The need for rich data in a shared ledger paradigm

Over the last two years, the potential of a new shared ledger paradigm has been discussed in numerous publications. In its Annual Economic Report 2023, the BIS presented its blueprint for a future monetary system, envisaging a new type of financial market infrastructure – a ‘unified ledger’ – which could ‘capture the full benefits of tokenisation.’

Other industry bodies have also been exploring the potential of a shared ledger. Last year, the Monetary Authority of Singapore (MAS) announced its Global Layer One (GL1) initiative to facilitate seamless cross-border transactions using an open, digital infrastructure. Other notable initiatives include the International Monetary Fund (IMF)’s X-C platform, and the work being done by a broad set of banks in the Regulated Liability Network (RLN).

So what is a shared ledger, and what sort of benefits could it offer?

The concept of a shared ledger represents a shift in the way financial systems and books of record are kept. Today, financial institutions and financial market infrastructures record transactions separately on their own databases, and use a messaging structure to reconcile and instruct positions across different records of value.

But in the future, other models could take a different approach.

One such model could be for institutions to record aggregated balances using a shared ledger. Instead of requiring messages to instruct settlement to be sent between institutions, a shared infrastructure could provide a common view, with real-time visibility, of balances across all the shared ledger’s participants.

Benefits of a shared ledger model

This model could result in a number of benefits. For one thing, the use of shared ledger technology and tokenisation could theoretically reduce risk and cost in the market.

Operating on a real-time, 24/7 basis, such a shared ledger could offer instantaneous movement of value and native atomic settlement for Delivery versus Payment (DvP) and Payment versus Payment (PvP) transactions, while reducing the need for reconciliation between financial institutions. There could also be an opportunity to build additional services on top of the shared platform.

As such, the shared ledger model could potentially help to improve the cost, speed, predictability and accessibility of cross-border payments – thereby supporting the G20 roadmap, and the continued push to improve cross-border payments by the Committee on Payments and Market Infrastructures (CPMI).

Enhancing the proposition

So far, so good. But alongside a shared ledger, there’s also a need for a robust messaging layer to enable the necessary exchange of rich, structured data about any given transaction.

Blockchain technology – which the shared ledger would use – is very effective at recording whether or not a movement of funds has taken place. As a mechanism for accounting, it could fulfil the roles of recording balance information and proving that settlement has taken place.

But in order for transactions to be frictionless, additional types of data also need to be transferred to enable value-added services such as AML, compliance, sanctions screening, trade and accounts receivable reconciliation. Today, with 89% of cross-border payments reaching recipient banks within an hour, achieving compliance through having the right data available is key to an instant transaction flow. However, shared ledgers are not well suited to carrying and storing high volumes of data due to the way data is synchronised across parties and the computing power required.

This is where a messaging layer fits in. At its core, messaging facilitates the transfer of data held by different institutions, whether to affect the legal settlement of transactions or to enable the ancillary value-added services which are critical to global financial transactions.

The industry has come a long way in transforming payments with rich, structured data via ISO 20022, with the benefits of this shift now starting to become apparent. Moving forward, an ISO 20022-based messaging layer will enhance the shared ledger proposition by offering a payload of rich and structured data to fulfil the adjacent functions that are essential to the completion of any regulated financial transaction in an instant and frictionless way.

Defining the future of tokenisation

One way that the future of tokenisation could be realised is with a ‘big-bang’ transition towards a shared ledger paradigm. Alternatively, it could take the form of a more gradual path with multiple shared ledgers coexisting with traditional systems.

Or the future may lie somewhere in between.

While shared ledgers represent a longer-term vision, the level of complexity and coordination required to bring this vision to market makes this a challenging undertaking – for example, requiring the deployment of a highly scalable and resilient platform, with all parties integrated to it.

Attempting to recreate every part of the financial stack is unlikely to be a viable approach. By leveraging existing components of the financial system that already work well together – including secure financial messaging such as that provided by Swift – the industry can avoid undue levels of market concentration risk, and draw upon tried-and-tested practices to deliver the rich, structured data that it has been working towards for decades.

One option could be to develop a form of industry ‘state machine’ (in other words, a dynamic model that reflects the current state of transactions and balances across institutions) for regulated financial services. This could be built on the existing financial messaging layer, providing a common view of the state of transactions across their lifecycle. Rather than having each institution record its own individual ‘state’, that function could be abstracted and performed at an industry level, similar to how messaging evolved. Such a state machine could be built on more decentralised blockchain technology, or equally a more centralised platform like Swift’s Transaction Manager could be enhanced for this use.

In our view, this approach represents a more achievable and pragmatic path to unlocking the benefits of shared ledger technology, as well as the value provided by the rich and structured data carried in a messaging layer.

Collaboration is key

Right now, all of this is theoretical – and collaborative innovation will play a crucial role when it comes to putting these ideas into practice. In particular, it will be important for shared ledger implementations to collaborate with established financial messaging providers to explore how these complementary propositions best work together.

In the next two years, the industry’s migration of cross-border payments to ISO 20022 will prove to be a core asset that any new payment system or shared ledger model should leverage. Allowing financial institutions to re-use well established industry standards like ISO across the multitude of systems they integrate with will demonstrate clearer value and accelerate adoption.

Swift has a long history of working with the financial services community to solve challenges and facilitate industry-wide innovation. We continue to demonstrate this by participating in industry initiatives such as the RLN, and by driving activities such as our recent central bank digital currency (CBDC) sandbox and blockchain interoperability experiments.

Above all, we support industry efforts to improve transaction speed and reduce friction, and will continue to partner with the financial community and the public sector to explore ways of improving financial markets. By working together, we can co-design a future state financial system able to meet the current and future needs of its participants and their clients.