Need to look beyond ‘Swift’ settlements
Blockchain can eliminate many of the inbuilt inefficiencies plaguing the older system
Everybody loves a good heist evident from stories told throughout generations — from the tales of Robin Hood and his merry men to films such as The Italian Job, the Fast & Furious franchise, or Ocean’s 8.
However, one of the most impressive almost-thefts in the real world is the infamous $1 billion bank job, a story about how an anonymous syndicate of hackers nearly stole that amount from Bangladesh’s Central Bank.
While the first stock exchange, in Amsterdam, was established in 1602, it wasn’t until the late 2000s that global trading became mostly digital with transactions transferring from the antiquated 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.
Nearly 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 utilised breaks in communication that occurred throughout the transaction process to steal nearly $1 billion. 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 Tale of Dole
The dilemma of centralised systemic failure isn’t just a result of malicious attacks from hackers, it’s plentiful in the financial system too. For instance, read along for another brief tale of systemic failure summarised by ConsenSys founder, Joe Lubin: “A lawsuit involving Dole Foods showed that the company had 12 million more shares of its stock than it had originally thought, exposing a weakness in the financial system.
“In 2013, the then-publicly listed Dole Foods was taken private by its CEO, David Murdock, at a rate of $13.50 per share to be paid out to stock owners. However, in response to a lawsuit by those same stockholders (who alleged that the shares were actually worth more), the court ordered Murdock to pay additional funds per share, with interest.”
For context, Cede & Co., a nominee of the Depository Trust Co (DTC), owns all the stock in all the NYSE companies maintained on a centralised ledger. Essentially, there’s a record that you own the stock all without ever granting you actual possession of that stock.
Now to make matters worse, the DTC occasionally executes a process known as a “chilling” — where the DTC stops recording ownership of who holds shares in a company days before a large merger or private buyout. In the case of Dole Foods, the DTC didn’t know who owned Dole Foods shares when the buyout occurred and instead required brokers to determine who received the additional shares and interest payments.
Systemic flaws and process inefficiencies exhibited in the billion-dollar bank heist and Dole Foods cases impact the whole financial industry. Just as the internet and digital records transformed financial markets, there will be a natural integration of blockchains 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 (SWIFT and DTC) as these examples illustrate. 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 tokenisation of assets, allowing individuals to own their assets as opposed to the current system where DTC maintains custody. Tokenisation is the process of converting an asset into a fractional unit called “token” that can be moved, recorded, or stored on a blockchain.
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 centralised, 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, but its reverberations will be felt throughout the globe and stories of Dole Foods and the $1 billion 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.
■ Anupam Gupta is Programme Director at ConsenSys MENA.