DekaBank’s SWIAT Proposes Trigger Payments for Tokenized Securities Settlement – Ledger Insights

Germany’s SWIAT, the DLT tokenization network founded by DekaBank, is proposing a trigger payment solution, Cycros, to use central bank money to settle digital asset transactions. One of the benefits of distributed ledger technology (DLT) is the reduction in risk by enabling the simultaneous transfer of money and tokenized securities in delivery-for-payment (DvP) transactions. Ideally, this would be done with the central bank’s digital currency (CBDC).

However, a CBDC digital euro is unlikely to come online anytime soon, so a trigger payment solution provides an alternative in the meantime. Especially as March 2023 sees the launch of the Eurozone DLT Pilot Regime, which supports blockchain-based securities trading and settlement infrastructures.

Banque de France has already shown a willingness to get involved in projects using its pilot wholesale CBDC. However, it remains to be seen at what scale this will be available, given the Pilot regime should be many tens of billions or even hundreds of billions in volume.

As for trigger payments, Deutsche Bundesbank tested a similar solution with Deutsche Börse last year. SWIAT is now planning a proof of concept for Cycros with a prototype aimed at buying and selling securities as well as repurchase agreements.

“The most interesting, innovative and effective aspect of this proposal is leveraging the existing cash infrastructure to quickly bring delivery vs. payment with central bank money to DLT,” said Dr. Timo Reinschmidt, European Head of Banks and Broker-Dealers, Standard Chartered. “Intraday risk is reduced by simultaneous delivery of digital securities against the exchange of central bank money.”

But when we spoke to DZ Bank’s Holger Meffert a few months ago, he saw a trigger solution as a short-term option. “This would be a solution that would be a temporary solution. Because to really do it the right way would need to have a coin on the ledger that is able to sit on the ledger,” Moffert said.

How the trigger payment works

Under the Cycros solution, the trigger initiates a central bank money payment in the upcoming Target2 RTGS (real time gross settlement) upgrade using ISO 20022 messages and SWIFT public key infrastructure.

It involves a deposit-like behavior. Once a security transaction is agreed upon, the smart contract associated with the digital security token will lock the security until payment is made. The digital security is transferred to the buyer when the payment is final and communicated to the smart contract.

Meanwhile, DekaBank launched the SWIAT network in 2021. It uses a corporate version of the Ethereum blockchain. To date, it has implemented securities lending, German-compliant bearer bonds and tokenization of existing traditional assets.