From Hawala to Swift: Inside the 1,000-year battle to move money safely

Finance has spent a thousand years trying to move wealth virtually. But every time innovators engineer a faster, more secure way to transfer capital, malicious actors hit back with new, sometimes highly sophisticated, attack vectors.

For over 50 years, the messaging system developed by the Society for Worldwide Interbank Financial Telecommunications (Swift) has been the dominant infrastructure for cross-border settlement, routing roughly $5 trillion daily. However, facing pressure to improve speed, reduce cost and compete with the growing number of blockchain rivals, the bank-owned organization is under pressure to evolve.

In recent years, stablecoins and tokenized deposits have emerged as potential “SWIFT killers”, a phrase coined in a 2017 Brave New Coin analysis about Ripple, a blockchain designed to handle cross-border transactions. It took almost nine years for Swift to respond. Just last month, it unveiled a blockchain ledger and, shortly after, HSBC and Standard Chartered executed the first live transaction, settling in seconds rather than days.

Swift’s potential inspiration

In the 8th century, Islamic merchants moving goods between Baghdad, Cairo and the Indian subcontinent had a problem. Moving gold physically was dangerous, with bandits on the lookout for victims. No amount of armed escorts could solve that issue.

So they created a network of brokers called hawaladars who moved value through trust and a code word rather than hard currency. A merchant handed cash to a hawaladar in Baghdad, and a counterparty picked up the same amount in Cairo. A merchant in Baghdad could build a trading empire from Cairo to Calcutta without a coin moving internationally.

The suftaja followed, replacing the secret code and broker with an encrypted message on paper. By the 1200s, Florence and Venice had a similar idea. Their letters of exchange moved fortunes across Europe without a coin on any road.

The goldsmith bankers of 17th-century London came next. The receipts they issued for gold deposits circulated as paper money. That worked until too many people asked for their gold back at once, triggering the first bank run and a new kind of risk.

Then came the South Sea Bubble of 1720, one of the first large-scale financial frauds involving paper instruments. Investors were sold shares in a company with no real assets. Paper replaced gold, while speculation and fraud replaced robbery.

In the early 1800s, central banks and correspondent banking were established. Banks settled debts with each other through correspondent accounts, creating a new type of risk. If one failed, so did the others.