Working with Clearstream, Northern Trust, SETL and others, SWIFT plans experiments in Q1 2022 in order to “explore how it can support interoperability in the development of the tokenized asset market.”
Relative to digital currencies and stablecoins, the current market cap of tokenized assets is small, however, the momentum for these digital assets is set to “accelerate rapidly in the coming years,” according to SWIFT’s announcement.
By certain estimates, volumes could “reach some 24 trillion USD by 2027.”
Tokenization may be applied to stocks and bonds, but also “to illiquid assets, including commodities, property or even art,” the update noted.
For instance, a share or bond “with a high value per unit (say over $500) can be divided into digital pieces that each have ownership and value.”
This increases the liquidity of the overall asset, and accessibility, “by enabling a wider demographic of people to invest in assets that may historically have been unavailable to them,” the announcement explained.
As noted in the announcement:
“Banks and securities firms are responding to tokenisation by developing services − including fractionalization, a process whereby assets are broken into smaller value digital tokens − amongst other digital asset servicing capabilities, such as private key safekeeping. Financial market infrastructures also are embracing tokenization by supporting the full lifecycle of digital securities.”
As interest surged, SWIFT is exploring how it can “enable and improve interoperability between participants and systems during the transactional lifecycle of tokenized assets.”
To this end, SWIFT plans “a series of experiments in Q1 2022 leveraging its trusted role as a central platform to explore the issuance, delivery versus payment (DVP), and redemption processes, to support a frictionless and seamless tokenized asset market,” the announcement noted.
These experiments will use both established forms of payment and central bank digital currencies (CBDCs).
Asset tokenisation − a trend and challenge for securities markets
Over the coming decade, tokenized and traditional assets will “likely co-exist, and this poses potential challenges.”
One major risk is that “a variety of technologies, platforms and regulatory environments will create a thicket of connections for securities market participants.”
This could “result in inefficiencies and fragmentation, as well as rising costs and risks across the industry,” the update explained.
SWIFT is well-placed to assist with addressing this challenge. As a neutral, international cooperative with a sharp focus on ensuring interoperability and setting standards for the industry, they are able to “interconnect market participants and simplify operations by completing activities centrally that otherwise would be performed bilaterally between institutions.”
This role “relies on SWIFT’s strong identity and security frameworks, alongside our unparalleled reach and record of reliability,” the announcement explained.
Accordingly, the team is ‘looking at how we can support both traditional and tokenised assets flows, with a focus on regulated assets only.’
The update clarified that they would “not become a crypto-custodian nor perform direct settlement of tokenized assets as a financial market infrastructure would.” Instead, they see their role as helping to “connect all entities as efficiently as possible and enabling our customers to provide better services to their end-users.”
SWIFT, Clearstream, Northern Trust, SETL and other industry participants are “exploring the feasibility and benefits of SWIFT as an interconnector, linking up multiple tokenisation platforms and various cash-leg payment types,” according to an update from SWIFT.
This will build on SWIFT’s successes “in achieving interoperability for CBDCs outlined in our whitepaper published earlier this year,” the announcement added.
In the experiments planned for Q1 2022, Clearstream and Northern Trust, alongside other industry players, will “represent key parts of the tokenized − and traditional − asset ecosystem, including securities market infrastructures, local custodians and global custodians.”
The announcement further revealed that SETL and Northern Trust will support SWIFT and the participants “in the integration between the various DLT environments and with transaction orchestrations using their respective capabilities.” Results of the experiments will be “shared with the financial community afterwards,” the update confirmed.
Thomas Zschach, CIO at SWIFT, stated:
“As a neutral cooperative with a reach across 11,000 institutions in more than 200 countries, and oversight by central banks globally, SWIFT is uniquely placed to engage closely in the future of securities.”
Vikesh Patel, Head of Securities Strategy, SWIFT, said:
“Our vision for instant and frictionless transactions not only applies to traditional securities instruments but also to new asset classes as well. The insights from this exercise with leading capital markets participants will help us define and prioritise the concrete steps required to enable seamless processes for tokenised assets.”
Anthony Culligan, Chief Engineer at SETL, remarked:
“We are very pleased to be contributing to this important initiative. We see significant innovation in securities tokenisation at the moment and these experiments have the potential to create broader accessibility and interoperability between the emerging networks.”