Looking at the future through the past; How Cypherium will disrupt archaic financial systems like SWIFT & ACH
Centralized Banking and its Payment Solutions
Business conducted between two entities has always required a 3rd party to verify the transaction and ensure that the transaction terms are satisfied for both parties. This seemingly novel idea has become the foundation for the entire global economic system. Entities like SWIFT and ACH are the silent intermediaries that power the global marketplace. While this trust-based system has taken us very far, it does not come without its own limitations and risks. In order to better understand Cypherium and the disruption to modern banking it presents, we must first need to understand our current approach and the limitations it presents.
SWIFT
SWIFT (Society for Worldwide Interbank Financial Telecommunications) was established by six major international banks in an effort to create a cooperative banking society that could easily allow people to send and receive financial transactions. Initially SWIFT was only for basic payment instructions, however, it now sends messages that cover actions such as security, treasury, trade, and system transactions. The utility of SWIFT is broken down by the following segments:
- 50% payment based messages
- 47% security transactions
- 3% treasury, trade, and system transactions
At its core, SWIFT is designed to securely transmit information; its standardized codes allow all parties to easily follow a system and decode vital information. SWIFT’s network offers many different types of services that aid both corporations and individuals to conduct frictionless international commerce. Some of these services are as follows:
- Applications — Enabling access to a variety of applications, that include real-time instruction matching for treasury and forex transactions, inter-bank payment processing instructions and infrastructure, as well as the securities market infrastructure which includes payments processing, and clearing & settlement instructions for all transactions related to securities, forex, and derivatives.
- Business Intelligence — Offers visualization into the dynamic real-time view of messaging, activity, trade flow and reporting.
- Compliance Services — Provides Know Your Customer, Sanctions, and Anti-Money Laundering services for compliance and security.
As of right now, SWIFT’s secure network has more than 10,000 financial institutions in 212 different countries to send and receive information about the transactions mentioned above to each other. However, a key differentiation that SWIFT has over other centralized payment networks like VISA or Mastercard, is that it only transmits the message across to the other party it does not actually hold any funds or manage any client accounts. While SWIFT’s large partnership network and efficient messaging system completely innovated the way international commerce is performed, like most human processes, the bottle-neck to SWIFT has long been human involvement and the chance for human error; the system is only as effective as the people inserting the correct inputs and outputs. While seemingly uncommon, there are far too many cautionary tales of people incorrectly using SWIFT, and funds are sent to the wrong place or at the wrong time. Just recently, Citi Bank sent $900 million to the wrong account and a judge ruled that this transaction cannot be reversed. In addition to the costly human error component of SWIFT, the global marketplace has developed to the point that it needs lower-latency services; SWIFT system suffers from slow transaction speeds, which in certain instances could be up to 5 days. Moreover, the lack of transparency from SWIFT makes it hard to get a definitive settlement timeline, for time-sensitive transactions this is not a sustainable solution.
ACH
Unlike the SWIFT network which only sends information, but does not actually process transactions, the ACH (Automatic Clearing House) system processes large volumes of individual payments electronically — meaning it doesn’t simply transfer a message but rather conducts a transaction by carrying the funds along with it. It has become one of the biggest payment systems in the United States as it processed 24.7 billion transactions valued at $55.8 trillion. The ACH system works in two ways; credit processing and debit processing. An ACH credit process allows the deposit of funds into a bank account, as it is initiated by the payer of the funds. While an ACH debit process allows the withdrawal of funds from a bank account and is initiated by the receiver of funds.
In either case, the ACH transaction is simultaneously entered into the payment system ledger dedicated to ACH by an originator. The role of the originator is to obtain the approval and required authorization for a given transaction; the operator is either the Federal Reserve or the Electronic Payments Network and is decided upon by the nature of the transaction (credit or debit). By adopting this method, significant savings in both time and fees have been realized through the setup of recurring automatic payments. If a singular payment needs to be made then an electronic debit payment authorization by the bill payer needs to be approved and submitted to the bank.
Even though the use of ACH has created several efficiencies such as convenience, cheaper money transfer, and an overall low carbon footprint; this solution still comes with its limitations and risks. To save on operational costs, the ACH network processes transactions in batches; there are times when transfers are not processed until the specific volume threshold has been reached. This results in ACH payments not being suitable for any transaction that is highly time-sensitive, as the delivery of the transaction is dependent on other counterparties reaching these volume requirements. In addition to these time considerations, relying on a third party still presents several risks as human error can result in funds being misappropriated or misallocated. While the ACH is a more efficient solution than SWIFT, the system is doubling down on the use of intermediaries and third-parties, further highlighting the need for decentralized solutions.
Cypherium and other decentralized interoperable blockchains
The biggest take-aways from this deep dive into centralized banking and its corresponding payment solutions is that the industry lacks transparency, charges unnecessarily high fees, carries slow transaction times, and ultimately has become too reliant on a third party for verification and validation. Blockchain technology directly addresses the flaws of centralization, and all of the pain points mentioned here have an eloquent solution through the use of decentralization. Cypherium is at the forefront of disrupting our banking landscape through the use of decentralization, let’s explain why.
Focusing on an interoperable platform for multiple Central Bank Digital Currencies (CBDCs), Cypherium uses its self-designed hybrid blockchain to solve the aforementioned problems and delivers the solution of platform interoperability. Cypherium is addressing the shortcomings of current blockchain offerings and is creating a product that can interact with a wide range of both centralized assets and decentralized protocols, all while maintaining the inherent strengths that cryptocurrencies are built with including transparency and decentralization.
The problems posed by SWIFT and ACH are self-evident. In order to address these key shortcomings, the Cypherium team has set out 5 goals for the project:
- An instant ledger to process real-time transactions for billions of users.
- This was a huge pain point within SWIFT and ACH as they relied substantially on manual verification methods that not only were time-consuming but also error-prone and high in operational costs.
- Scalability within blockchains has always been a bottleneck for the industry, especially within the realms of mass adoption; Cypheriums network has the throughput to process 10,000 transactions per second.
2. A smart contract platform to enable enterprise use cases for all industries.
- Typically centralized banking platforms are siloed and do not have the versatility to meet the growing needs of the market. This is seen from both SWIFT and ACH, as each solution has failed to embrace the newer needs of the modern market.
3. A trusted database to connect isolated data islands around the world.
- The validation and verification of the transactions that occur within services like SWIFT and ACH are done manually, which leads to slower processing times and being prone to human error. This added variable of manual verification leads to higher transaction costs.
4. An open network to enfranchise any participant or contributor.
- Since banking and its payment solutions are siloed, only other financial institutions can connect directly to services like SWIFT and ACH, this means that, fundamentally, all end-users are forced to use this system to participate in the international economy.
5. A secure vault to combat the increasing threats to data privacy.
- With SWIFT, all transactions that occur are used to create data dashboards. The users are not in control over their data.
- Blockchains currently foster anonymity but only with respect to identity; data privacy is still not addressed to the same extent.
These are the stark differences between a decentralized interoperable blockchain such as Cypherium and the aforementioned centralized banking infrastructure & payment solutions.
Cypherium’s market-ready technology is the first protocol that achieves the ‘blockchain trilemma’ and has a protocol that delivers on scalability, security, and decentralization. Unlike most protocols that have one consensus mechanism for verifying transactions and minted new coins, Cypherium has decoupled this architecture and created two separate mechanisms that work in unison. The ‘Election Chain’ selects Proof of Work validators to mine new blocks while the ‘Transaction Chain’ combines the “proprietary Byzantine fault-tolerant consensus algorithm, CypherBFT, to verify said transactions. This architecture delivers a highly scalable network that is capable of conducting 10,000 transactions per second — a number that is competitive to that of Visa and Mastercard.
As we continue to see strong market validation from decentralized exchanges, liquidity providers, and other banking services, the inefficiencies brought by SWIFT and ACH, like their lack of transparency, high transaction fees, and potential for human error makes the need for decentralized disruption more apparent than ever.
Decentralized interoperable blockchain solutions like Cypherium are paving the way for a truly trustless and highly accessible network. Cypherium’s use of its’ hybrid protocol and the legacy web allows for any existing system to onboard onto the Cypherium blockchain, while the use of Java will reduce the learning curve for new developers, and will make it easier for them to learn how to code on top of Cypherium’s blockchain. True financial interoperability starts with an even playing field; while SWIFT and ACH catered to banks and other financial institutions, they failed to incorporate the needs of retail investors and civilians. Cypherium’a inclusive ecosystem will give these financial service providers the low-latency network they need, while also giving civilians access to the banking infrastructure they have long been looking for.
About Cypherium
Cypherium is a decentralized smart contract platform for creating and connecting dApps, CBDCs (Central Bank Digital Currencies), Enterprise Applications, and Digital Assets. Cypherium is one of the first blockchain companies with tangible blockchain applications, use-cases, and partnerships with industry-leading enterprises and government institutions.
