Amid all the tumult in the crypto world, some of the world’s largest banks have been quietly reflecting on ways to bring digital assets to institution
Amid all the tumult in the crypto world, some of the world’s largest banks have been quietly reflecting on ways to bring digital assets to institutional customers. And last week, a plan emerged.
A collaboration, under the guidance of the Society for Worldwide Interbank Financial Telecommunication, better known as Swift — the global financial communication and payments network — will soon be testing ways for permissioned bank-owned blockchains to not only talk to each other, but also communicate with public blockchains like Ethereum.
Participants in this global experiment include more than a dozen financial heavyweights, including Citi, Lloyds Banking Group, BNP Paribas, BNY Mellon, and the Australia and New Zealand Banking Group. Chainlink, the decentralized oracle network, is developing the technology to “bridge” these sundry blockchains.
“Institutional investors increasingly are considering investments in tokenized assets,” stated the Belgium-based Swift, which connects more than 11,000 financial institutions worldwide, in its June 6 blog. Its headline neatly summarized the task at hand: “Swift explores blockchain interoperability to remove friction from tokenized asset settlement.”
The problem is that digital assets today are tracked on a wide range of blockchain networks that are not interoperable, Swift further explained. Each chain has its own functionality and liquidity profile, and there’s a lot of technical “friction” when giant institutions try to interact with one another, let alone public blockchains like Ethereum or Polkadot.
This test phase will look at three specific use cases, according to Swift:
“The first use case will involve the transfer of tokenized assets between two wallets on the same public blockchain network (Ethereum Sepolia testnet). The second involves the transfer of tokenized assets from a public blockchain (Ethereum) to a permissioned blockchain. And a third use case will test the transfer of tokenized assets from Ethereum to another public blockchain.”
Chainlink, for its part, “will be used as an enterprise abstraction layer to securely connect the Swift network to the Ethereum Sepolia network, while Chainlink’s Cross-Chain Interoperability Protocol (CCIP) will enable complete interoperability between the source and destination blockchains,” Swift stated.
Unfazed by SEC lawsuits
In an interview with Cointelegraph last week following the news, Chainlink co-founder and CEO Sergey Nazarov was asked about the fact that the concurrent Swift/Chainlink announcements seemed to be overshadowed by news of the two United States Securities and Exchange Commission lawsuits against crypto exchanges Binance and Coinbase.
News about infrastructural advances sometimes appears to get lost. Or maybe the industry is evolving on parallel tracks now — the regulatory/markets track and the technical/infrastructural?
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“Yes, there’s these two parallel worlds,” answered Nazarov. “The cryptocurrency markets go up and down. Historically, what I’ve seen is that when the cryptocurrency markets contract, banks lose interest” in digital assets and blockchain technology.
“But I’m not seeing that this time,” he said, stating that the banks are holding fast, quietly working on infrastructure solutions, despite the enduring “crypto winter.”Meanwhile, Swift and its client banks don’t seem to think that the blockchain industry will be consolidating any time soon. “There’s unlikely to be a single prevailing blockchain network,” said Tom Zschach, chief innovation officer at Swift.
“We would expect to see a multitude of different platforms emerging, each serving different customer segments with their own bespoke capabilities and requirements. In such a highly fragmented ecosystem, it would simply not be feasible for financial institutions to connect to each and every platform individually.”
‘It’s the main problem’
Building “bridges” so private and public chains can share information won’t be easy. Historically, cross-blockchain bridges have been vulnerable to hacks, with some $2 billion stolen from bridges in 13 separate heists by mid-way through 2022, according to a Chainalysis report. Is security still a challenge?
“I would say it’s the main problem,” answered Nazarov, “because the bridges that exist today haven’t been around for long.” Fortunately, those hacked in 2022 didn’t hold extraordinarily large amounts of value, he added.
But looking ahead, “we’re talking about bridges that can move around trillions of dollars of value.”
Transfers in the trillions will have to become de rigeur, or standard practice, if “the blockchain industry is to grow into what it should be — not $1 or $2 trillion” in market capitalization, but something on the order of $10, $20 or $50 trillion, said Nazarov. And so interoperability “is,…
cointelegraph.com