In that case, why would the US have to act "indirectly", threatening bank A not to work with bank B? They could simply deny any transfers to and from bank B's account at the Feds, which would make any transactions impossible?
Yes, unless the banks have mutual accounts with each other that they can use to settle instead. So, if bank B is accepting to be owed money by bank A for any transfer from A to B, they don't need to settle – but there's practical limits to that, imposed by both risk and regulatory concerns. Eventually, they'll need to settle up if funds flows A -> B and B -> A don't largely cancel each other out.
> And is a transfer from A to B really a transfer from A's account at the Feds to B's?
For wire transfers and ACH, it is.
> They could simply deny any transfers to and from bank B's account at the Feds, which would make any transactions impossible?
Yes – that's in fact exactly what a freeze of that bank's Fed reserves is!
> unless the banks have mutual accounts with each other that they can use to settle instead.
So this is just based on trust that the other bank will keep a truthful score of the transfer, and there won't be a dispute at settlement time?
If the banks are often willing to trade with each other "on trust alone" like that, I suppose that shows why the Feds can't always directly block dollar transfers, but have to rely on threats of account freezes.
Exactly: Either there is trust (and external settlement is not required), or there isn't, in which case banks will usually only credit incoming transfers to their customers once the underlying funds have settled.
Practically, trust is a spectrum, and banks might only settle once the outstanding balance in either direction has become too large (that's then called "netting").
> If the banks are often willing to trade with each other "on trust alone" like that
Bank balances are ultimately only be useful to their accountholders if they can effect some payment with them. There is therefore also a spectrum of fungibility of USD balances.
If you think about it, what makes USD useful is the fact that they can be used to pay for imports from the largest economy in the world. Only very few US companies would be willing to trade with you when being paid in USD balances at some foreign bank that they can't, as one significant example, pay their taxes with.
They could also go much further. US has the power to force any bank that wants to transact in USD to freeze all Russian assets no matter the currency.
This is a very big stick.
Ish. In reality, this power is constrained by our courts. Which is why we have the privilege. A foreign person wrongly frozen can take on the U.S. government in court and win.
"I deem it legal to freeze assets of terrorists."
"I now deem you a terrorist."
The stick is real, it is very sharp and pointy; but it's a thin and targeted stick. Stab top many people with it, and it'll snap.
Or do they have another way?
Blocking Swift access makes it very inconvenient for banks to perform international settlement, because banks today rely on automated Swift messages to coordinate such transfers. However, even before Swift, international transfers were possible: by phone or telex. The banks have to find other ways to communicate, which isn't easy in practice, but not impossible. The fact that Russia has its own Swift competitor, to which some international banks might switch over time, would probably help with that.
But by freezing bank accounts at the Fed, the actual settlements - the events at which money actually changes hands - could be prevented in the first place, no matter the way in which banks agreed over those settlements. Switching back to good old telex (or another financial communication network) wouldn't help in such a scenario. Banks would have to fall back to exchanging big suitcases of dollar bills, which obviously wouldn't practically work.
Because no bank would survive this, they would immediately cooperate when confronted with such a threat and freeze any Russian-held funds, even if those funds weren't actually held in USD in the first place and thus would theoretically be unaffected by the Fed account freeze.
I don't really understand this distinction. But before I can ask a question, there are some points about my understanding of how payments work, so that you can verify me:
1. All payments, no matter which payment system, can be performed only between 2 bank accounts. In order to send or receive money I must have an account in a bank.
2. A bank is pretty much defined by regulations it must follow. Following these regulations gives a bank some amount of trust/authority to say that a given person/entity has that much money within this bank. This money don't necessarily have to be backed by anything, so, ultimately, "it's just a number".
3. All transfers in a given currency are directly or indirectly performed via central bank that emits this currency (or FRS in case of USD). This is the ultimate top-level ledger for transfers in this currency.
4. So, ultimately to transfer non-physical assets (i.e. fiat money) 2 authorities for a given currency (i.e. central banks, or banks that follow CB regulations) must communicate one to another that a given number is deducted from account X and added to an account Y. There's nothing more.
So, if money is just a number, "transferring" it is just a message. So why exactly SWIFT is a messaging system that doesn't transfer money, and how money is transferred, then? And what (in general terms) even are these messages SWIFT is needed for, that aren't money transfers?
That's why I consider the capability to settle the individual transfers to be more important than the capability to negotiate these transfers, and the time of settlement to be the actual time at which wealth is transferred. Before that moment, the transfer is effectively incomplete, which usually doesn't matter much for smaller sums of money, but in case of large amounts that introduce large imbalances between banks you can be pretty sure the banks will want to settle among each other first before the recipient gets full access to the transferred money.
However, all of this is based on the assumption that Swift is used for inter-bank communication as in "non-central-bank to non-central-bank". I always assumed that central banks would have their own communication channels with the non-central-banks and would not have to use some intermediary like Swift, as they themselves are a central entity able to standardize message formats and such.
But as a short-term measure, revoking SWIFT access is probably also somewhat effective. As you say, setting up alternatives is not impossible, but not easy either.
I'm not sure if crypto is currently ready. But one BIG reason for it to succeed, is that the current system is just old... We have all these fintech startups improving money flow, and transfer times, and easy of payment... But it seems like tech build upon tech. centralized startups/companies owning payment systems (Apple Pay, Stripe, Adyen).... Man, i'm going to buy some more ETH :p
Then you had to trust that they didn't hand you false coins. After that came false checks. Nowadays you need to trust that online shops aren't trying to scam you.
Essentially whenever you do business there will be one person that needs to make the first move, crypto or fiat, someone always needs to deliver first. But if these two business partners don't trust one another then they need a third party they can both trust.
In our world these are most often banks or notaries. People that will take money from person A hold it till person B delivers then pass it on. If person B doesn't deliver person A gets their money back, if person A doesn't pay person B doesn't deliver.
Now, crypto is trying to claim that smart contracts will solve this in crypto world but that raises the question of who executes these smart contracts and who feeds them information. After all this once again feeds back into the trust problem.
Essentially you need banks not because they are modern or technologically up to date or fast, but because they are in fact fully capable of clawing money back if the laws allow them to, unlike crypto where your money is secured by math.
Because even if some people don't like it, the chance of the average person being scammed is far higher than your bank or the government misusing the trust you have given them and taking your money.
[0] Including Ethereum.
Yes. This is not a technology problem. This is how banks have been working for the last 400 years.
You can't get rid of banks because banks are what create the money. The crypto people have a terrible understanding of what money is.
It really is, but to answer your second question, it's important to consider *which* bank. There's reserves (i.e. balances of banks at the Federal Reserve) and bank deposits (which really are just numbers in banks' databases).
Having an account at the former is effectively what makes numbers in the database of the latter "real USD".
> Otherwise some Russian bank could just increase that number to whatever they like. And say "Look, we own 100 Trillion USD. Now let's go shopping.".
They could, but these assets/liabilities would not be backed by any reserves linked to the USD payment rails.
Reserves are theoretically irrelevant (though practically regulated) as far as transfers between accounts of a single bank are concerned. But as soon as a second bank comes into the picture, i.e. for inter-bank transfers communicated via SWIFT or otherwise, all transfers will ultimately be backed by Fed account to Fed account transfers in the background.
> So I guess USD needs to be recognized by the US somehow?
Indirectly so, yes: What makes USD "real" is the ability to transact with the larger ecosystem of US and offshore banks that have a shared agreement on what "real" USD are.
Practically, this means being connected either directly (via a Fed account) or indirectly (via a bank that itself does have a Fed account) to that system.
> Could the US simply "void" all USD that are owned by Russia?
Indirectly, yes: They can force every bank holding USD balances for embargoed beneficiaries to freeze these assets. Failing to comply could, in the absolute worst case, lead to that bank's Fed accounts being frozen as well (which would take away its ability to settle in USD with other banks).