In the Fall of last year, consultancy group BCG predicted that asset tokenization would become a multi-trillion-dollar industry, an idea that has been echoed by financial giants since. Despite the sector still being in its infancy, 97% of institutional investors believe that tokenization will revolutionize asset management.
“That’s a shockingly high number, which I think reflects the optimism and wide applicability of this technology,” said Mike Castiglione, Industry Analyst. “But we still need to experiment on solving practical problems.”
Being so nascent, the industry has swathes of potential challenges that could prevent the technology from being integrated into the traditional banking framework. One of these is the lack of standardization.
Tokenized assets are primarily managed on different blockchains, each with its own functionality and liquidity profile. For transactions to happen between banking entities, interoperability between these blockchains is considered crucial to prevent increased costs and operational challenges involved in creating individual connections.
On August 31 2023, global banking infrastructure Swift released the results of a new set of experiments that tested the use of their infrastructure to create interoperability between different blockchains. Their experiments involved “more than a dozen” financial institutions, market infrastructures, and Web3 platform Chainlink.
“Interoperability is at the heart of everything we are doing at Swift to facilitate the seamless flow of value across the world in the face of increasing fragmentation,” said Tom Zschach, Chief Innovation Officer at Swift. “For tokenization to reach its potential, institutions will need to be able to connect with the whole financial ecosystem seamlessly.”
The results showed that interoperability between blockchains was possible, taking steps to answer questions around standardization within the global banking network.
“It’s now clear that both top global banks and leading market infrastructures believe there will be greater adoption of digital assets across the entire banking industry and that this adoption will happen using multiple different blockchain technologies at the same time,” said Sergey Nazarov, Co-Founder at Chainlink. “The collaboration between Swift, over ten of the largest financial institutions, and Chainlink proved that interoperability across chains is critical to enabling the next stage of digital asset adoption across the global financial system. When combining Swift and CCIP, we were able to show that this new level of interoperability across various blockchains is now possible with minimal resources from even the largest banks and market infrastructures.”
For many watching the adoption of tokenization by financial institutions, the engagement of an established body for global banking like Swift signals evidence of practical steps being undertaken, giving weight to tokenization’s hype.
“Very serious organizations were taking part, coming together with a really important part of the financial system, SWIFT,” said Castiglione. “There are parallels between what the blockchain community says blockchain can do to upgrade banking infrastructure compared to what SWIFT did in the 70s and 80s.”
“To me, it shows the continued attention on blockchain as an infrastructure to upgrade financial transfers and settlements. It shows that there’s a consensus view that improving financial transfers is a problem still to be solved, and blockchain might be one way to do that.”
Changes In Swift Governance May Be Necessary To Become The International Standard For Blockchain Use In FIs
However, the experiments are but a step. In order for blockchain to meet its fullest potential within established infrastructure such as Swift, other levels of innovation may be needed.
“To determine whether this is a true interest in adopting blockchain as one way to solve infrastructure problems, I’d really look at the oversight and governance of Swift,” said Castiglione.
“Governance innovation has to match the tech innovation,” he continued. “Right now, the oversight of SWIFT is among the G10 Central banks.”
Swift is established in Belgium and states that it maintains neutrality in governance, with shareholding allocation based on each nation’s use of the Swift messaging service. Depending on a nation’s shareholder ranking, it may propose one or two Directors to the Board or join other nations to propose a Director collectively. The board is made up of 25 directors that, for the most part, pertain to Europe and other G10 nations. Only one has connections to Africa, none to South America, and, in Asia, one director each from Hong Kong, Singapore, China, and Japan.
Despite not being a bank itself, Swift has been subject to oversight for risk management information security and reliability, among other factors, since 1998, “reflecting its connection to systematically important banks worldwide.” Oversight is from the Central Bank of Belgium, supported by the G10 central banks, and in 2012, the framework was reviewed to include a wider number of central banks in its governance structure.
Despite India and Brazil’s economies being in the top 10 of global GDP, according to the IMF, with accelerated growth, India’s Central Bank has access to the oversight of SWIFT but no appointed director and Brazil currently has neither.
“The promise of blockchain is that it’s open and usable across geographies, independent of current institutions,” said Castiglione. “It’s important to ensure that if SWIFT is going to be the international standard for blockchain in financial institutions going forward, countries are fully represented or represented to match their actual economic weight.”
“Across many international organizations, you’re seeing that the ultimate power distribution or the economic importance of a particular country doesn’t reflect the representation they have on these established bodies…at a certain point if other countries feel that they don’t have a seat at the table. It just increases the incentive for them to look for alternatives.”
