Once considered perhaps the largest middleman at risk

of being disrupted by blockchain, Swift took a notable step today toward becoming a disruptor. Revealed on the eve of its largest annual event, Sibos, the inter-bank platform, along with six banks including BNP Paribas, BNY Mellon and Wells Fargo, has deemed its flagship blockchain trial a success from both a technical and business perspective. First announced in January, the proof-of-concept tested whether moving funds stored in nostro-vostro accounts for international transactions to a blockchain could free up those funds to further investment.

But in spite of the PoC achieving multiple objectives, Swift says there's still a long way to go before implementation, primarily since its 11,000 members will not benefit equally from the project In conversation, Swift's head of R&D Damien Vanderveken explained that some banks that have invested heavily in traditional, centralized solutions for nostro-vostro accounts are already experiencing efficiency gains, and as such might not be as keen to invest in a blockchain-based solution.

Vanderveken said:

"The PoC demonstrated that it can fulfill the requirements. The business value depends on the level of automation of the participants. We will need to make sure for the final solution that we take care of the different levels of investment."

As a result, instead of a one-size-fits-all solution, Vanderveken said each Swift member will eventually have to analyze the value offered by blockchain and weigh it against the costs of implementation.

Benefits of blockchain 

Built as part of Swift's Global Payments Innovation initiative (GPI) within its newly revealed DLT sandbox, the PoC uses the open-source Hyperledger Fabric platform to test two main applications. The first used real, anonymized production data from each of the banks to provide "the account owner and the account servicer a complete view of all the nostro-vostro accounts that they own or serve," Vanderveken said.

The second simulated back-office procedures, which gave the participants a node hosted in the cloud to test the benefits of moving funds from multiple accounts to a single distributed ledger. These two applications provided users not only increased visibility of and access to available funds, but also simplified the reconciliation process, which uses Swift's ISO 20022 standard. "The feedback from everybody is unanimous," said Vanderveken. "What we have built in terms of applications actually does meet the requirements."

Technical limitations

While the nostro-vostro blockchain PoC was deemed a success, Swift also noted several limitations. In particular, Vanderveken said Swift is concerned about the possibility that cryptographic security could be hacked with quantum computers. A technology still in the proverbial petri dish, the thought has pushed Swift to create a "hybrid architecture," where some transaction components were distributed on a blockchain, while others were "operated by a neutral third-party."

At the top of the list for the latter was the identification of participants, or as Swift described it earlier this month in a paper jointly written by BCG Financial, "a universally trusted global KYC registry." For businesses like Swift, which operate in permissioned systems, this is considered a crucial security feature.

Vanderveken said:

"If you want to ensure data confidentiality, and you don't want to rely solely on encryption — which is prone to failure in the long run as encryption becomes hacked by technology progress — you need to have solutions where data is then segregated."

Swell for Sibos?

This successful test of Swift's blockchain PoC is particularly notable leading up to the Sibos conference in Toronto, since the financial incumbent has stiff competition with distributed ledger startup Ripple hosting a competing event called Swell. Twice during Sibos, Swift will demo the PoC in front of a live audience. But while participants (of both events) perform their own cost-benefit analysis of blockchain, the second phase of Swift's POC will already be underway.

Since Sept. 27 financial institutions — including ABN Amro, Deutsche Bank and JPMorgan Chase — have been validating the PoC results, with a final decision expected by the end of year. But one thing is certain, Vanderveken said Swift only intends to move forward in implementing the new technology if its members benefit.

He said:

"We need to take care of the differences of the various banks to make sure such a solution is successful."

Chuck Reynolds

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