Hacker News Reader

Comment by belorn | Hacker News Reader

I would be interesting to hear an further explanation in how this distinction is important.

Money in banks is in the end just information stored in ledges about who owns who money. If a transaction occur within a bank it just numbers of one account getting an relative change to an other account. If an transaction occur between banks, the banks has a relation and the bank own ledger get changed, in addition to the individual accounts. With a clearing house you add a middle man that takes up part of the risk if either bank would fail in their obligation to honor the ledger. The actually movement of physical funds and valuables is quite rare and don't general occur from single transactions.

If you can't transfer the information then the system of transferring information stored in ledges stop working. One can go out-of-band, but that assumes the other party is also willing to do so, and that there is no law/agreement against by-passing sanctions.

View on HN

The distinction is which messages we are talking about. When I (a US bank) send a message to the US Federal Reserve to please transfer $1,000,000 to another US bank, and the US Federal Reserve updates their records accordingly, that is an actual transfer of money.

When I send a message to the other US bank saying "Hey, I sent you $1,000,000. Of that, $10,000 is for John Doe, $10,000 for Jane Smith, $5,000 for Alice, $5,000 for Bob, ......" that's SWIFT.

To my understanding, the common method is that bank A and Bank B is both customers at the clearinghouse, in your case the US Federal Reserve. Bank A has an account, and Bank B has an account, generally a deposit serving as security.

A "bank day" is basically the sum at the end of the day that bank A own to bank B. No physical money get transferred unless the US Federal Reserve requires it, which if both banks has fairly similar outgoing debt to each other the accounts won't change by much. the US Federal Reserve don't see the "$10,000 is for John Doe, $10,000 for Jane Smith", only the sum of all transaction going from A to B or B to A.

Bank A tells bank B that "I told the US Federal Reserve to update your account by +$1,000,000 and reduce my own account by same amount, and you can verify this by talking to the US Federal Reserve and checking your account. The items that those +$1,000,000 represent are listed here. John Doe get $10,000, Alice get $5,000, ...". This occur through the SWIFT protocol. Bank B then do the same by first telling US Federal Reserve and then giving bank A the list of the individual items.

The US Federal Reserve don't really transfers money. They simple managed the ledgers for banks relation with other banks. What occurs is simply a ledger being updated about how much bank A is in dept to bank B, and wise verse. The federal bank will step in if a bank defaults, or I guess if the differences between A and B becomes too great to manage.

The US Federal Reserve's ledger *is the money*, in exactly the same way that the Bitcoin blockchain is the money.

Thanks, this comment has explained to me what SWIFT is more than anything else I've read so far :)

So how does it work when there are multiple of these systems (CIPS). Is double spending possible?

Of course double spending is possible -- the entire world economy currently relies on it.

Essentially trust. If your bank does not have relations with a foreign bank in a faraway country, both can use an intermediary bank that both trust and do have relations with.

> how this distinction is important

It's not. At least not in the short term.

Reply on news.ycombinator.com