Banks Are Done Experimenting With Tokenization (SWIFT Is Scaling Fast)

Transcript

What do you mean you don't have a QR code? Like, you know, what do you mean I can't do that? Or what do you mean there's a limit? It's so far beyond my realm of reality right now. >> Welcome to the rollup. We [music] talk to the biggest and brightest minds in fintech. Enjoy the show. Don't forget to like, comment, and subscribe. >> And we are live with the digital assets business lead at Swift, Avlon Ingram. Welcome to the show. It's an pleasure to have you. Uh Swift's blockchain based shared ledger is live. It went live in July. Um, and so we'd love a catch up on how things are going, what it was like to go live, and generally how you're doing here at Token 2049.

>> Well, I mean, for token, I wore very comfortable shoes. Normally, it would be an insensible pair of shoes, but we're in sneakers today, but I think fits into uh the general flow of token. Any case, but in terms of ledger, um, 9 months, an absolute roller coaster. As you know, we announced that we were going to build a blockchain ledger at Cybass last year. To think that nine months later, we actually have a live blockchain ledger. Um, 17 banks transacting live transactions sort of blows blows the mind a little bit. But I think it is a very strong indication of market maturity.

>> Uh, institutions are backing this. I think I read a statistic that since 2020, banks have spent something like a hundred billion on tokenization. Right. I don't think it's anymore a question of will this space be something that is institutionally adopted. That that question is now definitely out the window. Exactly. Exactly. Right. >> Amazing. And so this has been live since July. You made the announcement at Cyos last year. I was just at Cyos last week. Um and it was so exciting to see a lot of these the largest financial institutions in the world all in the same room and tokenization digital assets. This was the center of the conversation. And so these banks have actually started to transact on Swift's

ledger. This is a blockchainbased solution. Give us a sense of what have the primary use cases been so far and maybe just compare and contrast what people are using Swift's blockchain for and what people typically use for anyone who's unfamiliar. What do people typically use for and what are they using the blockchain for? The way that I would rather position this is if you think of Swift as a technical operator, um, for lack of a better analogy, the plumbing, right? Today, we have messages that are able to be transacted. I think of that as akin to, you know, a letter being addressed to you with really important documents inside, right?

That's kind of the Swift message. What that Swift message doesn't have the capability of doing today is moving a digital asset. You need a blockchain for that. So for us this is a technology upgrade, a very necessary one because the market indicators are that digital assets are are here to stay. Uh we've in fact been exploring in the space for the last 10 years if you can believe it. I think we're all a bit fatigued around sandboxing. So getting something to the market that was going to actually start to see real world transactions was really important which is your point of use cases. One of the more interesting dynamics within our working group of banks is talking far less about the technology and really starting to talk about business outcomes. I think for a

long time it was very much stuck in like the technology conundrum like how we make blockchain work, what does this all mean? What is a smart contract? That's sort of been pushed to the side. And what we're really focused on now is what is the business outcome? And I think what we're seeing is a lot of excitement around uh corporates. So your large multinational corporates who have bank accounts all over the world saying surely I can optimize the way that I manage my treasury which is a very similar problem statement to a bank right like how do I optimize my liquidity so that I can you know put capital into yield bearbe bearing instruments that give me a little bit more something for for my buck right as opposed to sort of

this trap liquidity so I would say for banks primarily it's going to be like liquidity optim optimization which sort of echoes for for a corporate treasurer. The retail space we're not really focused on right now. We're probably more in the wholesale interbang phase, but arguably if you can solve something that is of like 100 billion or 10 billion, you could arguably solve something for 100,000 or a thousand, right? >> Absolutely. And that is downstream of some of the solutions that you're working towards today. And I think you're you're speaking to one of the greatest value propositions of the space, which is to unlock so much of the idle capital that is sitting there rigid, not generating, not as productive as it could be. And that was one of the

things that I heard at Cyos last week was people are so excited to unlock this idle capital. It's more money for the companies themselves and ultimately more money for their customers as they're able to save on some of these fee structures. uh you're also speaking to something that I think uh just puts even more emphasis on the problem which is that very soon and this is again something I heard last week was uh the impetence for 24/7 markets is extremely important again having something idle and locked in a world of 24/7 simply won't work and and we're we're working towards an environment where these things are more rapid they're more online and ultimately um we unlock block

so much so much of that idle capital. Um, and we're seeing a lot more of this globally connected environment. And I think a lot of the companies and the institutions that are excited for 24/7 like us in the States are also here in the Asia market. We're here at token 249 in Singapore and so many I think five of the 17 banks that are live with the swift ledger are based here in the Eastern Hemisphere. Maybe you can just give us a sense of what it's like. What is what is different about orchestrating across financial institutions in the west and orchestrating across financial institutions in Asia?

>> Well, Robbie, I've been based here for 7 years. So, the the likelihood that my answer is going to be biased is pretty high. Um, but what stands out for me is probably your regulator. uh one who's very much forward thinking, always about innovation, always creating an environment of collaboration, saying come to me, let's try and and think through this problem together. So a lot of the banks this side of the world have a vast experience already in the tokenization space. They've been doing it for a very long time. And that's not to discredit anything that's happening in the west, but certainly we've seen a lot of it. The second thing from a payments innovation perspective in Asia that rapid movement has been happening for years. So I think the agility of

payment teams within banks in Asia has long been very uh robust because you know the way in which I could pay for a taxi if I'm leaving the conference is probably about five or six different ways that are all really accessible to me and I don't have to think about living in Asia. In fact, now when I travel abroad and I'm like, "What do you mean you don't have a QR code?" Like, you know, "What do you mean I can't do that?" Or, "What do you mean there's a limit?" It's so far beyond my realm of reality right now. So, yeah, I think that kind of experience, the pace of movement in Asia has set them up really well for this kind of exploration.

>> Okay. And so, it it it sounds like Asia has been far ahead for a long time. And it actually made things quite easier over here because they've already overcame so much of that educational hurdle and they've already started to, you know, put some of those sandboxes into practice. And I take it a lot of that was fueled by some of the regulatory environments as they exist in Asia and and as they exist in in the West. And so help us sort of understand what it was like to come here, work with some of these pilot banks. How were those conversations a little bit different than the conversations in the West?

I don't know if they were that vastly different. I think you know we're as I say talking about the technology a little bit less. Maybe the starting point for some of the organizations is a little bit different right because of the amount of exploration they've already done in some of these pilot programs that have been happening for years. The starting point from an expertise perspective is maybe a little bit different. the conversations themselves, whether you're talking about west or east, they're customer focused, right? What do we what can we solve for our customers? What is the big unlock for them? What is the big unlock for us?

Right? Do we need a blockchain to do this? I think is a really big question. What is already available to us within traditional rails that could maybe just be optimized? So I think we've been challenged and and the reason why when we run a working group we try and keep it very jurisdictionally diverse is to make sure that we're taking everything from all the different regions learnings but at the same time you start to see the commonality of of of trouble problems use cases. >> It's a very thoughtful approach to to to build a diverse group and and experiment within several of these jurisdictions.

Um, and I think there's also a knowledge that spans uh the onchain digital financial world as well as the traditional financial world that you're talking about. And this is what people in this conference are calling the financial singularity where these two ultimately converge and come together. And again, this was something I heard at Cyos as well as at this conference is the difference between stable coins and tokenized deposits. Now, le uh Swift's ledger um is primarily geared for tokenized deposits as I understand it. Maybe you can give us a highle sort of educational lesson on the difference between tokenized deposits and stable coins and then also how tokenized deposits maybe interact with stable

coins. >> Yeah, I mean I I would say firstly on the interaction piece right now I don't really see any sort of intersection between the two. What I would rather say is different each of them really applying to a different use case. Right? So typically where I see stable coins being activated within banks, a lot of consorcia based stable coins, right? There's a lot of conversation around those becoming a settlement asset. You wouldn't talk about a tokenized deposit necessarily in the same way, right? It's it's a a commercialized bank deposit or tokenized commercial bank money, right? Mhm.

>> So they they have different features. Uh of course a tokenized deposit is a liability of a singular bank. Therefore, generally speaking, not interchangeable. So acts as a bit of a wall garden. You have portability with with a stable coin. Obviously assuming that whoever is going to be the receiver of your stable coin is happy to happy to receive it. Um, when you look at our model, I would look at it as commercial bank money rather than a tokenized deposit in the traditional sense. We don't necessarily require that the bank actually has a commercialized solution to their own customers. They're not necessarily tokenizing their customers uh deposits, >> but what you are in fact doing is tokenizing funds on a private on a

private ledger. Uh, that is a starting point, right? I think the the view that we have is the world is going to remain hybrid. There is still multiple forms of value today. There's still multiple systems today. That's not new just because there's now a digital wrapper over these things. That nature, I think, is only going to grow. There's going to be more variability. There's going to be more variety. And variety being the spice of life, that's obviously very important. >> Um, so I think there's going to be a huge coexistence in the space. And for me, it's going to be use case driven. If I h if I'm a bank and I have to further fragment my liquidity to use stable coin X versus being able to hold that money

on my own balance sheet, that might be a good use case for me for that particular kind of transaction because it's 10 billion. Okay, >> that might be slightly different if I'm talking about some of my retail transactions where actually I'm more interested in that case around speed or or cost uh as I see it. Okay. So, you don't see stable coins and tokenized deposits or commercial bank deposits competing with one another. You see them being used for adjacent orthogonal use cases. >> Yes, absolutely. And I think as we start to get a little bit better about articulating each of these business cases, I think there will be a natural division on where to use what. But let's also remember there's jurisdictional differences on how we look at these

things, right? Generally speaking, however, a tokenized deposit being commercial bank money remains commercial bank money, right? The way in which we look at stable coins from jurisdiction to jurisdiction does actually differ where there's a general agreement around the credential treatment of of commercial bank money. So, I think there is a little bit of disparity. You know, if I think about can I send a stable coin to this jurisdiction? Is it allowed? We don't have so much of that question when we talk about commercial bank money, >> right? Okay, that makes sense. And and as I think about commercial bank money, whether my, you know, money is deposited into one depository institution or another, I don't think about those as disperate. But what you're saying, I

think, is that these are ultimately representing liabilities on these commercial banks. And so they are somewhat uh individualized uh because they each represent the deposits at that individual bank. >> Exactly. Right. and and Swift helps to connect all of these together. >> Quite right. So, we're essentially acting as an interbank liability registry, right? So, bank A sends bank B $100, we record that. A bank B sends $80 back, we record that. And sort of we're acting as that sort of true state of those different interbank liabilities.

So the by separating the payment execution from the settlement layer, you're actually able to then devise that after a certain period of time, settlement window is then closed, bank A owes bank B or bank B owes bank A, right? So because you've been able to decouple those two things, you're actually not interchanging those particular tokens. But I must stress as well that this is an MVP, right? This is what we needed to do to really take a first step of saying let's try and do something in this space that is going to be foundational that is going to get us out [music] of sandbox pilot etc. start to have real world um I guess application of these things uh

real world curiosity around all of it real world learning and then we can kind of grow from there. So tokenized deposit, sure today. What could it be in the future? I think some of that's going to depend on regulation as well. How we see different jurisdictions think about things like deposit tokens, e-oney tokens, CBDC's even. How does that then start to shape our ledger in the future? >> And the CBDC point, you know, speaks to the jurisdictional conversation that you've been speaking about as well. And helping to orchestrate and interconnect all of these is something that uh Swift is going to be thinking a lot about very soon. I I'd love to hear a little bit more on how you've unbundled the settlement from the execution because you know when I con conceptually think

about a ledger I think that you know we're going to settle these balances across these different accounts on this ledger but that's not necessarily what's happening. You're still settling the uh deposits on these individual rails on the pre-existing swift rails. So maybe you can just describe what parts of an interbank transfer are still happening on the traditional swift rails versus what is now happening on the blockchain. >> So some of our design principles when coming into this from the banks was let's also reuse as much of our architecture that that it's already there. So first off banks are still reusing the messaging layer. what we're recording on on the chain is really the necessary information value uh currency

parties involved and so forth. Okay. uh and then we're keeping that record state and we're essentially doing netting right so that we understand after that particular window has closed and what you could imagine with a smart contract is I could define that based on my counterparty right you know counterparty who I've known for a long time and I have a credit line with I might say do you know what I'm happy to do my settlement with you every 3 hours for another you may say well actually I'd rather manage that from an exposure value perspective so at 100,000 you know we want to end that settlement and we want to force that. Now it doesn't necessar we orchestrate the settlement but we don't complete that settlement.

So what will then happen is a bank will still initiate a settlement instruction as they do today and that will either happen via their correspondent banking accounts or it will happen via RTGS right so that that is where it follows the traditional rail >> but a lot of that has to do with availability of unchained settlement venues right um so I I think by using the existing architecture it's already regulated it's already accepted as a financial standard and it's already widely adopted.

>> What it gives you is the ability to really experience you know at least parts of this but to also start to >> decide what is it that we need in the future. Okay. And what we clearly need is onchain settlement venues. Um and that and that's also one of the inhibitors to the 24/7. >> Banks are looking to settle their interbank liabilities 24/7. They need those those venues available to them to allow that interbank settlement to happen at any point in time. And and what do those look like? Uh these onchain settlement venues because it sounds as if that is like you said the inhibitor to not only 24/7 but also a fullyfledged endtoend solution for these banks. What does an onchain settlement venue look like? Do they exist right now

in form or is it simply a matter of adoption? But but I I take it these are still not sufficient. Maybe you can help illustrate what one of these looks like. Look, I mean, I think they they're called different things in different jurisdictions. And you could also argue, does it need to be on a blockchain or do we just need the RTGS to operate 24/7? >> And RTGS, >> sorry, real time gross settlement system. Okay. Right. So, essentially banks holding accounts at at the central bank. So, settling in central bank money. >> One could argue that if you are able to interact with that RTGS at any point in time, does it need to be on blockchain?

I mean, it would be more elegant and it would be more beautiful, but arguably not a necessity if you're at least getting real-time notification of the settlement having completed. >> That would that would give you an onchain settlement venue. >> Exactly. Exactly. Um, well, not onchain and if they were just 24/7, but you know, we could through an API, I mean, really being simplistic about it, through an API, you could then receive a notification to say settlement has completed. And do you anticipate that most of these banks will uh coalesce around a particular solution?

>> I think it will be jurisdictionally uh different. Um I think we have a very key well so from what I've seen anyway you know wholesale CBDC's is something that we're very comfortable with uh in Asia. What we're seeing happening more within Europe is really uh consorcia based stable coins but also still a keenness around um CBDC's. what that looks in other parts of the world I think is going to be a little bit different. UK, you have an FMI token, right? A synthetic CBDC. >> Do we see start to see more of these like omnibus accounts at a central bank?

That makes a lot more sense. I think it's going to really be jurisdictionally different for us. The important role that then we play is to not make a model so rigid that if you're a jurisdiction that favors a CBDC, we're like, >> "Sorry guys, like you're out." Right. >> You know, for us, it's about having a flexible model that that sort of respects what should always be the case as jurisdictional difference. >> Yeah. The flexibility and the generality. Um and and like you said, variety. I mean, that's the the spice of life. That's invention. And and so part of that is is continuous adoption. Uh you started with 17 banks, right?

There's thousands, tens of thousands of banks out there in the world. How do we increase the number? Right? You you've picked off a select few. you've you've cherrypicked a select few. Um I take it and we like to talk a lot about network effects in this industry, right? Once you start to develop a critical mass, all of a sudden there's going to be tons of inbound and you know people be banks will be knocking down the door to be part of this network. As you start to think about what this continuous adoption process looks like, how do we ultimately take 17 banks as part of this pilot program for the Swift ledger to 1,700 and then 17,000?

>> Yeah, it's I mean it's a good question. Firstly, I the banks came so we we had a working group of just over 40 uh banks. Uh one of our conditions was having a tokenized deposit platform or or a private ledger to begin with. So you then start to filter around the group because not everyone has that same level of maturity to be able to participate. So there was sort of a natural selection that took place in the first instance. Some banks ready to move other banks you know that then got themselves to a point of maturity that they could join a little bit later on. I think when we started out the year we were thinking you know what test with about like six banks see how it goes. What we hadn't anticipated was the demand to sort of

rise to to 17. Um our intention right now is not to look at critical mass as the number of banks that we have on board. For us, critical mass is probably better measured by is there customer value in this um is there enough for there to be recurrent transaction volume? Is there enough that there is at least demand from an adoption perspective? >> So I think for now we're to be honest with you, I think both ourselves and the banks are very much in the learning phase. This is the first time that they're really using a ledger where they're now starting to interchange use tokenized deposits for cross border >> that it is a step change even though

it's still commercial bank money and so what you will have is an iterative process what I anticipate is that each bank will decide where in that iteration makes the most sense for them to join because let's also be honest about the investment cost here you know for every bank yes we can talk about the large banks that that are already participating. What happens when you're talking to a bank that maybe just has one or two correspondent banking relationships, does it make sense for them to lay down a private ledger to to participate or do we get to a space of maturity within the ledger itself where that doesn't become a necessity anymore?

So I think there is probably going to be a perfect storm coming very soon where we start to see like a nice little balance of adoption versus necessity for for for the banks themselves in terms of value proposition. >> It's a very exciting point in time as we've graduated from the theorizing to the education to the sandboxes to ultimately putting this into practice from the announcement at Cyos last year to ultimately where we are now 9 months later with this pilot program live. It's very exciting times. It feels like we are on this inflection point where a lot of those metrics that you mentioned, these north stars are starting to develop and these banks are starting to take notice and the demand is certainly there. Avalon, I really appreciate you

spending the time today. It was a very insightful conversation to understand how Swift is thinking about this from the interbanking lens. Really appreciate you taking the time. >> It's my absolute pleasure and thank you for having me. >> Absolutely. Love to do this again sometime.