SWIFT and tokenized settlement

A couple of weeks ago, I wrote about SWIFT’s goal of becoming a tokenized securities settlement network. This is moving forward, with the confirmation yesterday that the network will support live bank digital asset pilots starting in 2025.

In this case, “support” means handle the messaging needed to coordinate delivery-versus-payment (DvP) transactions, which is orders of magnitude more complicated than what SWIFT does now.

For those not familiar, SWIFT (which stands for the Society for Worldwide Interbank Financial Telecommunication) was established in 1973 as a bank-owned, Belgium-based entity to coordinate payments messaging. If your bank in the UK wants to send a payment to Brazil, SWIFT handles the inter-bank instructions.

Digital assets threaten to upend SWIFT’s “reason for being”, as – in theory – messaging is not needed on blockchains since payment and transfer happen simultaneously and programmatically (handled by the code).

But SWIFT has realized that the eventual digital assets landscape in institutional markets is going to be a mosaic of different ledgers – some public, many private, and they will all need to talk to each other.

SWIFT is, after all, a bank “connector” in that it enables banks to transact with each other. Its blockchain-related work over the past few years has been pointing toward it becoming a ledger “connector” as the ecosystem evolves.

But in this new market paradigm, it’s not just about messaging, so the development is a profound transformation for the network.

Now, SWIFT helps money move around. Much of this is used for settlement, but that’s not directly relevant to SWIFT’s operations since 1) assets and money move on separate ledgers, and 2) SWIFT just handles the money part.

Get assets and money on the same ledger, and SWIFT’s potential role changes. It moves from being an interbank messaging service to a key part of financial market infrastructure, which would – in theory – necessitate a change in its regulatory status. That alone would be expensive and time consuming, but possibly worth it, given the alternative.

The organization will have competition – other connectivity networks are also hoping to fill the “space” between ledgers, including Partior (reportedly in the process of “scaling up”), Project Guardian, Canton, Regulated Liability Network and many others.

But SWIFT arguably wins in current size – it is owned by over 11,000 banks, and according to a company statement, it already connects around 4 billion accounts across 200 territories. Plus, it has the trust of global regulators. ?

Even apart from the potential size and heft, I’m intrigued by the ability of such a large and systemic organization to position themselves for change, in a way that many financial institutions and their regulators have been unable to do.

(This is an excerpt from my Crypto is Macro Now newsletter, a ~daily publication where I look at the impact of crypto on the macro landscape. If you’re not a subscriber, I hope you’ll consider becoming one!)