While the first stock exchange, in Amsterdam – Netherlands, was established in 1602, it wasn’t until the late 2000s that global trading became mostly digital with transactions transferring from the antiquitated paper system to SWIFT (Society for the Worldwide Interbank Financial Telecommunication), the Brussels-based electronic network used by 11,000 financial institutions in over 200 countries. Neatly all major banks use SWIFT, which deploys military-grade security and is designed to be an unbreachable system.
The hacker syndicate deployed malware to infiltrate the Bangladesh Central Bank’s SWIFT process and identified various systemic flaws in the messaging procedure. With this information, the hackers executed an attack during worldwide bank closures on weekends and national holidays. The group simultaneously utilized breaks in communication that occurred throughout the transaction process to steal nearly 1 billion US-Dollar. Thanks to some dumb luck on the bank’s behalf, the hacker syndicate failed in what would have otherwise been a movie esque theft.
The dilemma of centralized systemic failures as this example clearly shows isn’t just a result of malicious attacks from hackers, it’s plentiful in the financial system too, like for example stock, futures-and option trading, cross currency transactions etc.
Systemic flaws and process inefficiencies exhibited in the billion – dollar bank heist impact the whole financial industry. Just as the internet and digital records transformed financial markets, there will be a natural integration of blockchain into financial markets over the next decade.
Blockchain networks, like Ethereum, offer an immutable ledger where all records can be accessed preventing the issues that are demonstrated by single database systems like SWIFT as the example illustrates. The ability to issue, convert securities or other assets onto a blockchain creates continuous markets that are open every day of the year, barring the need for holiday breaks or the execution of a “chilling” during buyouts or mergers. Blockchain protocols like Ethereum prevent collapses in communication because all nodes have access to the same information. Ethereum also enables smart contracts – code written agreements that auto execute without the need for intermediaries. Smart contracts can be created for escrows, digital rights, stock voting, and so much more.
Furthermore, blockchains support tokenization of assets, allowing individuals to own their assets as opposed to the current system where often third parties maintain custody. Tokenization is the process of converting an asset into a fractional unit called “token” that can be moved, recorded, or stored on a blockchain in “wallets”. The holding of the token would then represent the “partial ownership” of the underlying linked asset. Therefore, blockchains can make investing in real world assets much more convenient and efficient.
A more modern, secure, robust, quicker and accurate method of payment needs to be adopted that challenges the incumbent SWIFT for its centralized, expensive, complex and often digitally excluded payment systems and network. This is particularly relevant at a time when financial institutions are under increasing pressure to reduce costs and secure customer data from hackers, which blockchain could achieve.
The integration between blockchain technology and financial markets will take time in my opinion, but its reverberations will be felt throughout the globe and stories like the 1 billion USD bank heist will disappear into internet lore, while we embrace a new epic of financial transactions executed in a more transparent, secure and efficient manner.