Bitcoin Will Replace Swift Before Visa – Bitcoin Magazine
This is an opinion piece by Shinobi, a self-taught Bitcoin educator and tech-savvy Bitcoin podcast host.
With the advent of the Lightning Network, the notion of bitcoin as a medium of exchange has taken off in recent years in terms of dominant narratives in this space once again. Ultimately, it is a necessary component of something that aims to become money. Storing value is meaningless in the context of money without the ability to easily exchange it, and Lightning is the most promising tool at this point to truly scale the ability to do so.
Conceptually, the main focus of medium of exchange as functionality has been around consumers – fulfilling the needs of the average person and their daily needs to buy groceries, shop online, pay for services, etc. This is not the only scope of exchange in an economy. Companies pay suppliers, they have to pay for contractors or services too, international shipping companies have to receive money from all over the world from their customers – most of them are not consumers, but companies. Imports flow all over the world on a massive scale, and have to deal with the complexities of currency exchange between many different national currencies.
Barter doesn’t just mean that people pay for their coffee, the whole function of barter happens at all levels and scales in the economy for purchases of much greater value than your daily Starbucks latte.
This is where bitcoin will really shine sustainably at scale as a medium of exchange, not Joe who buys his coffee every day. SWIFT processes about $5 trillion in payments every day, about $1.25 quadrillion a year. One need look no further than the fact that many Russian banks are cut off from the SWIFT system to see the potential risks of relying on it to settle international payments. This follows a curved distribution where 5% of the total payments processed account for 95% of the value, and the vast majority of payments are for much lower sums (average payment is ~$400,000, and median ~$5,000 as of October 2010). So very large value payments account for the vast majority of value transferred across the network, but the remaining small percentage of value is distributed among a large variety of individual actors making small payments that are still in the grand scheme of things, not a small amount of money. Indeed, this distribution shows why SWIFT is ripe for disruption by Bitcoin in the latter category.
As I addressed in this March article discussing the same topic in the context of explicit sanctions evasion, the main limiting factor in using Bitcoin to process conventional payments denominated in fiat currencies is liquidity. I broke down how even though 100% of the mining hashrate in Iran, which is 5% of the network, was completely owned by the government and they kept 100% of the revenue, they could acquire $700 million worth of Bitcoin a year to pay for imports. In the grand scheme of things, it’s not really much. Iran imported $38 billion worth of goods in 2020 – $700 million is just a fraction of that.
This dynamic changes when you start considering a country with a thriving fiat market for Bitcoin. The situation with Iran was that they were considering burning oil instead of being able to export it directly for sale, and using Bitcoin mining to fill that gap. The problem is that it is limited by how much mining hardware they can get their hands on. Consider a country that is not so heavily sanctioned but potentially exposed to it, that can still export stuff and has a thriving Bitcoin/fiat market with a volume of ~$10 million a day. If people from all over the world were willing to pay for exports from that country with Bitcoin, there is a $10 million a day market that can convert it to fiat every day. There is potentially $10 million of money coming into the country every day to pay for exports (I know…this is an overly simplistic analysis, which ignores changes in market conditions, how that will affect market liquidity, the consistency of demand for Bitcoin , etc. — but stick to the simplistic analysis just to consider the point). That’s ~$3.6 billion a year. Now imagine a market volume of $100 million per day, that’s ~$36 billion per day. That is almost Iran’s annual imports as of 2020.
Now imagine the last 5% of value processed by SWIFT which accounts for 95% of all individual transactions. Imagine all the different companies and individuals making international payments that fit into that bucket of payments. As long as the source country has the liquidity in a fiat/Bitcoin market to allow someone paying to buy it, and the destination country has enough liquidity for the receiver to sell it, Bitcoin is a perfect tool to process the international payment with minimal slippage/fees and make up within a few blocks. Add the Lightning Network into the picture and it can be decided in seconds.
The more speculative liquidity around Bitcoin, the more value can be processed in such a system between different jurisdictions to facilitate international trade. You don’t even have to be a sanctioned entity country to see the value in this. Settlement can be literally instantaneous. SWIFT can take days, even weeks sometimes, depending on where the money moves between and the checks that SWIFT runs over a payment. Bitcoin removes this delay, removing the potential for a third party to stop the payment. It boils down to only the two exchange points between fiat and Bitcoin in the respective jurisdictions in terms of counterparty risk to which the two transactors are exposed.
However, even that can be removed by simply directly storing and controlling the Bitcoin itself. The only risk at that point is the volatility of Bitcoin itself. This too can be handled. At the simplest level, a small portion of the Bitcoin a company holds can be deposited into an exchange with futures products, and with leverage can be used to short the Bitcoin price to hedge against volatility. 10x leverage means you only need to put 10% of your Bitcoin on such a platform to secure that exposure. If the Bitcoin price goes up and your short is liquidated, the price rise of Bitcoin will offset that and give you the same amount of fiat value. If it goes down in value, the money you make from the short position will compensate for the falling value of Bitcoin and you will still have the same amount of fiat value.
Discrete log contracts (DLCs) even offer the ability to hedge against the price volatility of Bitcoin on the network itself through a smart contract. This allows you to control Bitcoin directly, have contracts revert to your control in self-custody when it closes, and even allows the use of multiple price oracles so that no single one is trusted to honestly report the price of Bitcoin.
People are acting as if Bitcoin needs to hit the point of hyperbitcoinization to become an important backbone in processing payments in the world, or to become a system as important to the economy as SWIFT. It doesn’t. Market volume at a certain level means that the amount of Bitcoin being actively bought and sold. This means that the demand is there to regularly process the buying and selling of Bitcoin within this value range no matter what time period you are analyzing. The same goes for futures markets, no matter what volume is present, it is available to people who want to keep the Bitcoin themselves rather than be exposed to counterparty risk to hedge against that volatility, and not have their business destroyed if the price of Bitcoin suddenly crashes down. to a massive extent.
Bitcoiners have become so focused on the idea of grassroots adoption – which is not in itself a bad thing, as it is certainly a necessary aspect of Bitcoin adoption to truly become real money – but they have started to lose sight of the other side of that coin. Big players, big value settlement. Bitcoin is ripe for a massive disruption to systems like SWIFT, and as the world becomes both politically and economically unstable, I think the time will come sooner rather than later.
I believe that Bitcoin and Lightning will begin to see widespread use by businesses as an alternative to SWIFT and other settlement systems before they see widespread use as a means of consumer payment. It is simply easier to convince a few thousand companies of the added value and utility, and get the work done to integrate there, than it is to convince hundreds of millions of people of the added value, and get the work done to integrate it there. It would also probably make the latter’s job easier if the former was done first, as most people tend to follow in the footsteps of things that seem credible.
What could put more credibility in the mind of your average person than constantly hearing how Bitcoin is being used to settle international business payments and draw business away from conventional settlement systems?
This is a guest post by Shinobi. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
