SWIFT, SEPA Instant and Stablecoin Payments

In Part 1 we looked at the three layers of technology behind stablecoin payments. This part answers a simple question. Why would anyone use this system at all, when banks already move money every day. The clearest way to answer it is to take one payment and send it three different ways.

Imagine a business in France that needs to pay a vendor in the United States. The amount is the same, the two parties are the same, and only the rail changes. First we send the payment through SWIFT, then through SEPA Instant, and then through a stablecoin. Following the same payment three ways shows exactly where each rail is strong and where it stops.

Why each bank keeps its own ledger

To understand why the rails behave so differently, it helps to remember one thing from Part 1. A ledger is a record of who owns what, and every bank keeps its own ledger. Your bank knows what you hold because it is written on the bank's own books. Another bank keeps a separate set of books for its own customers.

There is no single shared ledger between banks. So when money moves from a customer of one bank to a customer of another bank, the two separate ledgers have to be brought into agreement. Inside one country this is well organised and quick. Across borders and across currencies it involves more banks, more steps and more time. This is the root of why cross-border payments are slow, and it is the problem each of the three rails handles in its own way.

The payment through SWIFT

What SWIFT actually is

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is often described as the system that moves money across borders, and it helps to be precise here. SWIFT is a messaging network. It carries payment instructions between banks in a secure and standard format. The money itself moves separately, through a chain of banks that hold accounts with one another.

Following the payment

When the French business sends the payment, its bank sends a SWIFT message towards the vendor's bank in America. If the two banks hold accounts with each other, this is direct. Often they do not, so the payment passes through one or more intermediary banks that sit between them. These are called correspondent banks. At some point in the chain the euros are converted into dollars. Each bank in the chain checks the payment, takes a fee, and passes it on. The money usually arrives after one to several business days.

Where SWIFT is strong and where it stops

SWIFT reaches almost everywhere. It connects banks across nearly every country, which is why it is the rail that applies for a payment from France to America today. Its cost is that the payment is slow, it passes through several parties, fees are taken along the way, and it is hard to see where the money is at any moment. For a payment across continents, SWIFT is the rail that works, and it works in the way just described.

The payment through SEPA Instant

What SEPA is

SEPA stands for the Single Euro Payments Area. It is the arrangement that lets euro payments move between banks across the area as smoothly as a payment inside one country. SEPA Instant, whose full name is SEPA Instant Credit Transfer, goes one step further. It moves euro from one account to another within seconds, at any hour of the day, including nights and weekends.

Following the payment

Here we reach an important point. SEPA works only inside the SEPA area, and it works only in euro. A vendor in the United States who needs to be paid in dollars sits outside both of these limits. So for our example, the payment from France to America, SEPA Instant does not apply at all. SEPA Instant is the fast rail inside Europe, and it stops at the edge of the area and at the edge of the euro.

What SEPA Instant solves

This matters for an honest comparison. SEPA Instant already solves the problem of slow payments inside Europe. A euro payment between two accounts in the area is now fast and available around the clock. What it does not solve is the cross-border and cross-currency problem. The moment the money has to leave the euro or leave the area, SEPA Instant is no longer the tool.

The payment through a stablecoin

Following the payment

Now the same payment through a stablecoin. The French business converts its euros into a stablecoin, which is the on-ramp from Part 1. The stablecoin then moves across the blockchain straight to the vendor's wallet. There is no chain of correspondent banks in between. The transfer settles in minutes and it works at any hour, including weekends. At the other end the vendor either keeps the stablecoin or converts it into dollars in a bank account, which is the off-ramp.

What actually changed

The difference comes from the shared ledger. With SWIFT, a message is sent and the money moves slowly through a chain of banks that each keep their own books. With a stablecoin, the value moves on one ledger that both sides already share. The slow part of the old system was bringing separate ledgers into agreement, and on a shared ledger that agreement already exists. That is why the payment is fast and works around the clock.

Where stablecoins are strong and where the work moves

The strength of a stablecoin payment shows exactly where the other two rails are weak. It is fast across borders where SWIFT is slow, and it works across currencies and outside Europe where SEPA cannot reach. It also runs at any hour, and it can reach places where the network of correspondent banks is thin. The work does not disappear though. It moves to the on-ramp and the off-ramp at each end, and it brings the new risks that Part 3 covers. A stablecoin is a different rail, and it is useful to see it as different rather than simply better.

The three rails side by side

Where this goes next

So the reason to use a stablecoin is not that banks are slow everywhere. Inside Europe, SEPA Instant is already fast. The reason is that stablecoins reach across borders and across currencies, at any hour, in a way the older rails do not. The speed and the reach come from removing the chain of banks in the middle.

Removing that chain has a cost though. The banks in the middle also provided protection. They could check payments, hold them and reverse mistakes. Part 3 looks at what those protections were, and at the new risks that appear once they are gone.

A short glossary for this part