Is payments giant SWIFT preparing for a blockchain-bound future?

SWIFT is a payment colossus. It operates in more than 200 countries, has more than 11,000 financial institution customers and sends around 8.4 billion financial messages each year. It is a world leader in cross-border bank-to-bank payments and recently played a key role in the West’s economic sanctions against Russia.

However, that doesn’t mean the Belgium-based cooperative is immune to disruptive tremors. Critics have long argued that the interbank messaging system, founded in the 1970s, is “old, inflexible, slow and increasingly vulnerable to cyber attacks.” In May, Mastercard CEO Michael Miebach cast doubt on SWIFT’s ability to survive the next five years. Meanwhile, it continues to be threatened by a growing wave of blockchain-based payment networks on the one hand and an expected influx of central bank digital currencies (CBDCs) on the other.

But last week, in a sign that even established legacy financial networks can (possibly) change their stripes, SWIFT confirmed a proof-of-concept project with blockchain oracle provider Chainlink. If all goes well, SWIFT’s bank users can easily access and transfer digital assets on multiple blockchain platforms. Days earlier, SWIFT also announced that it is using fintech firm Symbiont’s enterprise blockchain platform to improve messaging for corporate events such as dividend payments and mergers.

This development raises an intriguing question: Rather than engaging in a zero-sum fight to the death, traditional financial (TradFi) and decentralized financial (DeFi) firms are actually converging—that is, moving toward a common middle ground that includes tokenized assets, DeFi , interoperability and, yes, regulation?

Collaborating on an existential threat?

“All financial commodities will move across blockchain networks in the future,” Matthew Hougan, chief investment officer at Bitwise Asset Management, told Cointelegraph. “It is not surprising to see legacy firms wanting to adopt and/or collaborate on a technology that represents a fundamental threat to their existence; indeed, it should be applauded.”

Of course, this is just a pilot program. Hougan added, “It’s not like SWIFT has blockchain religion overnight and converts all their activities to DLT.” But, it is a start, and for that the network should be applauded, he suggested.

In this rapidly evolving technological world, “there is no room for binary views that embrace an ‘I win, you lose’ mentality,” especially within the capital markets and financial sector, Mark Smith, CEO and co-founder of Symbiont, told Cointelegraph, and add:

“Ultimately, what ends up being the norm is usually a hybrid, and we’re definitely seeing a fusion that will borrow from the best TradFi and DeFi have to offer.”

Jonathan Solé, director of strategy at SWIFT, speaking at last week’s Smartcon 2022 conference in New York, acknowledged an “undeniable interest” on the part of institutional investors in digital assets “whether these are stablecoins, CBDCs or anything that you can tokenize on the capital” marketplace » including shares and bonds.

Banks and other TradFi institutions are looking to SWIFT to “bridge the gap” between their infrastructure services, such as exchanges, custodians and clearinghouses, “and all these new blockchains that are going to provide these services” for tokenized assets, he added at a panel titled “Bridging Traditional Finance and DeFi.”

The session was moderated by Chainlink CEO Sergey Nazarov, who noted that SWIFT had the TradFi world’s “largest private key infrastructure”, adding:

“There’s no need to get rid of the private key infrastructure that already securely signs transactions to move around trillions of dollars in value. All of these standards could simply have an addition to them that says: blockchain stuff.”

But, SWIFT “doesn’t necessarily want to build an integration with every single chain on the planet,” Nazarov added, which is why it was exploring Chainlink’s Cross-Chain Interoperability Protocol (CCIP) as a way for it “to become interoperable across all blockchain environments.”

Stephen Prosperi, head of product management and digital securities management at DTCC, which provides clearing and settlement services for US securities markets – another TradFi heavyweight – supported this point. Different digital currencies “will live across different chains,” and firms like DTCC don’t want to build separate infrastructure to connect to each of the 100 blockchains that host desirable digital assets. A central entry point such as CCIP can therefore be useful.

Are cross-chain bridges safe?

However, the Smartcon panelists did not address any of the challenges associated with cross chain bridges, including safety concerns. “Yes, there are security risks with cross-chain projects,” Hougan commented, “that’s why you need pilot projects like this.”

Cross-chain bridges are designed to solve the problem of interoperability between blockchain platforms. Blockchain networks today — Bitcoin, Ethereum, Solana, and others — are like the railroad systems of the 1800s before gauge sizes were standardized. Passengers and freight had to be offloaded to another train when incompatible rail lines met.

Cross-blockchain bridges are designed to solve this kind of incompatibilities, but the problem is that they seem to be vulnerable to hacks. About $2 billion has been stolen from bridges in 13 separate robberies, according to Chainalysis, the most this year. Ethereum founder Vitalik Buterin, also red-flagged cross-chain bridges recently, suggested that they can enable 51% network attacks.

A key problem appears to be that the “bridges” tend to accumulate large amounts of “locked assets” from different blockchains, some quite obscure and not always built with advanced security features, according to Elliptic’s Cross-Chain Report 2022 released on October 4 , who noted:

“This has made bridges an attractive target for cybercriminals. […] From January to July 2022, $1.2 billion worth of crypto assets were stolen across eight bridge compromise incidents.”

Chainlink presumably believes it will do a better job of security than cross-chain bridges have done in the past. Nazarov said the same in interviews after Smartcom. “That is what CCIP seeks to solve. And I don’t think it’s an unsolvable problem. I think it’s a solvable problem,” he told Fortune.

Are traditional institutions ready for tokenization?

Aside from the need for interoperability, are there other commonalities that bring TradFi and blockchain providers closer together? Are capital markets ready for tokenization, for example, Nazarov asked the panelists.

“Well, it’s definitely here. It’s not going to go away,” Solé replied. “We have adopted all our messaging standards so that we can ensure that we can safeguard the information necessary for tokenized assets.”

“We’re actually looking at tokenizing all different types of assets internally,” Victor O’Laughlen, managing director and head of enterprise tokenization at Bank of New York Mellon (BNY), told the panel. BNY’s broker-dealer and investment manager clients “don’t want to segregate and manage their assets in different pools. They want to have one client experience.” Another attraction of blockchain-enabled tokenized assets is that they are available 24/7, O’Laughlen added:

“It’s the infrastructure that always stays up, right? The crypto markets have really pushed the financial markets to think about that. And we need to be able to support our customers in any time zone, anywhere.”

Beyond interoperability and tokenization, there was some interest among TradFi representatives in actual DeFi projects – but with caveats. “If financial services want to go into DeFi mode, it has to be some kind of regulated DeFi,” Solé said, although some might see that as a contradiction.

Prosperi reiterated the need for some sort of “permission DeFi,” one that had compliance baked into it. they deal with.”

BNY Mellon’s O’Laughlen saw some upsides to DeFi protocols. “DeFi can benefit intraday liquidity, where liquidity is needed to kind of grease the wheels.” Institutions may begin by lending or borrowing assets or cash, such as “some of the more vanilla types of [DeFi] transactions that take place between counterparties and financial institutions will be a good first step.”

A boost for crypto adoption

Finally, what, if anything, does all this have to do with crypto/blockchain adoption? Ecumenical panel discussions like the one at Smartcon are encouraging, but will partnerships like SWIFT-Chainlink really “accelerate the adoption of DLT blockchains and benefit various institutions across capital markets,” as Nazarov suggested?

“It’s positive news,” Hougan told Cointelegraph. “Every time an incumbent realizes that it needs to think about the implications of blockchain technology, it makes it easier for the next one to do so. This is another brick in the wall.”

“Chainlink has a strong competitive position in providing oracles and trustless data sources, and it is growing by integrating these tools into multiple capital markets and payment networks,” Lex Sokolin, chief economist at ConsenSys, told Cointelegraph. “The purposes of blockchains are different and varied. In general, I think more integration means more paths to adoption.”

Smith, for his part, sees a “real maturation” of blockchain technology across financial services, seeing it as the “connective tissue” that will make both TradFi and DeFi successful. Blockchain technology was originally created to provide a better banking payment system, and 13 years later, “it continues to be more widely accepted and adopted among banks, asset managers and global markets,” Smith said.