Global bank messaging network SWIFT is set to trial live transactions of tokenised assets and digital currencies in 2025, marking a significant development in the slow integration of such assets into the broader financial ecosystem. This initiative is pivotal as it could reshape various aspects of the global financial sector, from trading efficiency to regulatory frameworks.

The concept of “tokenisation” has gained traction among banks and asset managers, who are increasingly interested in transforming traditional assets, like bonds, into digital units typically represented by blockchain-based tokens. The aim is to make trading faster, cheaper, and more efficient by eliminating intermediaries traditionally involved in transactions. Despite these efforts, tokenisation has yet to achieve widespread adoption within the financial industry, leaving many potential benefits unrealised.

Simultaneously, approximately 90% of the world’s central banks are actively testing central bank digital currencies (CBDCs)—digital versions of fiat currency designed to facilitate the trading of tokenised assets. These monetary authorities are keen to leverage technological advancements that have propelled the popularity of cryptocurrencies like Bitcoin. SWIFT’s trials of both CBDCs and tokenised assets indicate the increasing importance of these innovations in the financial landscape.

SWIFT has already been working on a new platform aimed at linking CBDCs currently under development to the existing financial system. Nick Kerigan, SWIFT’s head of innovation, stated, “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. That’s the stage that we are moving to next year, albeit in a controlled way.”

This move could pave the way for more dynamic and responsive financial markets. By enabling the seamless transfer of tokenised assets alongside traditional currencies, the SWIFT initiative could facilitate faster settlement times and lower transaction costs, thereby enhancing overall market efficiency. Additionally, it could democratise access to financial instruments, allowing smaller investors to engage with asset classes that were previously out of reach.

However, the fragmented nature of the current market presents a significant challenge to the adoption of tokenised assets. Most initiatives are still confined to banks’ internal systems, limiting their effectiveness and reach. Kerigan pointed out that “to successfully trade and settle a tokenised bond transaction, you need the cash, and that’s where a tokenised deposit or wholesale CBDC comes in. It’s not good enough if you just have delivery or just payment; you need both.”

The implications of SWIFT’s trials extend beyond mere technical advancements. They signal a shift in how financial institutions might operate in the near future. As banks begin to explore the integration of tokenised assets into their existing frameworks, they may need to rethink their business models and adapt to a new competitive landscape. For instance, traditional banks could find themselves competing not only with fintech firms but also with new entrants that offer tokenised versions of existing financial products.

Furthermore, the regulatory landscape will likely evolve in response to these changes. As tokenisation and CBDCs gain traction, regulators will need to establish clear guidelines and frameworks to ensure consumer protection, market integrity, and financial stability. The introduction of tokenised assets may prompt a reevaluation of existing regulations, particularly in areas related to anti-money laundering (AML) and know-your-customer (KYC) protocols.

Moreover, the trial by SWIFT could spur further collaboration among financial institutions and technology providers, fostering innovation and driving the development of new solutions. As the industry embraces digital transformation, we may see increased investment in technologies that facilitate the trading and settlement of tokenised assets, further bridging the gap between traditional finance and the emerging digital landscape.

SWIFT’s initiative to trial live transactions of tokenised assets and digital currencies represents a significant step forward in the integration of these innovations into the wider financial sector. While challenges remain, the potential benefits of enhanced efficiency, reduced costs, and improved access to financial markets could fundamentally change how transactions are conducted. The successful implementation of these trials may set the stage for a new era in finance, one characterised by greater agility and responsiveness to market demands. As the financial sector prepares for this transformation, stakeholders must remain vigilant in navigating the regulatory and operational challenges that lie ahead.

(Adapted from Business-Standard.com)