Working with Clearstream, Northern Trust, SETL and others, Swift plans experiments in Q1 2022 to explore how it can support interoperability in the development of the tokenised asset market.
Relative to cryptocurrencies and stablecoins, the current market capitalisation of tokenised assets is small but momentum for these digital assets is expected to accelerate rapidly in the coming years. By some estimates, volumes could reach some 24 trillion USD by 2027.
Tokenisation can be applied to stocks and bonds, but also to illiquid assets, including commodities, property or even art. For example, 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.
Banks and securities firms are responding to tokenisation by developing services − including fractionalisation, 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 tokenisation by supporting the full lifecycle of digital securities.
As interest increases, Swift is exploring how it can enable and improve interoperability between participants and systems during the transactional lifecycle of tokenised 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 tokenised asset market. 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, tokenised 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.
Swift is uniquely placed to help solve this challenge. As a neutral, global cooperative with a strong focus on ensuring interoperability and setting standards for the industry, we 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.
Accordingly, we are looking at how we can support both traditional and tokenised assets flows, with a focus on regulated assets only. We would not become a crypto-custodian nor perform direct settlement of tokenised assets as a financial market infrastructure would. Rather, we see our role as helping to connect all entities as efficiently as possible and enabling our customers to provide better services to their end-users.
Collaborative innovation in action
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. This will build on Swift’s successes in achieving interoperability for CBDCs outlined in our whitepaper published earlier this year.
In the experiments planned in Q1, Clearstream and Northern Trust, alongside other industry players, will represent key parts of the tokenised − and traditional − asset ecosystem, including securities market infrastructures, local custodians and global custodians. 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.
“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,” says Thomas Zschach, Chief Innovation Officer, Swift. “We look forward to this set of new experiments and innovating collaboratively with market participants on the emerging trend of tokenised assets.”
“Our vision for instant and frictionless transactions not only applies to traditional securities instruments but also to new asset classes as well,” adds Vikesh Patel, Head of Securities Strategy, Swift. “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, stated: "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."