SWIFT calls for harmony

This report by the Economist Impact and commissioned by SWIFT makes the case that we are currently in a world of financial fragmentation. And, the future of fragmentation is bleak - “there are no winners”. They define financial fragmentation as “a reduction in international financial integration and the disruption of cross-border payments, credit and investment that ultimately reduces cross-border capital flows”. And the cost of this disarray is, in a worse case scenario; “global GDP roughly 6% lower and nearly 280 million fewer jobs.”

Reducing fragmentation, according to SWIFT, requires harmonious regulation, standards, and international cooperation. That would help to reduce risks for investors and strengthen the financial system’s integrity. It would help drive continued market and regulatory innovation to leverage the digital tech revolution. A focus on establishing common standards and enhancing interoperability across financial systems will be essential to ensure these solutions work seamlessly and securely across borders.

While significant efforts continue in the traditional finance world to standardize processes and foster regulatory harmony, a revolutionary decentralized finance (DeFi) ecosystem is simultaneously emerging to tackle the same challenges. Although both spheres are likely to share ideas and gradually converge on best practices, I suspect that a complete merger of the two systems is still many years away. For the foreseeable future, market participants will likely need to navigate both realms, each offering its unique opportunities and challenges.