Institutional investors are increasingly considering investments in tokenized assets as they seek new forms of value — but they face a complex challenge. These investments are tracked on a diverse range of blockchain networks that are not interoperable – each has its own functionality or liquidity profile, which creates significant overhead and friction in managing and trading the assets.
In a new set of experiments, Swift will collaborate with more than a dozen major financial institutions and financial market infrastructures (FMIs) including Australia and New Zealand Banking Group Limited (ANZ), BNP Paribas, BNY Mellon, Citi, Clearstream, Euroclear, Lloyds Banking Group, SIX Digital Exchange (SDX) and The Depository Trust & Clearing Corporation (DTCC) – to test how firms can leverage their existing Swift infrastructure to efficiently instruct the transfer of tokenized value over a range of public and private blockchain networks.
This latest round of experimentation builds on a series of successful trials in 2022, and also will explore how the industry could address potential operational and regulatory pitfalls facing financial institutions when operating in blockchain environment.
“In such a highly fragmented ecosystem, it would simply not be feasible for financial institutions to connect to each and every platform individually. That’s why the community is working with Swift to develop an interoperability model that would enable access to different platforms globally,” said Tom Zschach, chief innovation officer at Swift, in a statement.
“There’s unlikely to be a single prevailing blockchain network. We would expect to see a multitude of different platforms emerging, each serving different customer segments with their own bespoke capabilities and requirements. In such a highly fragmented ecosystem, it would simply not be feasible for financial institutions to connect to each and every platform individually. That’s why the community is working with Swift to develop an interoperability model that would enable access to different platforms globally.”
“More institutions are beginning to explore how to serve customers on both permissioned and public blockchain networks like Ethereum,” said Jonathan Ehrenfeld, head of Securities Strategy at Swift, in a statement. “This is raising questions around the key use cases and what would be required to support these activities in a secure and compliant manner.”
Use cases
The first use case will involve the transfer of tokenized assets between two wallets on the same public blockchain network (Ethereum Sepolia testnet). The second involves the transfer of tokenized assets from a public blockchain (Ethereum) to a permissioned blockchain. And a third use case will test the transfer of tokenized assets from Ethereum to another public blockchain.
Chainlink, a Web3 services platform, will provide connectivity across public and private blockchains for these experiments. Chainlink will be used as an enterprise abstraction layer to securely connect the Swift network to the Ethereum Sepolia network, while Chainlink’s Cross-Chain Interoperability Protocol (CCIP) will enable complete interoperability between the source and destination blockchains.
“It’s clear that as banks endeavor to access multiple blockchains, a common connectivity layer across the various chains will be a critical building block for their adoption of on-chain finance,” said Sergey Nazarov, co-founder of Chainlink, in a statement.
Swift will also explore a set of non-technological considerations that are necessary for regulated institutions to interact with public blockchain networks and engage in cross-network transactions. This encompasses a range of operational, compliance, and regulatory challenges, including key focus areas like confidentiality and privacy of data, or liability and recourse when transacting with public blockchain environments.