The organization behind most of the world's cross-border money and security transfers is deploying a blockchain proof-of-concept (PoC) for clients' shareholders to use in electronic voting.
SWIFT said this week it will jointly conduct the PoC in the Asia Pacific region with securities software provider SLIB and the Singapore Exchange (SGX), along with Deutsche Bank, DBS Bank, HSBC Holdings and Standard Chartered Bank.
"Shareholder voice in corporate decision-making is stifled by the existing paper-based voting process. Technology is the solution to enhancing shareholder say," Tony Lewis, head of Securities Services at HSBC, said in a statement. "E-Voting using [distributed ledger technology (DLT)] has the potential to create greater efficiencies, transparency and participation."
SWIFT has previously carried out DLT PoCs around Nostro Vostro account reconciliation (bank-to-bank account transfers), as well as serving as a potential connector allowing DLT and other e-commerce and trading platforms to use SWIFT's global payments innovation network (gpi).
"We continue to explore a wide range of new and emerging technologies to best meet the needs of our customers, including the use of APIs that provide rapid cross-border payments on SWIFT gpi," a SWIFT spokesperson said via email.
SWIFT is among a groundswell of financial services firms testing blockchain as a more efficient and transparent way of conducting cross-border financial transactions, unhampered by much of the regulatory oversight to which current networks must adhere.
SWIFT may also be feeling pressure as more and more firms in financial services pilot, or outright adopt, DLT technology.
"There is a lot of competition now," said Avivah Litan, Gartner vice president of research. "If you think about SWIFT, it was just a big banking network that moved money quickly and authenticated users, but it costs a lot to do that. And now there are competing initiatives using blockchain."
Litan pointed to J.P. Morgan Chase, CLS Group and Ripple, a permissioned blockchain ledger that moves money using a proprietary cryptocurrency, as prime examples of those developing blockchain for cross-border financial transfers. "Ripple is a competitor in the sense that they are trying to set up a bank-to-bank network," Litan said.
In October, J.P. Morgan created what at the time was arguably one of the largest blockchain payments networks in existence. The Royal Bank of Canada and Australia and New Zealand Banking Group Ltd. were the first two banks to join the blockchain network, "representing significant cross-border payment volumes," JP Morgan said at the time.
J.P. Morgan said its blockchain-based Interbank Information Network (IIN) would significantly reduce the number of participants needed to respond to compliance and other data-related inquiries that delay payments.
Last month, J.P. Morgan announced plans to launch what is considered to be the first cryptocurrency backed by a major bank, a move that could legitimize blockchain as a vehicle for fiat cryptocurrencies.
"J.P. Morgan could run an international network. They're the largest ACH processor and credit card processor domestically," Litan said. "All this points to stablecoins for international transfers and blockchain DLT as more efficient – and SWIFT is threatened by it."
Nearly two years ago, New York-based cash settlement system provider CLS (Continuous Linked Settlement) announced it was building a payments service with IBM that would enable cash trades on the Hyperledger Fabric blockchain platform. Along with SWIFT and the Depository Trust and Clearing Corporation (DTCC), CLS Group was a founding member of the Hyperledger Project, which is overseen by the Linux Foundation.
At the time, more than a half dozen banks agreed to support CLS' blockchain platform, including Bank of America, Bank of China (Hong Kong), Bank of Tokyo-Mitsubishi UFJ, Citibank, Goldman Sachs, JPMorgan Chase and Morgan Stanley.
In November, CLS Group announced that its DLT platform, CLSNet, was live with Goldman Sachs and Morgan Stanley. The blockchain network offers a standardized, automated bilateral payment netting service for more than 120 currencies. Six additional banking partners from North America, Europe and Asia, including Bank of China (Hong Kong), committed to joining the service, CLS said in a statement.
"This really isn't a revolution, it's just a big incremental improvement to doing business as usual. It's more efficient to move money through DLT," Litan said.
Blockchain distributed networks are a good way to move money because each participant in the network has their own independent copy of the electronic ledger and can verify the transactions are moving properly. There is no central banking authority.
"If you want to see if your money is moving right, you don't need to call SWIFT or log into SWIFT's network, you can look at your own node," Litan said. "You can also participate in validating the transactions if you want to."
In most cases, financial institutions using permissioned blockchain networks to move money aren't interested in participating in the validation process – known as blockchain consensus – but they may eventually want that power, Litan said.
"They trust [the financial services firms] to run the network, but they want their own copy of the ledger because then they can run their own smart contracts and do other things that [the financial services firms] may not do," Litan said.
SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, provides a messaging network that allows banks and other financial services to transmit information about monetary transactions in a standardized and secure format.
SWIFT is behind most cross-border money and security transfers, serving 10,000 member institutions who send about 24 million messages daily over the network.
SWIFT's PoC, which will use the Hyperledger Composter blockchain platform, will explore whether the technoloogy can help simplify "the currently inefficient management of shareholder meetings and the associated voting processes that are often time-consuming and resource intensive," SWIFT said in a statement.
"Proxy voting, in particular, often results in avoidable complexity and errors that could be eliminated through greater transparency and automation," SWIFT said.
SWIFT will facilitate the PoC in its DLT sandbox testing environment with Deutsche Bank, HSBC Holdings and Standard Chartered Bank joining as participants, while Singapore-based DBS and SGX serve as both participants and issuers. The participants will reuse the SWIFT network and their existing SWIFT infrastructure and interfaces to access, test and validate the applicability of DLT.
The PoC, which will run during the first half of 2019, is designed to test the deployment of a voting system in collaboration with issuers and a Central Securities Depository (CSD), where the information is stored and managed on the permissioned, private blockchain.
The distributed ledger will also demonstrate the viability of hybrid solutions based on ISO 20022 – the standard for electronic data interchange between financial institutions – combining messaging and DLT to enable interoperability between institutions and avoid market fragmentation. And, it will test SWIFT's capacity to host third-party applications in its sandbox and reuse its security and interface stack.
