In November 2018, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) - a financial market infrastructure (FMI) institution that provides secure messaging for international payments - suspended certain Iranian banks’ access (including that of the Central Bank of Iran) to its messaging system. This step was seemingly taken to protect the stability and integrity of the global financial systems. However, the reluctant tone of the announcement could hardly disguise the reality that SWIFT took such an action conceding to the US government push to expand the secondary sanctions on financial messaging services to the Central Bank of Iran. Although the US did not have jurisdiction over SWIFT, which is a cooperative company incorporated under the Belgian law and is owned and controlled by its shareholders (financial institutions), after months of intense negotiations about the US demands and irrespective of the dismay expressed by European officials, SWIFT had to acquiesce. In making SWIFT to yield to US demands, the US government apparently went to such an extent as to threaten the SWIFT’s twenty five board members (which include two US bankers from Citi Bank and JPMorgan) with visa bans and asset freezes, and its member banks with charges and fines.
The intrusion of considerations beyond the scope of financial regulation in the operation and risks management of Financial Market Infrastructures (FMIs), was of such proportions that triggered radical proposals for reforming and restructuring the international FMI institutions. The recent calls for establishing international payment rails independent of the US have shown the frustration with the hegemony of a single dominant player having formal (i.e., through extraterritorial application of its laws or through secondary sanctions) and informal dominance over international payment infrastructures. For example, German foreign minister Heiko Maas proposed that Europe could create its own SWIFT rival based on the euro rather than the US dollar (USD). More recently, speculations about Synthetic Hegemonic Currency (SHC), which would be provided by the public sector through a network of central bank digital currencies (CBDCs), could also be viewed as a mechanism that could - in the long run - lead to decentralization in a multipolar international monetary and financial system. However, it is unlikely that a system, which is based on fiat money, issued and controlled by states, could stand tall against the pressures exerted by one or more groups of hegemonic governments.
These developments have also highlighted the need for a truly decentralized uncensorable FMI on which one or a group of coordinated actors could not exert arbitrary influence. Such a value proposition requires a settlement asset that is denationalized, decentralized (peer-to-peer), divisible, digital, and globally transferable, and that provides certain levels of anonymity to its users. Bitcoin, which is built upon an open-source protocol, a distributed tamper-resistant timestamped globally synchronized ledger, and embeds a native digital asset is an obvious candidate to play such a role, despite its shortcomings in terms of price volatility. In this regard, it is important to mention that in spite of its currently predominant use as a speculative asset, Bitcoin and its underlying technology can be viewed as a new model for a parallel decentralized FMI (dFMI) for clearing and settling obligations in its unanchored native settlement asset (i.e., bitcoin). In addition to clearing and settling its native asset, Bitcoin can be used to transfer the title to tangible or intangible assets on top of the Bitcoin blockchain. This is made possible because Bitcoin’s scripting language allows embedding metadata in bitcoin transactions. For example, colored coins allow for recording the creation, ownership, transfer, and tracking of extrinsic digital and physical assets other than bitcoin.
Add censorship-resistant property of Bitcoin to the above specificities. Censorship resistance as the unique value proposition of Bitcoin is very much reflected in the Bitcoin whitepaper as well as Satoshi Nakamoto’s communications with early bitcoin adopters. Given the fate of Bitcoin’s predecessors such as Digicash and American Liberty Dollar (ALD), whose centralization was their undoing, the creator or creators of Bitcoin had the understanding that permissionless innovative payment systems have to be decentralized, otherwise those innovations will face the same fate as Bitcoin’s ancestors. This is also clear from the chronology of the technological breakthroughs that led to the birth of Bitcoin.
More importantly, censorship-resistant property of Bitcoin is reflected in the design of the Bitcoin network. The clearest manifestation of this property is in the trade-off between efficiency and censorship resistance. Rather than opt for fast and efficient payments, Bitcoin goes a long way to create extreme inefficiencies by introducing a distributed ledger that should be maintained, updated and validated by all fully validating nodes, only to make sure that no single or a small group of participants violate the rules of the Bitcoin protocol, modify the ledger arbitrarily or censor other stakeholders from participating in the Bitcoin network. Such a tradeoff has been made because the unique value proposition of Bitcoin and blockchain technology is not to replicate the functions of centralized technologies in a faster or cheaper fashion.
It is indeed hard not to notice that the censorship-resistant property of Bitcoin drives the entire mechanism design in the Bitcoin network. Since Bitcoin is designed to operate outside the legal framework (i.e., alegality), it assumes an adversarial environment and prepares to defend itself against various attack vectors using a variety of ex-ante built-in mechanisms within the Bitcoin network rather than rely on the external legal system for ex-post remedies. To this end, the PoW security and consensus mechanism and various other incentive mechanisms are embedded to align the often varied and divergent interests of network participants and discourage uncooperative behavior that could result in attacks on the network.
Whether a parallel dFMI relying on a settlement asset other than fiat currencies can alleviate the issues of financial exclusion and censorship remains to be seen. In particular, because the reason that the US possesses disproportionate influence over payment infrastructures is not entirely due to the reserve currency status of the USD, which is predominantly used in international FMIs, but also it is because the US has a large and attractive economy the benefits of which are hard to forgo for market participants in the face of a threat of being cut out of the US markets. But it seems that decentralized financial technologies, in particular, their structural architecture, which is built upon decentralized or distributed, consensus-based and censorship-resistant mechanisms without relying on centralized third parties can help shield such infrastructures from undue political influence. Despite its current shortcomings in terms of price volatility and fungibility issues, Bitcoin remains to be a giant leap for mankind that offers a universal, permissionless, trust-minimized and censorship-resistant store of value and value transfer network.
