SWIFT, CHIPS, ACH, Fedwire and Bitcoin…

Bank transfers, especially international bank transfers, can be incredibly complicated with many players both directly and indirectly involved.

As you might imagine its actually even more complicated and nuanced than it looks on the surface; in fact banks often times maintain accounts with each others to accelerate transfers as well.

This on the surface makes lots of sense but when you consider that in the US alone there are around 6,800 federally insured financial institutions and that there are over 200 sovereign nations that this quickly becomes an unworkable approach.

This is why there are these clearing-house entities; they act as brokers of these relationships.

Something else that many don’t realize is that not all banks belong to these organizations. As a result there is a routing problem that’s not dissimilar to the routing problems on the internet — there are many ways those funds might get transferred from one location to another each with their own cost and performance penalties.

But if only some banks belong to these organizations and every bank doesn’t have an account with each other how do they facilitate the interbank transactions? Through intermediaries of course; often via larger banks just like how the smaller banks outsource credit cards to third-party card issuers.

Over the years numerous attempts have emerged to modernize the banking system but interests are entrenched and something as fundamental as banking doesn’t change overnight. The efforts that have been successful have either looked like new products for banks to sell or solve immediate and tactical cost structure issues in their businesses.

Unfortunately this often results in more transactional intermediaries and not less, this is why in 2014 when we have global internet connectivity can still take a week (or more) for interbank transfers to actually settle.

One of the reasons I like Bitcoin is it represents a model where this slop and inefficiency can be removed which can dramatically speed up the financial system at the same time it has the potential to significantly reduce costs to all the players in the ecosystem and in the process kick off a new wave of innovation.

The largest hurdles are certainly regulatory and resistance to adopt technologies not under their direct control but like the ban on export of strong cryptography from the United States any restrictions that are put in place will only last for a limited time because its impossible to stop to use of the associated concepts and when their critical mass represents a competitive disadvantage the financial ecosystem would jump in near unison to take advantage of them.

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