Cross-border payments are entering a new phase, where traditional rails meet digital asset innovation. In a major step forward, Ant International and HSBC have teamed up to pilot tokenized deposit transfers over the Swift network using the ISO 20022 protocol.
ISO 20022 is a messaging standard that allows organizations to exchange significantly larger payments data than current standards allow. Although ISO 20022 has existed for decades, this pilot marks the first time the protocol and the Swift network have been used together to send tokenized deposits across borders.
In the initial trial, Ant International’s blockchain was integrated with HSBC’s tokenized deposit service to complete a transfer between Singapore and Hong Kong.
Struggling to Overcome Complexity
The Swift network has connected financial institutions around the world. While it has played an integral role in making the cross-border payments model more efficient, international transactions continue to face significant issues.
Historically, cross-border payments have relied on the correspondent banking model, in which each bank establishes partnerships with foreign institutions, creating an intricate web of intermediaries. This complicated structure often leads to delays, high transaction fees, and limited transparency.
Despite coordinated efforts by various organizations to improve international payment systems, there have been less-than-stellar results. According to a recent progress report from the Financial Stability Board (FSB), key performance indicators for cross-border payments have shown only marginal improvement over the past two years.
FSB identified two major challenges: the complexity of coordinating across different regions and the persistent hurdles that arise from outdated, legacy payment infrastructures.
A Proponent of the Standard
These challenges are among the reasons why Swift, along with others, has been a strong proponent of ISO 20022 as a messaging standard. The format’s data capabilities can make cross-border payments more efficient by reducing manual interventions and their associated costs.
When a cross-border payment is delayed, financial institutions often must embark on extensive investigations to determine the root cause. Swift recently noted that delayed payments cost financial institutions more than $1.6 billion annually due to these investigations, which can take days to resolve.
Beyond reducing delays and costs in the cross-border payments system, ISO 20022 also gives financial services companies insights they can leverage to identify fraud and money laundering activities. This is why the U.S. Federal Reserve recently transitioned its Fedwire Funds Service to ISO 20022. After longtime use of the format, Swift has now officially mandated ISO 20022 as the standard for cross-border payments on its network.
Underpinning Payments
Swift has been pushing to streamline its operations through digital asset technologies.
The network said it’s creating a blockchain to underpin its transactions. In a collaborative effort with 30 global financial institutions, Swift said it would develop a shared digital ledger that is interoperable with blockchains supporting stablecoins, tokenized deposits, and central bank digital currency transactions.
The platform is designed to serve as a secure, real-time record of bank transactions, leveraging smart contract capabilities to enforce compliance. Swift’s goal is to enable real-time cross-border payments.
The Rise of Tokenized Deposits
Although this blockchain may still be in its early stages, Swift’s collaboration with Ant International and HSBC could add powerful capabilities to its already formidable network.
Stablecoins may be the digital asset du jour, but tokenized deposits have been gaining substantial traction. Stablecoins are issued by private or public entities and backed by reserves managed by those organizations.
Tokenized deposits, by contrast, are digital representations of bank deposits held by regulated institutions. Therefore, they are backed by FDIC insurance and are often better suited for use by highly regulated financial institutions.
The use cases for tokenized deposits—including cross-border payments—have attracted interest from financial services players as diverse as Citigroup and the Bank of England. BNY Mellon, the world’s largest custodian by assets, has also explored using tokenized deposits to enable institutional clients to make blockchain-based payments.
“The use cases for a company like BNY are many,” Joel Hugentobler, Cryptocurrency Analyst at Javelin Strategy & Research told PaymentsJournal. “There’s the potential for automation on unlocking liquidity once certain obligations and conditions are met, and for 24/7 cash sweeps that reduce intraday borrowing or overdraft risk. Tokenized deposits could reduce failed-trade risk in fund redemptions due to instant settlement. They have the potential to be programmable coupon or dividend disbursements. Repo transactions and clearing are a huge part of banks operations, so this could reduce the timelines and move collateral instantly.”
