How to Rob a Bank with a Laptop

So much for the caper film…. In 2001’s “Ocean’s Eleven” the all-star crew of thieves employ explosives, acrobatics, a remote-controlled van, balloons and hacking to pull off their multimillion-dollar casino heist.  But with all the advances in security, technology and encryption in the past fifteen years, these days all you need is the un-Clooney-esque hacker to pull off a similar theft at your local, national – or central bank.

In early February of this year the Federal Reserve Bank of New York, one of the twelve U.S. Federal Reserve Banks, was robbed.  The target was a bank account belonging to the government of Bangladesh, and the thieves got away with $81 million. Only a typographical error by the hackers, detected in a follow-up transfer request, stopped them from stealing a further $850 million.

As bad as the hack was, the response by both the Fed and Bangladesh central bank has turned into an exercise in finger pointing, with each holding the other responsible.  While the thieves initially gained access to the information needed to transfer the money by hacking into the Bangladesh bank, apparently the Federal Reserve Bank failed to follow proper procedures in processing the transfers.  Also unclear is how much of that $81 million Bangladesh will ever see again.  It’s a story that should give anyone with money in the bank a little bit of an uneasy feeling.

There was a middleman in this transaction called SWIFT, which is short for the Society for Worldwide Interbank Financial Telecommunication, an interbank messaging system that authorizes transfers between financial systems. Bangladesh may have a legitimate gripe given that SWIFT doesn’t handle actual funds transfers; it transfers payment orders which then must be settled between banks. But somehow the Fed processed the hacker’s payment orders until a misspelled word in one of the many transfer orders derailed the scam.

We Can Find Cuban Cigars But Not Bank Robbers?

The Bangladesh central bank also has a point in that the U.S. has a lot of control over SWIFT, even though its headquarters is in Brussels and it’s supposed to be an international interbank exchange system. Europeans were outraged when they found out the NSA has been routinely spying on SWIFT transactions for some time. This begs the question: if the NSA could stop a $25,000 transfer between Denmark and Germany to pay for a shipment of Cuban cigars, why couldn’t they stop a billion dollar heist? That question is even more germane considering that the funds that were transferred to a string of casinos in the Philippines. It seems unlikely that central banks would routinely be sending hundreds of millions of dollars to gambling establishments around the world. How that didn’t raise a red flag with either banking officials or the NSA is another big mystery. What’s certain is this latest incident will deepen tensions between the United States, the European Union and the rest of the world when it comes to U.S. influence over SWIFT.

The Abstraction That is Now Money

This incident points out how fragile the concept of money is in the modern world. In the beginning man traded items of value, called barter. When this became inconvenient we created shortcuts, tokens that could be easily carried and exchanged for the items needed. Those tokens evolved into an early form of money, essentially tokens made of a precious commodity, like gold or silver, that we called coins. It wasn’t long before gold and silver, which are heavy to carry around, were being represented by pieces of paper that could be redeemed for actual gold and silver. That was the basis for currency up until the 1970s, when we finally severed any tie between the paper and the actual precious metal. Now the paper’s been replaced by digital blips in an online bank account.

It’s a process is called “abstraction” and it means what we call money today has been abstracted to the point where it’s just numbers in a computer. A few more clicks on a computer somewhere in the Fed and Bangladesh can have its money returned. But what if some outside entity could stop the Fed from returning the blips?  What happens if they erase all our blips on the day you total your car, or need to make a house payment?

If we could talk to people who were alive a hundred years ago and tell them money today is just numbers in a machine they would think we were crazy, perhaps rightly. That’s why it’s important that investors today keep a percentage of their wealth in something solid that will maintain enduring value, regardless of what’s passing as currency at the moment. The only value those computer numbers have is when you exchange them for something with solid, tangible value. With this incident, the Fed has demonstrated clearly that they can’t be trusted with our computer blips, so we’d better have something of real value ready to protect ourselves.