Stablecoin vs SWIFT: Traditional Banking vs Blockchain Payments

Global commerce survives thanks to payment rails that support cross-border payments. Financial institutions, companies, and other payment providers can transfer funds across the globe with ease.

​

The dominant system for these transfers is still SWIFT, an infrastructure established in the 1970s. However, emerging technologies, including blockchain and blockchain-based stablecoins, have also been adopted recently.

In this article, we take a more detailed look at stablecoins and SWIFT and their differences.

Stablecoins, as the name suggests, are a type of digital token currency designed to maintain a stable value. They are issued by private companies and exist on the blockchain. These digital assets are usually pegged to a fiat currency (typically the US dollar) and can also be backed by cash reserves and other high-liquidity assets. Some stablecoins may also be backed by other cryptocurrencies, such as Ethereum.

It’s important to note that stablecoins, unlike CBDCs (central bank digital currencies), are not legal tender. Depending on the coin, they fall under different regulations and scrutiny. Some of the most broadly used stablecoins include Tether (USDT), EUR CoinVertible (EURCV), and Circle (USDC).

Over the last few years, stablecoin payments have been gaining popularity as businesses use them to make high-value transactions. They are able to offer significant advantages compared to conventional banking methods, such as:

• Higher speed transactions
• Lower costs
• Access to newer markets

Originally founded in 1973, SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a global network that enables secure international transfers of money and other financial instruments. It connects over 11,000 financial institutions worldwide.

Under the SWIFT system, each institution is assigned a UIC (Unique Identification Code) to help ensure the security of transfers and payments. SWIFT also has massive political significance, playing a central role in transactions involving securities and trade, and is often a tool to enforce sanctions against other countries.

SWIFT and stablecoins can both benefit your business, depending on the characteristics that matter to you. Below, we break down the key differences between stablecoins vs SWIFT:

Most SWIFT transactions take a long time to settle, with settlement times ranging from 24 hours to 5 business days or longer. This depends on the number of intermediary banks involved in the process, different time zones, compliance checks, and regulations in different areas.

​

On the other hand, stablecoin transfers are usually completed and settled within seconds to minutes. This decentralized blockchain-based system bypasses conventional clearing systems and banking networks, improving efficiency and cash flow for organisations.

Another major point of difference between these two payment methods is the costs involved. As we saw earlier, SWIFT payments frequently involve multiple intermediaries and their associated costs. These could include:​

• Charges levied by the sending bank
• Charges levied by the receiving bank
• FX conversion rates
• Charges levied by any intermediary financial institutions

These costs tend to add up, drastically increasing the price of traditional transactions.

Stablecoins minimize these costs by conducting all transactions on the blockchain itself, decreasing the need for intermediaries. That is not to say they come without any costs. Depending on the network and infrastructure used, some blockchain-based transactions may cost less than 1% of the transaction value.

Another glaring difference between SWIFT and stablecoin payments is the traceability. Since all stablecoin payments are carried out on the blockchain, all transactions are permanently recorded on a public blockchain ledger. This allows for a verifiable, auditable trail, helping reduce reconciliation challenges common in international payments made with traditional systems.

​

Conversely, SWIFT payments pass through several different intermediaries. This reduces visibility regarding delays, processing steps, and additional fees. The audit trail can become unclear and muddled.

Another notable difference between SWIFT payments and stablecoin transactions is the settlement mechanisms they use:

​

Traditional SWIFT payments

SWIFT relies on traditional centralized payment rails to complete payments. These link together financial institutions, traditional banks, and other organizations worldwide. Utilizing globally recognized communication standards, SWIFT can allow your business to connect with other parties and intermediaries.

​

However, the settlement can often take time, with most payments taking 1 to 3 days to complete. Additionally, multiple intermediaries (brokers, asset managers, local agents, and more) are involved in the process, bringing up costs.

​

Stablecoin payments

Stablecoin, on the other hand, executes payments directly on a decentralized blockchain network. The blockchain serves as the settlement and execution environment, keeping a record of each transaction and acting as a ledger of payments.

​

Those involved initiate the payment by sending stablecoins from a digital wallet, and each transfer represents the exact amount. Since most stablecoins are pegged to a fiat currency 1:1, prices are more stable.

Both SWIFT and stablecoins play a central role in international transactions, and each has its own advantages and disadvantages. It’s important to understand the pros and cons of SWIFT vs stablecoins to make an informed decision about which to use.

SWIFT

SWIFT delivers several benefits, including:

1. Reliability: SWIFT payments are often completed within a few days. Their platform is encrypted and secure, making sure that transaction details are always confidential. Following the Bangladesh Bank Heist in 2016, SWIFT improved its security systems and ensured that your transactions continue to be safe.
2. Worldwide accessibility: SWIFT is a decades-old system that is almost universally accepted, connecting more than 11,000 institutions across 200 countries. It offers exceptional reach for companies.

However, some challenges of using SWIFT include:

1. Transaction costs: One of the biggest drawbacks of SWIFT is the high costs, which can skyrocket due to the numerous intermediaries involved in the process.
2. Centralization: Some critics contend that SWIFT's centralized architecture may make it more vulnerable to security threats.

Stablecoins​

Stablecoins also come with many benefits, including:

1. Stability: As the name suggests, stablecoins were designed to counter the price volatility that most cryptocurrencies faced. Their value is pegged to other assets, most notably government-issued fiat currencies such as the US dollar. This helps them maintain their value.
2. Speed: While SWIFT settles transactions in a few days, stablecoins settle payments within minutes. They are also not bound by banking hours and bank holidays, allowing transfers to be made around the clock.

However, stablecoins also come with certain critiques, including:

​

1. Issuer: The effectiveness, transparency, and reserve composition of a stablecoin rely heavily on the issuer. Since this is a decentralised system, it is vital to conduct proper research before choosing an issuer.

Regulations and learning curve: Stablecoins are being increasingly scrutinised as they gain popularity, and regulations vary based on the region you are in. Crypto-based currencies and digital tokens can also be hard to understand at first if you are new to them.

​In general, SWIFT payments are considered to be highly safe and secure. This is because they are centralized, offer strong data encryption and multi-factor authentication (e.g., OTPs), and adhere to the strict Customer Security Controls Framework. They are also subject to regular live monitoring of transactions and to intensive independent assessments to verify that security controls are being followed.​

Stablecoins are a newer technology and may entail certain security risks. For starters, their digital nature means that vulnerabilities (like compromised passwords and data breaches) can threaten the security of stablecoins.

Additionally, they are not subject to the rigorous checks and assessments that SWIFT is. Users also do not hold any legal claim over the assets underlying their coins. This lack of legal protection means stablecoin investors must depend on the integrity of the private issuer, without government or central bank control.

The regulations for stablecoins and SWIFT payments are different, with SWIFT being more centralized and established, while stablecoins are newer and have fewer regulations.

​

Stablecoins

The regulations for stablecoins vary widely by region, and it is important to navigate these overlapping rules to remain compliant. Important regulations to be aware of include:

• The GENIUS Act (U.S.):

This act was enacted to strengthen operational integrity and consumer protection. It mandates that stablecoin issuers comply with the Bank Secrecy Act, which mandates strong Anti-Money Laundering (AML) programs. It also mandates that stablecoin issuers must implement clear redemption procedures.

• EU Markets in Crypto-Assets (MiCA)

The European Union established the MiCA framework to improve the management of reserves and the openness of stablecoins. This system applies strict capital requirements on issuers and requires them to publicly disclose their reserve compositions.

• India:

In India, stablecoins are not classified as securities or currency. Instead, they are treated as Virtual Digital Assets (VDAs) under the Income Tax Act, and a 30% tax is imposed on any gains from VDAs.

​

SWIFT

SWIFT is a more heavily regulated, centralized system. It is subject to the SWIFT CSP Framework (Customer Security Programme), a set of controls intended to improve the security of all financial institutions connected to the network.

Some controls under this system include:

• Mandatory security controls like access control, vulnerability management and malware prevention
• Annual reporting of compliance status
• Regular assessment of the effectiveness of controls

Stablecoins and SWIFT can both be useful depending on the nature of the transaction.

SWIFT, for example, is more commonly used by financial institutions and central banks for institutional and interbank settlements. For example, a central bank in India may need to transfer funds worth $200 million to a bank in France. The SWIFT network would be used to carry this out securely.

Institutions and businesses which depend heavily on regulated banking and KYC/AML frameworks would also use the SWIFT network. For example, a businessman in New York transferring funds to a supplier in the UK could use the SWIFT network to ensure the transaction complies with international standards.

​

On the other hand, stablecoins have been widely adopted across industries and regions. For example, maybe your supplier requires payment immediately, but it is a weekend, and the banks are closed, so the SWIFT network wouldn't be working. In this case, stablecoins would be useful.

Additionally, organisations operating in corridors with high bank fees would benefit from using stablecoins. It is important to note that the recipient you are dealing with must also be able to and comfortable with receiving stablecoins as payment.

Both SWIFT and stablecoins carry risks, and it is necessary to be aware of them before choosing a transaction method.​

While stablecoins are designed to retain their value, they can easily depeg, meaning they lose value relative to their fixed dollar value. For example, in March 2023, the USDC fell from $1 to $0.87. This is able to undermine their ability to be used as an instrument for payments.

Additionally, most issuers do not have the same protections as traditional banks. These include capital requirements, regular examinations, liquidity buffers, and more.

The SWIFT network, while heavily regulated, is also subject to security risks. For example, in 2018, India’s City Union Bank was hacked, resulting in losses of more than $2 million via the SWIFT platform. The network is frequently targeted by cyberattacks, leading to fraudulent transactions.

Currently, traditional banking systems and the SWIFT network are still widely used for international transactions. However, reliance on blockchain has increased in recent years, and tokenization could be the key to improving existing systems and creating new ones.

Blockchain and tokenization could help lay the basis for future monetary and financial systems, especially when backed by central bank reserves, government bonds, and commercial banking.

At present, though, stablecoins do not fully satisfy the requirements to become the primary token in a new monetary system. This is due to a lack of centralised regulation, volatility in value, regional differences in compliance requirements, and other factors.

The advent of new technologies and the dependence on blockchain have been changing the way organisations conduct international transactions. While stablecoins are a useful tool for trade, they are still being developed and scrutinised. Traditional banking networks, while more stable and regulated, also come with drawbacks like high fees and long settlement times.

If your business is looking to increase its reach beyond India, Xflow is the solution. Xflow provides the secure infrastructure your organization needs to receive international payments while continuing compliance and speed. Our platform presents transparent pricing, next-day settlements, AI-powered FX insights, multi-currency transactions, and much more.

​

Go to Xflow’s website today to learn more!