How do you see the current state of the digital asset ecosystem for financial institutions?
The digital asset ecosystem is constantly evolving and is undergoing rapid development. In the past 12 months, there have been even more promising developments in the space, and lots to cover, so I’ll just highlight a couple of trends we see as important.
The first is around institutional investment. Our working assumption is that the buy-side will continue to have an outsized role in shaping the market in the future as other market actors will look to serve them going forward. We’ve seen various surveys across the past year noting the increasing level of interest that institutional investors have in allocating money to digital assets and securities, for a variety of reasons. You can see from the number of market announcements that more buy-side institutions are beginning to test the tokenisation of funds on-chain.
The second concerns government interests. Global regulators are increasingly expressing a willingness to find ways to support the development of the ecosystem, albeit in a risk-managed way. Clear guidelines are emerging across jurisdictions as well as industry sandboxes like the UK’s Digital Securities Sandbox, the EU DLT Pilot Regime, and initiatives like Project Guardian out of Singapore that are promoting public-private sector collaboration for real use cases.
These two trends together are driving an effort to build capabilities and competencies by institutions across the value chain.
Another aspect I would point out is that, to date, industry efforts have largely been focused on primary issuance, with less overall development and traction of secondary markets.
Finally, there’s also a real demand for solutions that can be moved into production to commercialise and create real value for customers.
What are some of the barriers to adoption and what is holding back further scaling of the market today?
I think in the grand scheme it’s still quite early for the market, and so there are several hurdles that have stood in the way of more meaningful adoption. Probably the most often cited point is around clear legislation and regulation, which is well covered, and moving in the right direction now.
In addition, the overall maturity of infrastructure is still relatively young. Many larger financial institutions have launched their own tokenisation platforms, but those use a range of different technologies and protocols, and they tend to focus on specific asset classes.
This infrastructure piece also pertains to connecting the cash leg, whether we’re talking about on-chain formats, like CBDCs and tokenised deposits, or more traditional fiat rails. In any case, the risk here is that a range of siloed systems, or ‘digital islands’ form, resulting in a negative impact on market fragmentation and liquidity.
There also needs to be further development around common standards and market practices. This would cover both enhancing existing data standards, for example, ISO 15022 and ISO 20022, but also newer areas like smart contract and token standards which today experience a high degree of diversity and can lead to operational challenges and compatibility issues when processing digital asset transactions.
The final point is to underline the need for players to ensure they develop very clear business cases to justify continued investment, given the fairly early stages of the market. Of course, there are clear exceptions to this, and we’ll gradually see more niche use cases mature into commercial solutions. This does create a little bit of a chicken and egg problem because markets and actors need a mature and interoperable infrastructure for real business value to materialise.
Swift has long played an important role in connecting financial institutions to traditional markets. Can that role extend to the digital asset ecosystem and help address some of these barriers to adoption?
Swift’s role for the past several decades has been to provide a global network and standardised communication between different platforms and actors across markets. Therefore, carrying forward this role to support and reach these emerging digital asset platforms or ledgers is a natural extension of the role Swift plays today.
On a technical level, we’ve proven that we can interlink different types of blockchain platforms and networks, whether that’s emerging CBDC, digital asset, or trade networks, across a range of technologies including both permissioned and permissionless DLT platforms.
Our commitment to interoperability will also go a long way to ensuring that the risk of fragmentation, creating so-called ‘digital islands’ is mitigated. Over the past several years, our own experimentations, along with the community, have been to demonstrate our vision of facilitating interoperability between digital systems and traditional systems.
Beyond the technical elements, we’ve also worked with the community to introduce updates to existing standards that can support digital asset transactions. For example, by incorporating digital token identifiers, blockchain wallet addresses, or DLT-based places of settlement. This reflects Swift’s role as a mobiliser of industry efforts in reaching harmonisation of common standards, such as ISO 20022. We believe this will pave the way for a unified, interoperable payments ecosystem, and set the stage for further innovations.
Ultimately, we believe our community should have the opportunity to reuse its existing investment and infrastructure, as they use to connect to Swift today. We want to create a single window that can support both digital and traditional asset flows going forward.
What does the future hold for Swift in this space?
Sibos 2024 is around the corner, and Swift is focused on building on the work we’ve done with the community over the past couple of years. Reflecting the industry’s sentiment and feedback from our customers to move beyond proof of concepts (PoCs), we’re working to enhance our existing infrastructure to be able to support real-world digital asset solutions.
For example, we have a clear focus on facilitating the orchestration of delivery-versus-payment (DVP) and payment-versus-payment (PVP) transactions between different networks and ledgers, over our existing network.
It’s important to reinforce that Swift is not going to go about this alone; as a cooperative owned by the community, we’re building for the community.
To get there, we’re planning a set of targeted pilots with the community in 2025 that will – for the first time – move out of a sandbox environment towards trialling real-world transactions, allowing us to test and refine the development of that infrastructure with valued input from our members.
Additionally, you can expect us to continue our collaborative efforts on the development of standards necessary to support digital securities. There’s more to come, so keep an eye out.
As a request to our community, please do get in touch with us. As we move forward, we continue to strongly encourage the spirit of collaboration and look forward to working even more closely with you.