Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.".
So I guess USD needs to be recognized by the US somehow?
Could the US simply "void" all USD that are owned by Russia?
> It can't be just a number on a computer in a bank, right?
It really is, but to answer your second question, it's important to consider *which* bank. There's reserves (i.e. balances of banks at the Federal Reserve) and bank deposits (which really are just numbers in banks' databases).
Having an account at the former is effectively what makes numbers in the database of the latter "real USD".
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.".
They could, but these assets/liabilities would not be backed by any reserves linked to the USD payment rails.
Reserves are theoretically irrelevant (though practically regulated) as far as transfers between accounts of a single bank are concerned. But as soon as a second bank comes into the picture, i.e. for inter-bank transfers communicated via SWIFT or otherwise, all transfers will ultimately be backed by Fed account to Fed account transfers in the background.
> So I guess USD needs to be recognized by the US somehow?
Indirectly so, yes: What makes USD "real" is the ability to transact with the larger ecosystem of US and offshore banks that have a shared agreement on what "real" USD are.
Practically, this means being connected either directly (via a Fed account) or indirectly (via a bank that itself does have a Fed account) to that system.
> Could the US simply "void" all USD that are owned by Russia?
Indirectly, yes: They can force every bank holding USD balances for embargoed beneficiaries to freeze these assets. Failing to comply could, in the absolute worst case, lead to that bank's Fed accounts being frozen as well (which would take away its ability to settle in USD with other banks).
I suppose what OP was arguing is, when bank A transfers to bank B, does bank B check with the Feds that the money from bank A is "real"?
And is a transfer from A to B really a transfer from A's account at the Feds to B's?
In that case, why would the US have to act "indirectly", threatening bank A not to work with bank B? They could simply deny any transfers to and from bank B's account at the Feds, which would make any transactions impossible?
> Indirectly, yes: They can force every bank holding USD balances for embargoed beneficiaries to freeze these assets. Failing to comply could, in the absolute worst case, lead to that bank's Fed accounts being frozen as well (which would take away its ability to settle in USD with other banks).
They could also go much further. US has the power to force any bank that wants to transact in USD to freeze all Russian assets no matter the currency.
With the already agreed sanctions (so not swift, but the ones about transactions in USD and EUR etc) - it was also written that the russian banks have up to May 24 to settle their transactions. Is that the last level of inter-bank settlements that's about? Or does it mean that the sanctions are ineffective until then?
So reading this: Banks are basically a necessary "evil" to make the current money system work. When I read how banks works, their technology, and how money works in general.. It makes me think: Is this really the way we want it to work.
I'm not sure if crypto is currently ready. But one BIG reason for it to succeed, is that the current system is just old... We have all these fintech startups improving money flow, and transfer times, and easy of payment... But it seems like tech build upon tech. centralized startups/companies owning payment systems (Apple Pay, Stripe, Adyen).... Man, i'm going to buy some more ETH :p
tl;dr, what makes electronic USD "real" is a system of consensus like bitcoin, except it's a node of 1 (the US Fed) with a handful of spokes (banks with Fed accounts) for scaling off that base node.
> It can't be just a number on a computer in a bank, right?
It can and it is, see the BOE paper.
> So I guess USD needs to be recognized by the US somehow?
This is a complicated question that will start a flamewar, but basically, any bank in the world can create dollars out of thin air given adequate collateral. Read about "Eurodollars".
> This is a complicated question that will start a flamewar, but basically, any bank in the world can create dollars out of thin air given adequate collateral. Read about "Eurodollars".
This is true, but it's actually sort of a specious point. What a eurodollar deposit "really" is, is just a short contract. Your European bank takes your exchange and promises to give you back dollars when you ask for them. That they may not have them right now is just a technical detail. But the value of the dollar is still set by what the market is willing to pay for it. The bank going "short USD" is a risk it takes, not an inflationary pressure per se.
So... sure. Foreign banks can create dollars just like brokerages can "create stock shares"[1]. Except, they really can't. They're just playing accounting tricks.
[1] Or, more relevantly perhaps, how one crypto exchange can create wrapped tokens representing foreign coins. This capability was part of the exploit chain that led to the DeFi hack last month.
It's amazing to watch people who have never really thought about this before realize the entire banking system is built upon a handful of centralized, permissioned databases which can pretty much be turned on/off at will for certain parties by the central banks.
What is even more amazing is watching these same people (no necessarily you OP, but prevailing opinion on HN...) then go on an argue that a permission-less distributed ledger like Bitcoin is a completely unnecessary waste of resources.
This is similar to the "why are banks allowed to print money by issuing loans and I'm not?" confusion that sometimes goes around.
Your internal balances are only good so long as the rest of the system trusts you. Magic up some fake balances and good luck getting the rest of the world to continue to take you seriously. "You want us to believe you've actually got that 100 Trillion? Show us?" How would this Russian bank spend these trillions? They can't cash out, because they don't actually have that much paper USD. Transfer it to another bank somewhere more reputable? How are you going to make those transfers clear?
I invite you to open your own bank and print yourself ten million dollars out of the air. Good luck converting that number to cash or transferring it to anywhere else!
H.4.1 is a really useful and important data set. For example, you can see that US Fed is holding T2.7$ worth of mortgage backed securities i.e., it's funding them.
> Could the US simply "void" all USD that are owned by Russia?
Beyond a certain threshold those USDs are typically stored as US Treasury bills because it's too risky to deposit billions of $$ in bank accounts. The risk of bank going under is real at those deposit levels.
For anything more I highly recommend reading up Fed Guy blog [1]. It's one of the best sources of this information I've come across; he's extremely concise, no-jargon and explains the core principles really well.
While at it, take a look at this BIS data[2]. tl;dr Russian residents owe ~B121$ to other countries' banks.
It's mostly just numbers on a computer in a bank. There are regulations concerning what banks can do with those numbers, but it all boils down to people having faith in the system in the end. That's why bank runs can quickly lead to economic disaster.
In a computer account. Here's a 22-second clip[0] from a 60-Minutes interview with a former chair of the Federal Reserve talking about how money is lent to banks. Literally just numbers on a computer.
"...We simply use the computer to mark up the size of the account that they have..."
Some good answers above provide more detail here, but ultimately yes: money, for the most part, really just is a number on a computer.
Here’s a good example: when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000. The bank just creates that money out of thin air, by adding to the number in your bank balance. Eventually that number goes down as you repay the loan, so it all washes out in the end (modulo interest, defaults, etc).
As an aside, that’s why low interest rates stimulate the economy: more loans are made, and more money is created, spurring more economic activity.
> when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000
While technically true, this is a bit misleading, because if you actually /do/ anything with the $500,000, that does in fact cause the bank's funds (i.e. reserves) to go down.
If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault, and when they request more from the Federal Reserve, their account there will be debited $500,000.
Or if you send it to someone at a different bank, then to settle the transaction your bank's balance at the Federal Reserve (or another intermediary bank) will go down by $500,000, and the other bank's will go up. This tends to average out if both banks are receiving deposits and making loans at equal rates, but if they become imbalanced the bank is at risk of its reserves falling below the requirements, which it must remedy or risk bankruptcy.
You're right that low interest rates make it easier for banks to create money, though, because one option a bank has to remedy low reserves is to borrow them from another bank at an interest rate that the Federal Reserve can influence.
> It can't be just a number on a computer in a bank, right?
It's two numbers in computers. It's a number in the computer of the bank that issued the money, and it's a corresponding number in the computer of whoever is holding that money as an asset.
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping."
It's not possible for a Russian bank to pretend they're holding more USD assets than they really are. The issuing bank knows how much USD is in Russian bank's deposit account. The Russian bank can issue its own USD liabilities (i.e. deposits) which are IOUs for the USD reserves that the bank holds on the asset side of its balance sheet. If the bank issues too many USD liabilities, they risk suffering a bank run that drains their USD reserves and puts them out of business.
> So I guess USD needs to be recognized by the US somehow?
Not exactly. It's possible to have a USD-denominated deposit account at a bank that h deposits at banks in the US. Most of the USD-denominated instruments in the world are not directly recognized by the US. But the international monetary system is hierarchical. Every USD instrument is an IOU for another USD instrument. If you follow the chain of IOUs, eventually, you'll get to the Fed.
Let's just talk about USD specifically. (Other currencies work pretty similar, just with different central banks.)
The "single source of truth" is the Federal Reserve. Member banks (about 10,000 US domestic banks) can hold reserves directly at the Fed. Any reserve bank can directly transfer Fed reserves to another member bank or to the US Treasury using FedWire. The Fed "creates money" simply by crediting a member bank's reserve.
This is done in two ways, one is by paying interest on reserves. So if you're a member bank holding one million in reserves, the Fed simply bumps your balance up every night to reflect your interest payments. The other is by the Fed conducting "open market operations". When it wants to stimulate the economy by "providing liquidity" the NY Federal Reserve trading desk will buy treasury bonds and pay for them simply by crediting the balance of whichever member bank sold the bonds.
Member banks themselves can "create money" in the form of demand deposits. If you have one million in your checking account at Chase bank, all you really have is a promise by Chase bank to give you or whoever you want to send money to one million dollars. Essentially money is created the same way the Fed creates money, your checking account is nothing more than a credit in Chase's database.
However Chase's ability to create money is highly regulated and constrained. Banks have to conform to strict capital and leverage constraints. The OCC and other banking regulators will require that Chase hold enough assets in high enough quality to cover its deposit "liabilities". Some fraction of those assets will be dollars held as reserves at the Fed. Some will be bonds or loans, i.e. promises by other high-quality actors to pay dollars. Some of those assets could even be risky stocks, low quality bonds, commodities, etc. However the "risk-weighted" leverage ratio quickly scales up with risk.
In exchange for this regulation, deposits held at Chase or other member banks are treated as equivalent to Federal reserve dollars. That's because if for some reason, Chase is unable to pay back its depositors when they demand their money back, the Federal Reserve will "create money" to meet the obligations. This is essentially why bank runs no longer exist in modern banking.
Then there's the concept of "money markets", which is short-duration, high-quality assets that are essentially treated as "money-like". Often this tends to be short-term commercial paper from high-quality corporate issuers. A promise from Apple to pay $1.00 in 30 days is treated as "almost a dollar" by most of the market. In this sense, Apple can also "create money". But it's highly constrained, because it would quickly lose its credit rating or breach covenants in its longer-term bonds if it did so.
Finally there's the concepts of "eurodollar deposits". These are dollar deposits held at non-American banks but denominated in dollars. For example you could hold $1 million dollars at Mitsubishi bank in Japan, and you have a claim against Mitsubishi to pay out dollars whenever you want. Mitsubishi is not an American bank, and therefore is not directly regulated or insured by the Federal reserve. In some sense this makes eurodollars slightly less safe than dollars held at domestic member banks.
That being said Mitsubishi is regulated by Japanese banking regulations and implicitly insured by the BOJ (central bank of Japan). Mitsubishi will also make sure its dollar liabilities are never that large relative to its yen-assets. In the case of Mitsubishi failing, its highly likely the BOJ would bail them out by creating yen in the same way the Fed creates dollars. Some of that yen could be converted to dollars on the open FX market, and make the dollar depositors whole. Hence eurodollars are essentially just as safe as regular dollars as long as they're inside another high-quality banking system.
> In exchange for this regulation, deposits held at Chase or other member banks are treated as equivalent to Federal reserve dollars. That's because if for some reason, Chase is unable to pay back its depositors when they demand their money back, the Federal Reserve will "create money" to meet the obligations. This is essentially why bank runs no longer exist in modern banking.
This is not exactly true. Chase, like many other US banks, is regulated by the Fed, and deposits at Chase are insured by the FDIC (Federal Deposit Insurance Corporation). If Chase becomes insolvent, the FDIC will take over, pay depositors up to the FDIC insured maximum, and liquidate any Chase assets. The Fed is not required to do anything in such a situation.
The Fed may choose to conjure up some new money and loan that new money to Chase, and as Chase is a systemically important bank, the Fed might well do that before the FDIC steps in, but they are not required to.
I have been learning (via books, podcasts, coursera, etc.) about what money is and how it’s created, both domestically and internationally, both in commercial banks and central banks; and let me just say this is a superb summary of all of that. Bravo!
USD are ultimately bearer notes, we've just built a bunch of trust-based infrastructure to enable transactions without moving physical currency.
The key feature of this system (and what everyone is ignoring) is bank accounts that x/German bank has at y/Russia bank (this is also the actual means of transaction for SWIFT).
So in your example, 'y bank erroneously says we have $100tn' would actually just mean 'y bank is willing to credit the account of x bank by $100tn.'
If x bank then tried to pay y bank for a separate transaction with those fake $, then y bank is the loser anyway.
EDIT: Put alternatively, 'making up' USD is a near equivalent to making a loan, which is sort of the core thing a bank does anyway.
> I often wonder how money is stored. It can't be just a number on a computer in a bank, right? Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD.
A bank could easily create fake money into its own accounts, but it would have trouble transferring that money over to other banks. I wrote extensively about this topic here: https://www.attejuvonen.fi/money-out-of-thin-air/
> A bank could easily create fake money into its own accounts, but it would have trouble transferring that money over to other banks.
In fact, isn't that indistinguishable (mathematically) from paying interest? The bank's internal accounts all go from X to Y. In theory, the bank should made more money that that in total, so at any given point the sum of all accounts is less than the banks money and accounts recieveable (usually via loans). And the bank can provide that money to other people if needed. But if a bank paid 1000% APR on savings accounts, all that would happen is the bank goes belly up and a lot of those accounts won't be worth the numbers they claim to have.
They can "print" as many USD as they want in-house. But in order to process transactions abroad, they need a US bank account. They can't print money in that.
The US sanctions (freezing their US assets) has more effect, in that regard, than a SWIFT blockade. The US seems to be the interested party in this war, and Germany is much less enthusiastic about it. Remember, SWIFT is a Belgium company and the US has been hostile to European financial institutions lately.
Within the US banking system, all of that is, for the most part, kept in line with the Federal Reserve System and other regulatory apparatuses to keep everybody honest. Outside of the US, you run into so-called "eurodollars" (unrelated to the Euro currency) which is a complete mess of intertwined financial systems from across the planet that a lot of people smarter than me pin on being the cause of the European debt crisis.
As far as I know they really are just numbers in databases, but if it's foreign currency, they can't just magic them out of the DBA's fingers. There probably are ledgers that have to agree with each other, e.g. if a Russian bank claimed it had those 100 Trillion dollars from a Cypriot bank, then the Cypriot bank would have to confirm it gave them that much, and then show everyone the source of that money.
Which does make one wonder how easy it'd be for your trick to work.
North Korea is a major printer of fake $100 bills, a piece of paper that's actually worthless but others are willing to trade $100 worth of goods and services, or exchange for a bank transfer. Until a bill is found to be fake and destroyed, I guess there really is $100 more in circulation, and when the last person found out the note is fake, in effect NK has robbed them out of $100.
When people talk about the manual inefficiencies of finance, it's referring to all this happening in the backend behind the abstraction of quick/automated digital payments in fiat currency. It gets especially complex in international finance, hence SWIFT etc.
Well, it's a number in a ledger system somewhere (e.g. mainframe system, Oracle database, or what have you), with a lot of auditing, reporting, and procedures around changing that number. (Though, having an internal API to instantly get a new bank account number always seemed kinda funny to me).
Slightly related, I'd have to find it again, but I recall there was at some point an assembly level hack on some Oracle database holding core banking in one country.
Which could be revoked by printing new money with a new design and giving them only to the friendly parties in replacement of the old ones. It's routinely done (Euro is on its second design) and old banknotes and coins are no more valid after some years (the first series of Euros doesn't have an end of life yet.)
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping."
Yeah, they can, and do. This is what Eurodollars are. And why the World is continually on the brink of financial collapse whenever Dollars get too scarce.
Unfortunately many won't until they find themselves in a circumstance where decentralization is of vital importance. At which point it may be too late.
>Russia has also been building an in-house system since 2014—the last time SWIFT cutoff was threatened—which may mean they are able to temper some of the impact a cutoff would have on its economy.
If they're building a replacement, doesn't that also mean we should use "cut off SWIFT" now, rather than later when it'll be ineffective?
> If they're building a replacement, doesn't that also mean we should use "cut off SWIFT" now, rather than later when it'll be ineffective?
The replacement is already functional.
In fact, Russia is not the only one having built a replacement to protect against the risk that SWIFT would be sanctioned: Europe has done it too with Instex: https://instex-europe.com/about-us/
SWIFT is a private company; those sanctions make it less competitive, and it is hard to play whack-a-mole with a worldwide market.
SWIFT, to be fair, is very convenient because of its standards and high connectivity. But if SWIFT was sanctioned today, banks can use literally any mechanism to route funds, from SPFS to email. What matters is the recursive existence of accounts held at banks that have accounts held at banks.
I'm way too far away from power on anything like this so I might be terribly wrong, but I imagine that cutting off SWIFT might convince other countries doing bad things to consider adhering to Russia's system, if they see the West willing to cut them off as well. You then get fragmentation and SWIFT losing some of its "soft power".
Russia already uses multiple alternative settlement systems with China, Iran, and few other buddies like Norko, and Belarus.
> You then get fragmentation and SWIFT losing some of its "soft power".
This already lost any power it had in 2014, because the threat of disconnection was wasted.
An honestly, EU lost its face now to talk "soft power." Every foreign head of state going to meet EU bureaucrats will now look at them, and think "can I rely on these people who threw out every treaty for a want of sleeping without a blanket?"
SWIFT is kind of like Facebook. It has the benefit of “everyone” already using it. So even if you make your own Facebook it won’t have the same functionality as Facebook and it’s very unlikely everyone from Facebook will be motivated enough to make an account on your platform, too.
Another interpretation is that keeping them on SWIFT at least gives you some leverage, while forcing them out of it only accelerates other payment infrastructure, which essentially will play right into Russia's hands anyway.
SWIFT sanctions are kind of blunt given that we're now living in a world where any major power can write some software. And in this case both China and India offer alternatives.
That applies to a lot of known future sanctions. Eg clearly Germany would like to not need any gas pipeline, and Russia will aim to build more pipelines to China before German governments can say no more Russian gas. However, could excluding them from Swift at some point between 2014 and this week be justified?
I have always wondered, what combination of manual vs. automatic processes are happening when one makes a bank wire (actual wire transfers, not ACH)?
Because whenever I have done wires, in addition to the bank/IBAN/account numbers, there are all these manual fields like "for further credit to" etc. that are clearly having to be interpreted by someone. And very often errors come up and the funds are held or in limbo on one end or another.
Does anyone have a good explanation of what happens both on the initiating bank side and receiving bank side when a wire is done? I imagine that this is why it still costs $25-40 to handle them.
In Europe bank transfers are free and the standard way of transferring money. Cheques are pretty much extinct.
If American banks charge for them it's most likely because they can. It's standard practice in retail banking to offer commonly used things cheaply and then earn back the cost by charging loads for anything unusual.
As for how it actually works, in the European Bank I worked at we debited the account and then put the transfer in a batch file and sent it to the central bank which processed them every few hours. If the transaction failed for unknown reasons, someone would, I think manually review it.
To my recollection it’s manual and yes that’s why it’s expensive. Imagine it gets added to a queue, then daily via swift, the banks settle with each other. The queue has a bunch of different stuff and is a net single transfer between bank A and B depending on who owes who today. The manual part confirms that it was added to the queue which allows them the comfort of giving you access to the cash immediately. I think the fed insures these transactions and requires immediate availability of funds.
Interestingly SWIFT was used to effectively depose a Head of State already, specifically Pope Emeritus Benedict XVI. The Vatican's Bank was banned from the system and allowed back on after Benedict's resignation.
The lesson was not lost on Russia or China and they have been building an alternative system called BRICS.
Edit: Here's a contemporary source[1] from a "reputable" newspaper. It doesn't mention SWIFT by name but that's what it was. There were other "reputable" sources covering the story more explicitly back in 2013 as well, but web search's extreme recency bias leaves me unable to find them. Perhaps visit your local university library and they can help you search the periodicals.
The timing would imply that Benedict XVI resigned (at least in part) due to the scandal involving blackmail of homosexual members of the church. The wiki page on the resignation doesn't go into that at all, but does link to the scandal in the "See Also" section.
> On 17 December 2012, the Pope received a report on "Vatican lobbies" ... . The same day, the Pope reportedly decided to resign, a decision he made public in February 2013
It's possible that multiple factors added up to make the job too overwhelming for one man of his age, but the "vatileaks" scandal appears to be far more significant in coverage from what I can see.
The only reference I could find about that is an obscure Italian blog with the comment section filled with absurd conspiracy theories. Do you have some credible sources?
Readit News
I guess if I was super cool I would do an AMA because this is the only thread that is really my time to shine hahaha.
How does the system guarantee that nobody's creating money without notifying everyone? Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence? Is it all just a trust-based system, or are there additional controls?
This is a comment that's not related to SWIFT in particular.
Every asset (including money) is generally someone else's liability. The money that we hold as an asset is the liability of a bank. Anyone can issue their own liabilities, but you can't create money that's a liability of someone else. For example, I can't go to my bank and tell them I have a million dollars more in my deposit account than I actually do. They're keeping track on their end.
Similarly, a bank can't pretend that it has more reserve deposits at the Fed than it really does. The Fed keeps track of everybody's reserve accounts on their end.
> Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence?
This isn't an issue. The books of central banks don't need to adjust when other banks issue money (i.e deposits).
Through a series of regulations regarding minimum liquidity/capital [1] and/or reserve [2] requirements.
> Furthermore, does the system guarantee that the central banks of each country are correctly adjusting their books in consequence?
By requiring them to periodically report on their assets and liabilities, checking for compliance with [1] and [2], and monitoring their reserve accounts.
[1] https://en.wikipedia.org/wiki/Basel_III
[2] https://en.wikipedia.org/wiki/Reserve_requirement
Simple answer is balanced books. Longer answer is public reporting and reconciliation.
If a bank shows its Federal Reserve balance at X on its asset side and the Federal Reserve shows its bank balance at 0.9X on its liability side, that will raise issue on reconciliation. The system lazily evaluates, however, which makes it nimble but also corruptible--if that bank never tries to spend that money, it may not come to light until audit.
EDIT: apparently they use some old XML protocol, where twice a day a correspondant bank send them a list of accounts to debit or credit. They didn’t send something once, so my friend’s bank just replayed the previous settlement list.
Can we have a simple "for dummies" answer that explains how does the system guarantee that nobody's creating money without notifying everyone in practice?
Is there some kind of a public ledger? Do banks automatically broadcast their money creation operation to other banks?
Since SWIFT is not the only, but certainly the largest financial/interbank messaging network, I suppose the effects are similar, but "disabling SWIFT" to me always sounds like an implementation detail.
https://en.wikipedia.org/wiki/SPFS
Could you explain this to me like I am a complete moron? I understand that SWIFT allows for international payments, but I don't understand exactly how it differs from a normal bank account transfer within the same country.
Look into correspondent banking if you're curious how all of that works – SWIFT is just one (very popular) way correspondent banks can communicate with each other and/or look up paths to facilitate international payments for their account holders.
You generally need to be a bank or regulated financial institution.
SWIFT is just a messaging layer for correspondent banking. If you're not a bank, SWIFT access is about as useful as suddenly learning your country's president's cell phone number: Definitely cool, but the two of you would probably not have much to talk about.
When something really screwed up you resorted to sending MT599 messages around, free format text messages.
I believe it's all SWIFT over IP this century so probably not dissimilar to any other API you might use.
I.e. if you go and create a neobank through a baas provider you will inadvertently get access to SWIFT, it won’t be direct but you have access.
To get true access you have to go through and insane process and have a ton of controls and policies and create trust with the governing body of SWIFT.
Deleted Comment
Also. at a level above "money" what do the ultra wealthy (Rothschild, Rockefeller, etc) deal in as currency at their level. I believe they have another currency. These families have FAR greater wealth than Bezos and Zuck (Bill Gates is essentially family to the Rothschilds. through his father/grandfather)
https://docs.routefusion.com/blog
Dead Comment
So how does this stack up when the CIA are purportedly printing their own currency? Or are the CIA and others exploiting the lack of security measures built into cash? https://en.wikipedia.org/wiki/Superdollar#CIA
My understanding of money creation aka FIAT currency is banks/lenders deposit a small % with the central bank and can then create circa 90%+ of money out of thin air when someone takes on a loan. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
https://www.economicsnetwork.ac.uk/archive/starkey_banking#:....
With this being the case, then borrowing money not only demonstrates banks have more intelligence on people in order to decide whether to lend money or not, but it also benefits some in society more than others when considering credit rating agencies.
Edit: In other words, the amount of debt someone can take on is a sign of good behaviour and nothing more, a variation of monkeys being taught the concept of money and then scientists witnessing how monkeys traded their tokens, notably, females got cash for sex, males got cash for stuff the female wanted. Basic.
It can't be just a number on a computer in a bank, right? Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.".
So I guess USD needs to be recognized by the US somehow?
Could the US simply "void" all USD that are owned by Russia?
It really is, but to answer your second question, it's important to consider *which* bank. There's reserves (i.e. balances of banks at the Federal Reserve) and bank deposits (which really are just numbers in banks' databases).
Having an account at the former is effectively what makes numbers in the database of the latter "real USD".
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.".
They could, but these assets/liabilities would not be backed by any reserves linked to the USD payment rails.
Reserves are theoretically irrelevant (though practically regulated) as far as transfers between accounts of a single bank are concerned. But as soon as a second bank comes into the picture, i.e. for inter-bank transfers communicated via SWIFT or otherwise, all transfers will ultimately be backed by Fed account to Fed account transfers in the background.
> So I guess USD needs to be recognized by the US somehow?
Indirectly so, yes: What makes USD "real" is the ability to transact with the larger ecosystem of US and offshore banks that have a shared agreement on what "real" USD are.
Practically, this means being connected either directly (via a Fed account) or indirectly (via a bank that itself does have a Fed account) to that system.
> Could the US simply "void" all USD that are owned by Russia?
Indirectly, yes: They can force every bank holding USD balances for embargoed beneficiaries to freeze these assets. Failing to comply could, in the absolute worst case, lead to that bank's Fed accounts being frozen as well (which would take away its ability to settle in USD with other banks).
In that case, why would the US have to act "indirectly", threatening bank A not to work with bank B? They could simply deny any transfers to and from bank B's account at the Feds, which would make any transactions impossible?
They could also go much further. US has the power to force any bank that wants to transact in USD to freeze all Russian assets no matter the currency.
This is a very big stick.
I'm not sure if crypto is currently ready. But one BIG reason for it to succeed, is that the current system is just old... We have all these fintech startups improving money flow, and transfer times, and easy of payment... But it seems like tech build upon tech. centralized startups/companies owning payment systems (Apple Pay, Stripe, Adyen).... Man, i'm going to buy some more ETH :p
The Bank of England published a summary of how modern banks work. See https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
> It can't be just a number on a computer in a bank, right?
It can and it is, see the BOE paper.
> So I guess USD needs to be recognized by the US somehow?
This is a complicated question that will start a flamewar, but basically, any bank in the world can create dollars out of thin air given adequate collateral. Read about "Eurodollars".
This is true, but it's actually sort of a specious point. What a eurodollar deposit "really" is, is just a short contract. Your European bank takes your exchange and promises to give you back dollars when you ask for them. That they may not have them right now is just a technical detail. But the value of the dollar is still set by what the market is willing to pay for it. The bank going "short USD" is a risk it takes, not an inflationary pressure per se.
So... sure. Foreign banks can create dollars just like brokerages can "create stock shares"[1]. Except, they really can't. They're just playing accounting tricks.
[1] Or, more relevantly perhaps, how one crypto exchange can create wrapped tokens representing foreign coins. This capability was part of the exploit chain that led to the DeFi hack last month.
What is even more amazing is watching these same people (no necessarily you OP, but prevailing opinion on HN...) then go on an argue that a permission-less distributed ledger like Bitcoin is a completely unnecessary waste of resources.
Your internal balances are only good so long as the rest of the system trusts you. Magic up some fake balances and good luck getting the rest of the world to continue to take you seriously. "You want us to believe you've actually got that 100 Trillion? Show us?" How would this Russian bank spend these trillions? They can't cash out, because they don't actually have that much paper USD. Transfer it to another bank somewhere more reputable? How are you going to make those transfers clear?
I invite you to open your own bank and print yourself ten million dollars out of the air. Good luck converting that number to cash or transferring it to anywhere else!
You could start here: https://www.federalreserve.gov/releases/h41/20220224/
H.4.1 is a really useful and important data set. For example, you can see that US Fed is holding T2.7$ worth of mortgage backed securities i.e., it's funding them.
> Could the US simply "void" all USD that are owned by Russia?
Beyond a certain threshold those USDs are typically stored as US Treasury bills because it's too risky to deposit billions of $$ in bank accounts. The risk of bank going under is real at those deposit levels.
For anything more I highly recommend reading up Fed Guy blog [1]. It's one of the best sources of this information I've come across; he's extremely concise, no-jargon and explains the core principles really well.
While at it, take a look at this BIS data[2]. tl;dr Russian residents owe ~B121$ to other countries' banks.
[1] https://fedguy.com
[2] https://stats.bis.org/statx/srs/table/b4?c=RU
Money is an IOU from the bank. So that's what all banks do. But they'll need assets on the right side of their balance sheet.
[citation needed]
That is true, but arguably not a consequence of money being digital, but rather of fractional reserve banking.
Physical vs. digital accounting is largely orthogonal to full/fractional reserve banking.
In a computer account. Here's a 22-second clip[0] from a 60-Minutes interview with a former chair of the Federal Reserve talking about how money is lent to banks. Literally just numbers on a computer.
"...We simply use the computer to mark up the size of the account that they have..."
[0]: https://www.youtube.com/watch?v=hiCs_YHlKSI
Here’s a good example: when you borrow $500,000 from the bank, the bank’s funds don’t go down by $500,000. The bank just creates that money out of thin air, by adding to the number in your bank balance. Eventually that number goes down as you repay the loan, so it all washes out in the end (modulo interest, defaults, etc).
As an aside, that’s why low interest rates stimulate the economy: more loans are made, and more money is created, spurring more economic activity.
While technically true, this is a bit misleading, because if you actually /do/ anything with the $500,000, that does in fact cause the bank's funds (i.e. reserves) to go down.
If you withdraw it in cash, then the bank will have to give you some of the Federal Reserve Notes it has in its vault, and when they request more from the Federal Reserve, their account there will be debited $500,000.
Or if you send it to someone at a different bank, then to settle the transaction your bank's balance at the Federal Reserve (or another intermediary bank) will go down by $500,000, and the other bank's will go up. This tends to average out if both banks are receiving deposits and making loans at equal rates, but if they become imbalanced the bank is at risk of its reserves falling below the requirements, which it must remedy or risk bankruptcy.
You're right that low interest rates make it easier for banks to create money, though, because one option a bank has to remedy low reserves is to borrow them from another bank at an interest rate that the Federal Reserve can influence.
It's two numbers in computers. It's a number in the computer of the bank that issued the money, and it's a corresponding number in the computer of whoever is holding that money as an asset.
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping."
It's not possible for a Russian bank to pretend they're holding more USD assets than they really are. The issuing bank knows how much USD is in Russian bank's deposit account. The Russian bank can issue its own USD liabilities (i.e. deposits) which are IOUs for the USD reserves that the bank holds on the asset side of its balance sheet. If the bank issues too many USD liabilities, they risk suffering a bank run that drains their USD reserves and puts them out of business.
> So I guess USD needs to be recognized by the US somehow?
Not exactly. It's possible to have a USD-denominated deposit account at a bank that h deposits at banks in the US. Most of the USD-denominated instruments in the world are not directly recognized by the US. But the international monetary system is hierarchical. Every USD instrument is an IOU for another USD instrument. If you follow the chain of IOUs, eventually, you'll get to the Fed.
The "single source of truth" is the Federal Reserve. Member banks (about 10,000 US domestic banks) can hold reserves directly at the Fed. Any reserve bank can directly transfer Fed reserves to another member bank or to the US Treasury using FedWire. The Fed "creates money" simply by crediting a member bank's reserve.
This is done in two ways, one is by paying interest on reserves. So if you're a member bank holding one million in reserves, the Fed simply bumps your balance up every night to reflect your interest payments. The other is by the Fed conducting "open market operations". When it wants to stimulate the economy by "providing liquidity" the NY Federal Reserve trading desk will buy treasury bonds and pay for them simply by crediting the balance of whichever member bank sold the bonds.
Member banks themselves can "create money" in the form of demand deposits. If you have one million in your checking account at Chase bank, all you really have is a promise by Chase bank to give you or whoever you want to send money to one million dollars. Essentially money is created the same way the Fed creates money, your checking account is nothing more than a credit in Chase's database.
However Chase's ability to create money is highly regulated and constrained. Banks have to conform to strict capital and leverage constraints. The OCC and other banking regulators will require that Chase hold enough assets in high enough quality to cover its deposit "liabilities". Some fraction of those assets will be dollars held as reserves at the Fed. Some will be bonds or loans, i.e. promises by other high-quality actors to pay dollars. Some of those assets could even be risky stocks, low quality bonds, commodities, etc. However the "risk-weighted" leverage ratio quickly scales up with risk.
In exchange for this regulation, deposits held at Chase or other member banks are treated as equivalent to Federal reserve dollars. That's because if for some reason, Chase is unable to pay back its depositors when they demand their money back, the Federal Reserve will "create money" to meet the obligations. This is essentially why bank runs no longer exist in modern banking.
Then there's the concept of "money markets", which is short-duration, high-quality assets that are essentially treated as "money-like". Often this tends to be short-term commercial paper from high-quality corporate issuers. A promise from Apple to pay $1.00 in 30 days is treated as "almost a dollar" by most of the market. In this sense, Apple can also "create money". But it's highly constrained, because it would quickly lose its credit rating or breach covenants in its longer-term bonds if it did so.
Finally there's the concepts of "eurodollar deposits". These are dollar deposits held at non-American banks but denominated in dollars. For example you could hold $1 million dollars at Mitsubishi bank in Japan, and you have a claim against Mitsubishi to pay out dollars whenever you want. Mitsubishi is not an American bank, and therefore is not directly regulated or insured by the Federal reserve. In some sense this makes eurodollars slightly less safe than dollars held at domestic member banks.
That being said Mitsubishi is regulated by Japanese banking regulations and implicitly insured by the BOJ (central bank of Japan). Mitsubishi will also make sure its dollar liabilities are never that large relative to its yen-assets. In the case of Mitsubishi failing, its highly likely the BOJ would bail them out by creating yen in the same way the Fed creates dollars. Some of that yen could be converted to dollars on the open FX market, and make the dollar depositors whole. Hence eurodollars are essentially just as safe as regular dollars as long as they're inside another high-quality banking system.
This is not exactly true. Chase, like many other US banks, is regulated by the Fed, and deposits at Chase are insured by the FDIC (Federal Deposit Insurance Corporation). If Chase becomes insolvent, the FDIC will take over, pay depositors up to the FDIC insured maximum, and liquidate any Chase assets. The Fed is not required to do anything in such a situation.
The Fed may choose to conjure up some new money and loan that new money to Chase, and as Chase is a systemically important bank, the Fed might well do that before the FDIC steps in, but they are not required to.
The key feature of this system (and what everyone is ignoring) is bank accounts that x/German bank has at y/Russia bank (this is also the actual means of transaction for SWIFT).
So in your example, 'y bank erroneously says we have $100tn' would actually just mean 'y bank is willing to credit the account of x bank by $100tn.'
If x bank then tried to pay y bank for a separate transaction with those fake $, then y bank is the loser anyway.
EDIT: Put alternatively, 'making up' USD is a near equivalent to making a loan, which is sort of the core thing a bank does anyway.
A bank could easily create fake money into its own accounts, but it would have trouble transferring that money over to other banks. I wrote extensively about this topic here: https://www.attejuvonen.fi/money-out-of-thin-air/
In fact, isn't that indistinguishable (mathematically) from paying interest? The bank's internal accounts all go from X to Y. In theory, the bank should made more money that that in total, so at any given point the sum of all accounts is less than the banks money and accounts recieveable (usually via loans). And the bank can provide that money to other people if needed. But if a bank paid 1000% APR on savings accounts, all that would happen is the bank goes belly up and a lot of those accounts won't be worth the numbers they claim to have.
The US sanctions (freezing their US assets) has more effect, in that regard, than a SWIFT blockade. The US seems to be the interested party in this war, and Germany is much less enthusiastic about it. Remember, SWIFT is a Belgium company and the US has been hostile to European financial institutions lately.
Which does make one wonder how easy it'd be for your trick to work.
North Korea is a major printer of fake $100 bills, a piece of paper that's actually worthless but others are willing to trade $100 worth of goods and services, or exchange for a bank transfer. Until a bill is found to be fake and destroyed, I guess there really is $100 more in circulation, and when the last person found out the note is fake, in effect NK has robbed them out of $100.
When people talk about the manual inefficiencies of finance, it's referring to all this happening in the backend behind the abstraction of quick/automated digital payments in fiat currency. It gets especially complex in international finance, hence SWIFT etc.
Slightly related, I'd have to find it again, but I recall there was at some point an assembly level hack on some Oracle database holding core banking in one country.
Yeah, they can, and do. This is what Eurodollars are. And why the World is continually on the brink of financial collapse whenever Dollars get too scarce.
It's a distributed shared ledger.
If this hypothetical Russian bank attempts to add fraud to the ledger, it will cause a fork.
To fake money you need to forge transaction with input from somewhere, this can be checked.
And yet people question the utility of a decentralized, trustless, public ledger -- ie. blockchain.
If they're building a replacement, doesn't that also mean we should use "cut off SWIFT" now, rather than later when it'll be ineffective?
The replacement is already functional.
In fact, Russia is not the only one having built a replacement to protect against the risk that SWIFT would be sanctioned: Europe has done it too with Instex: https://instex-europe.com/about-us/
SWIFT is a private company; those sanctions make it less competitive, and it is hard to play whack-a-mole with a worldwide market.
SWIFT, to be fair, is very convenient because of its standards and high connectivity. But if SWIFT was sanctioned today, banks can use literally any mechanism to route funds, from SPFS to email. What matters is the recursive existence of accounts held at banks that have accounts held at banks.
> You then get fragmentation and SWIFT losing some of its "soft power".
This already lost any power it had in 2014, because the threat of disconnection was wasted.
An honestly, EU lost its face now to talk "soft power." Every foreign head of state going to meet EU bureaucrats will now look at them, and think "can I rely on these people who threw out every treaty for a want of sleeping without a blanket?"
SWIFT sanctions are kind of blunt given that we're now living in a world where any major power can write some software. And in this case both China and India offer alternatives.
Almost stole a billion dollars, if it wasn't for a very obvious typo.
Because whenever I have done wires, in addition to the bank/IBAN/account numbers, there are all these manual fields like "for further credit to" etc. that are clearly having to be interpreted by someone. And very often errors come up and the funds are held or in limbo on one end or another.
Does anyone have a good explanation of what happens both on the initiating bank side and receiving bank side when a wire is done? I imagine that this is why it still costs $25-40 to handle them.
If American banks charge for them it's most likely because they can. It's standard practice in retail banking to offer commonly used things cheaply and then earn back the cost by charging loads for anything unusual.
As for how it actually works, in the European Bank I worked at we debited the account and then put the transfer in a batch file and sent it to the central bank which processed them every few hours. If the transaction failed for unknown reasons, someone would, I think manually review it.
The lesson was not lost on Russia or China and they have been building an alternative system called BRICS.
Edit: Here's a contemporary source[1] from a "reputable" newspaper. It doesn't mention SWIFT by name but that's what it was. There were other "reputable" sources covering the story more explicitly back in 2013 as well, but web search's extreme recency bias leaves me unable to find them. Perhaps visit your local university library and they can help you search the periodicals.
[1] https://www.washingtonpost.com/world/europe/pope-struggled-t...
There's a BRICS bank though.
> On 17 December 2012, the Pope received a report on "Vatican lobbies" ... . The same day, the Pope reportedly decided to resign, a decision he made public in February 2013
It's possible that multiple factors added up to make the job too overwhelming for one man of his age, but the "vatileaks" scandal appears to be far more significant in coverage from what I can see.