Swift explores blockchain interoperability to eliminate friction in tokenized asset settlement
Swift investigates blockchain interoperability for seamless tokenized asset settlement
Author: Swift; Compilation: Song Xue, Blocking
Increasingly, institutional investors are considering investing in tokenized assets as they seek new forms of value – but they face complex challenges. These investments are tracked on a variety of non-interoperable blockchain networks – each with its own functionality or liquidity, which creates significant expenses and friction in managing and trading assets.
Overcoming this problem will be key to achieving long-term scalability in the market, and we are focused on eliminating international transaction friction, working with the community to explore potential solutions. In a series of new experiments, we will work with more than a dozen major financial institutions and the IMF, including ANZ, BNP Paribas, Mellon Bank, Citibank, Clearstream, Euroclear, Lloyd’s Banking Group, SIX Digital Exchange (SDX) and The Depository Trust & Clearing Corporation (DTCC) – to test how companies can use their existing Swift infrastructure to effectively indicate the transfer of tokenized value across a range of public and private blockchain networks.
The latest round of testing builds on a series of successful experiments in 2022 and will also explore how the industry can address potential operational and regulatory pitfalls that financial institutions face when operating in a blockchain environment.
The challenges of blockchain technology faced by investors and intermediaries
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In the capital markets, more and more people believe that blockchain technology has the potential to increase efficiency, reduce costs, and open up opportunities in certain areas of the industry. For example, the private market has always relied on legacy systems and processes, which increase costs and hinder investment. By rationalizing operations and settlement processes, blockchain can attract more investors to the private market and ultimately increase liquidity.
However, trading tokenized assets is still a niche activity in regulated areas. In order to expand the market size, financial institutions need to be able to interact easily and securely with multiple blockchain-based networks, just as they do today in facilitating traditional asset transactions.
Tom Zschach, Chief Innovation Officer at Swift, said: “It is unlikely that there will be a single mainstream blockchain network.” “We want to see a lot of different platforms emerge, each serving different customer groups with their own customized features and requirements. In such a highly dispersed ecosystem, financial institutions cannot connect to each platform individually. That’s why the community is working with Swift to develop an interoperability model that can access different platforms globally.”
Driving Change with Existing Infrastructure
If token transactions become more common, ensuring interoperability between financial institutions’ back-end and middleware systems and an increasing number of blockchain networks will be essential.
Financial institutions do not want to build new infrastructure and technology stacks from scratch, but rather want to use their existing infrastructure to connect to the blockchain distributed ledger in a compliant and secure manner. This can help companies simplify their architecture and operations, while minimizing investment costs and reducing the risk of technological obsolescence.
Meeting the Challenge: How Swift is Achieving Blockchain Interoperability
As a global cooperative dedicated to enabling instant, frictionless, and interoperable transactions, Swift has a unique advantage in helping the financial industry overcome this challenge.
In 2022, we demonstrated how we could use our existing infrastructure as a single access point to access multiple tokenized platforms operated by financial institutions running on private blockchains. The community has expressed broad interest in continuing our experiments and extending interoperability between platforms to use public blockchains as a underlying settlement layer.
“More and more institutions are beginning to explore how to serve their customers on public blockchain networks like Ethereum,” said Jonathan Ehrenfeld, Head of Securities Strategy at Swift. “This raises questions about how to support these activities securely and compliantly around key use cases.”
Ehrenfeld added: “Our experiments will help raise industry understanding of the technology and business requirements involved in interacting with multiple blockchain networks and in transacting across them securely using blockchain interoperability protocols to move data and value between legacy systems and potentially an infinite number of blockchains.”
About the Experiment
Our next set of industry experiments aims to demonstrate how Swift’s infrastructure can be used to promote interoperability, enabling tokenized value to flow between existing systems and public and private distributed ledger technology platforms that have existing connections, standards, and messaging protocols.
The first use case will involve transferring tokenized assets between two wallets on the same public blockchain network (Ethereum Sepolia testnet). The second will involve transferring tokenized assets from a public blockchain (Ethereum) to a permissioned blockchain. The third use case will test transferring tokenized assets from Ethereum to another public blockchain. Chainlink will be used as the enterprise abstraction layer to securely connect the Swift network to the Ethereum Sepolia network, while Chainlink’s Cross-Chain Interoperability Protocol (CCIP) will enable full interoperability between source and target blockchains.
“We are excited to work with Swift. Clearly, as banks strive to access multiple blockchains, various cross-chain generic connectivity layers will become a critical component of their adoption of on-chain finance,” said Chainlink co-founder Sergey Nazarov.
We will also explore a set of non-technical considerations that are necessary to interact with regulatory bodies and public blockchain networks and participate in cross-network exchanges. This includes a range of operational, compliance, and regulatory challenges, including critical areas of focus such as data confidentiality and privacy, or responsibility and recourse when transacting in a public blockchain environment.
Our research results will be published later this year.