The global bank messaging network SWIFT will initiate live trials of tokenised assets and digital currency transactions next year, marking a significant advancement in the slow-moving integration of digital currencies into the traditional financial system. This announcement from SWIFT, which plays a critical role in the global financial infrastructure, represents a milestone as financial institutions continue to explore the potential of blockchain technology and digital currencies to revolutionize financial transactions.

Tokenisation – the process of converting real-world assets like bonds into digital tokens that can be traded on a blockchain – has been a topic of interest for banks and asset managers for several years. These digital tokens represent a share of the underlying asset and can be used to facilitate faster, cheaper, and more efficient trades by reducing the need for intermediaries and simplifying settlement processes.

Although tokenisation holds immense promise, adoption has been slow. So far, initiatives aimed at tokenising traditional financial assets have not gained widespread traction. The primary roadblocks include technological challenges, market fragmentation, and regulatory uncertainty.

However, SWIFT’s latest initiative, set to launch in 2025, could pave the way for broader adoption of digital currencies and tokenised assets in mainstream finance.

The Growing Role of Tokenisation in Finance

Tokenisation of assets has long been seen as a game-changer for the financial industry. By converting assets like bonds, equities, and real estate into digital tokens on a blockchain, institutions can improve efficiency and transparency in trading. These tokens represent a form of ownership, and when combined with blockchain technology, they offer real-time settlement capabilities, reducing the need for traditional settlement procedures that can take days.

This digital transformation holds several key benefits, including:

1. Reduced Costs: Tokenisation can eliminate the need for various intermediaries, reducing transaction costs for institutions.
2. Faster Settlements: With blockchain, transactions can be settled almost instantly, rather than taking days or even weeks as in the traditional financial system.
3. Enhanced Liquidity: Assets that were once illiquid, like real estate or private equity, can be tokenised and traded on digital platforms, increasing market liquidity.
4. Transparency: Blockchain’s immutable ledger ensures that transactions are secure, transparent, and traceable, reducing the risk of fraud or manipulation.

While many banks and asset managers have experimented with tokenisation, the concept has yet to achieve widespread adoption due to concerns about scalability, security, and compliance with regulatory frameworks.

Central Bank Digital Currencies (CBDCs) Gaining Momentum

At the same time, central banks around the world are rapidly advancing their own digital currency initiatives. According to recent reports, approximately 90% of the world’s central banks are in the process of exploring or developing Central Bank Digital Currencies (CBDCs). These digital versions of fiat currency are designed to coexist with traditional money but offer the advantages of faster, cheaper, and more secure digital transactions.

CBDCs have the potential to transform cross-border payments, enabling central banks to settle transactions in real-time without the need for correspondent banking relationships. This could drastically reduce transaction costs and settlement times, particularly in regions where cross-border payment infrastructure is underdeveloped.

SWIFT has been at the forefront of efforts to integrate CBDCs into the global financial system. In March 2024, the organization announced the launch of a new platform designed to connect CBDCs in development with the existing financial infrastructure. This platform will allow central banks to test the integration of digital currencies with traditional banking systems, ensuring that CBDCs can be seamlessly used for everyday transactions.

SWIFT’s Digital Currency Trials

SWIFT’s new initiative will take these efforts a step further by facilitating live transactions of tokenised assets and digital currencies. Nick Kerigan, SWIFT’s Head of Innovation, emphasized that the trials will focus on moving digital assets beyond theoretical testing and into real-world use cases.

“Now we see industry demand to move out of that [trial] phase and see a digital asset really move, and have a counterparty pay them in real money against that,” Kerigan said. “That’s the stage that we are moving to next year, albeit in a controlled way.”

The initiative will combine various types of digital assets across different platforms, including both tokenised assets like bonds and digital currencies such as CBDCs. For example, to successfully complete a tokenised bond transaction, both the bond and the cash required to settle the transaction need to be tokenised. This ensures that delivery and payment happen simultaneously, without the need for intermediaries.

“It’s not good enough if you just have delivery or just payment, you need both,” Kerigan explained.

Challenges and Market Fragmentation

While the potential for digital currencies and tokenised assets is enormous, the market remains fragmented. Many banks and financial institutions have developed their own internal systems for tokenising assets, but these systems are not yet interoperable with one another. This lack of standardization has hindered the development of a unified market for tokenised assets and CBDCs.

In addition, regulatory uncertainty remains a significant barrier. Financial regulators in many countries are still grappling with how to classify and regulate digital currencies, especially in terms of anti-money laundering (AML) and know-your-customer (KYC) requirements. The legal status of tokenised assets also varies by jurisdiction, creating challenges for institutions looking to trade these assets across borders.

Despite these challenges, central banks and financial institutions are continuing to invest in the development of CBDCs and tokenised assets. Some of the world’s largest economies, including China, the European Union, and the United States, have made significant progress in developing their own digital currencies. These efforts are likely to accelerate as SWIFT and other organizations continue to push the boundaries of what is possible with blockchain technology and digital currencies.

The Future of Digital Finance

The live trials of tokenised assets and digital currencies planned by SWIFT for 2025 represent a critical step toward the future of digital finance. As financial institutions continue to explore the benefits of tokenisation and CBDCs, the financial system is likely to undergo a transformation that could make transactions faster, cheaper, and more transparent.

If successful, these trials could lead to the development of a fully integrated digital financial ecosystem, where tokenised assets and digital currencies can be traded seamlessly across borders and platforms. This would not only improve efficiency but also open up new opportunities for investors and businesses looking to access new markets and assets.

As SWIFT’s Kerigan noted, the market’s fragmented nature is currently holding back the adoption of digital currencies and tokenised assets. However, as industry leaders continue to push for greater standardization and interoperability, these technologies are likely to become an integral part of the global financial system in the coming years.

With central banks increasingly testing CBDCs for cross-border payments and more financial institutions adopting blockchain technology, the future of finance looks increasingly digital. SWIFT’s role in facilitating this transition will be crucial, as it bridges the gap between traditional finance and the emerging world of digital assets.

By 2025, SWIFT’s trials may very well be a turning point in the financial industry’s digital transformation, bringing us one step closer to a world where tokenised assets and digital currencies are the norm, not the exception.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

4th October, 2024