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(Kitco News) – The Society for Worldwide Interbank Financial Telecommunications (Swift) recently released the results of experiments it conducted with Chainlink (LINK), a leading Web3 service platform, which demonstrated that Swift infrastructure is capable of facilitating the transfer of tokenized value across multiple public and private blockchain networks.
Interoperability between blockchain networks has become a central theme in the ongoing development of distributed ledger technology as the list of digital assets continues to grow, while the majority of central banks around the world are also exploring the creation of central bank digital currencies (CBDCs) that will be able to transact on blockchain payment rails.
To gain deeper insight into what the Swift-Chainlink collaboration means for the border cryptocurrency ecosystem, Kitco Crypto spoke with Alexandre Kech, head of digital securities at SIX Digital Exchange (SDX), one of the firms that participated in the experiments.
The first thing Kech noted was that the results released by Swift were merely the experimental phase, and no products have been created yet. “The objective of the experimentation was to see how the financial industry could start operating on blockchains and grow using their existing infrastructure,” he said.
“So they’re all securely connected to Swift, and they used this secure access to the Swift network, along with a bridge built by Chainlink, to move an asset from a private blockchain to a public chain, a public chain to another chain, and so on,” he said. “If you imagine a world where everything is tokenized on blockchains, we end up with a global infrastructure where any digital asset can be exchanged and traded with another digital asset, similar to what happens on Ethereum.”
“This means major changes in terms of how financial institutions operate technologically, but also in their operations, and that’s not going to happen overnight,” he said. “So there will be the need for transitional and interoperable solutions to provide a way for old tech to connect with new tech in as smooth a way as possible. That was really the objective of this experimentation from my point of view.”
Benefits to users
From the perspective of SDX, which offers services on both public and private blockchains, these new developments are highly relevant to their customers because it will potentially impact “how they can access our services and the blockchains that we have,” Kech said.
“I think it will help the registered users of our exchange and settlement platform, which currently operates on a private blockchain, as well as our Web3 services, which operate on public blockchains like Ethereum, to conduct transactions across blockchains without them needing to manage a node directly from day one,” he said. “It’s more about leveraging existing connections to do what can be done through direct node management in a simplified manner. This allows them to start conducting transactions while they get familiar with blockchain technology.”
Kech said this should help companies work towards integrating blockchain in a confident way as the world moves towards a globally interconnected blockchain ecosystem.
But this solution isn’t the end goal, as it “doesn’t make much sense to have people communicating on blockchains using Swift messages,” he said. “You can’t really leverage the entirety of the potential of blockchain if you do that. Smart contract functionality can’t really be leveraged if you do that, you can really only do transfers of assets. So it’s just a first step.”
Swift’s motivations for the experiment
When asked if Swift could eventually make widespread changes to their system and integrate blockchain technology to keep pace with global developments, Kech – who worked at Swift for 18 years – said that while he is not privy to their current discussions on the topic, it makes sense for them to work towards integrating blockchain as banks and financial institutions increasingly explore the technology.
“SWIFT has the amazing advantage of having a global network of 11,000 financial institutions connected to the SWIFT network,” he said. “I think they will need to expand their services into something that is capable of supporting banks in terms of node management or in terms of direct access to blockchains.”
“The initial activities they are working on is to leverage existing tech to support this progressive migration towards more blockchain-based infrastructures,” he added.
When asked if Swift is making this move now as a way to take part in the growing wave of tokenization, Kech said “They could definitely go in that direction,” and noted that they chose the right partner in Chainlink to make that happen.
“I do believe that every bank and financial market infrastructure (FMI) provider, like SIX Group, for example, see tokenization as the future and therefore need to adapt or disappear,” he said. “It’s as simple as that.”
“Banks understand that, FMIs also, and that’s why SDX exists in the SIX Group context,” he said. “Swift also realizes that tokenization will be part of the future and it will eat a lot of their business if they don’t adapt to this new reality.”
An ecosystem of blockchains
Kech made a point to emphasize “blockchains” in the plural throughout the conversation as he sees the future landscape being comprised of a variety of interconnected private and public blockchain networks.
“It would be ideal if we had one blockchain like we have one internet, and that you could connect anything and offer whatever service in the same way that you do on the internet,” he said. “The difference is that there are so many use cases for blockchain in general, that it’s unlikely that one type of blockchain will support everything.”
“So hopefully we’ll end up with a limited number of blockchains with some privacy setups, or not, depending on the use case, such as a layer two on top of a layer one, or a dedicated private blockchain,” he said. “I honestly don’t know how it’s going to pan out, but it will likely be a mix of different architectures that will hopefully interoperate in the same way that there is interoperability on the internet thanks to HTTP protocols and those types of standards.”
When asked about SDX’s experience in the Swift-Chainlink experiment, Kech said they participated in the “non-functional type of analysis,” which involved evaluating things like what the system means “in terms of control over the asset, in terms of KYC of the participants, and how a platform, as an infrastructure provider, can keep the necessary control and abide by local regulations that are applicable to that type of setup.”
“So it was really more about understanding what we need to do next to enable that type of interoperability service as a product,” he said. This helped provide Chainlink and Swift with a better understanding of what needs to be done next.
“One of the issues identified is related to control,” he said. “Who is in control of the token moving from one chain to the other, especially for securities tokens? This is important from the regulatory point of view, especially in terms of dispute resolution in instances where something goes wrong. Those types of things are non-functional issues that need to be taken into account when you move from a very traditional, robust, centralized infrastructure to something that is more decentralized.”
Next steps for Swift
When asked what comes next in the process, Kech said that it depends on what Swift wants to do, because at this point, “It’s not a product, it’s so far just an experiment.”
“Will it become a product or not? They might share their plans next week at Sibos, which is the big Swift event they organize every year with about 8,000 participants,” he said. Kech noted that he will be participating in a panel on this topic during Sibos.
As for what banks should do in response to the Swift experiment, Kech said, “Beyond contributing to such useful exercises, they would not need to do anything. They can reuse their existing traditional messaging infrastructure to instruct the movement of a token from A to B, be it on the same blockchain or a different blockchain.”
“But is that sufficient?” he asked. “Probably not. “There is a need, especially for digital securities, to look at how corporate actions would be announced in that model. Does a smart contract-triggered announcement end up in a message that goes to the banks? Those types of things are complicated to do even in the traditional messaging world, so it will be even more so if you are in between two worlds.”
Big picture view
As for what this experiment means to the broader blockchain ecosystem, Kech said that SDX has a vision of a global, 24/7 trading and settlement platform that is completely secure on blockchains.
“I think that we will end up there eventually, but you might be surprised with the timeline,” he said. “I don’t think it will happen very quickly, to be honest, especially for financial products.”
“But we will hopefully end up with a global digital-asset-agnostic trading and settlement infrastructure, likely composed of multiple chains that are interoperable,” he said. “All services will not be accessible by everyone, but will likely incorporate the rules that exist today as a way to help protect investors.”
“As a licensed exchange with the proper market infrastructure, SDX will help with bridging assets between blockchains,” he said. “It will be about deploying services like those available on Ethereum, such as Uniswap and Aave, but in a regulated fashion. That way, if something goes wrong, regulators have someone to call to help remedy the situation.”
“We will also work on deploying multi-party, neutral smart contracts that have been properly audited, that are absolutely secure, and that if something goes wrong, there’s a dispute resolution process in place,” Kech added.
“It’s very similar to our core FMI activities today, but with a different infrastructure, we won’t be doing custody as today because everyone will be able to do their own custody or select a preferred custodian,” he said. “They might use us as a custodian, but everything will be in a more decentralized way. Custodians and custody solutions will be able to connect to multiple services leveraging the same source of liquidity.”
Just like what currently exists on Ethereum with the Meta Mask wallet, users are able to connect to protocols like Uniswap and Curve with the same wallet and conduct various transactions on different platforms. “I think that’s the future,” he said.
“Financial instruments will not be what they are today because they will be tokenized and natively issued on blockchain,” Kech said. “We are not waiting for that to happen. SDX has established a bridge with the traditional infrastructure of our parent company, SIX Group, which means that everything that exists traditionally can be tokenized on our infrastructure.”
“The next step will be to bridge our private blockchain-based infrastructure and make the assets it holds available on public blockchain networks in a controlled, compliant way,” he said. “The ultimate goal is to enable the holders of those assets and the issuers of those assets to freely move those assets between different types of setups.”
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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