Launched in 1977 by a coalition of banks, SWIFT is the main secure messaging system used to make rapid and secure cross-border payments. Restricting Russia's SWIFT access has been seen as a last resort as economic sanctions are concerned. The US and EU ban is now partially applied with some of the main Russian banks being covered.
The first reason why a ban has been so discussed is that SWIFT is a “strictly neutral” global financial infrastructure. In 45 years, only Iran has been cut off from SWIFT, because of pressure from the US, resulting in the nation losing a third of its foreign trade. But it also has the potential to be complex and costly for the West.
The ban could also speed up the development of alternatives to SWIFT. China has been building an alternative called the Cross-border Interbank Payment System (CIPS), which could provide a regional alternative for Russia to rely on instead. However, CIPS is small in comparison at just 0.3% the size of SWIFT.
Some fear Russia could evade sanctions through crypto. That is not a major risk this time. Most of the crypto trading volume happens on centralized exchanges with KYC measures. The main ones, such as Binance, Kraken and Coinbase, have already implemented the existing sanctions but refused Ukraine's demand to block all Russian users to protect financial freedom.
Even DeFi protocols require fiat-crypto on- and off-ramp and usually operate by centralized entities, making huge money movements quite easily identifiable thanks to the transparency of the blockchain transaction ledger. Blockchain compliance, AML and analytics companies are already working with governments and corporates to identify transactions from identified sanctioned entities.
Sanctions effect
These sanctions and restrictions have culminated in the Russian rouble plunging nearly 30% against the dollar on Monday, pushing Russia's central bank to more than double the key interest rate to 20% to fight the rouble devaluation.
The risk for Russia is a cash run on banks due to the increasing currency devaluation. In any case, finance, and fintech are having a key role in this war.
