Unfazed by SEC furore, top banks work to make blockchain interoperable

Amidst all the turmoil in the crypto world, some of the world’s largest banks have been quietly considering ways to bring digital assets to institutional customers. And last week, a plan emerged.

A collaboration under the guidance of the Society for Worldwide Interbank Financial Telecommunication, known as SWIFT – the Global Financial Communications and Payments Network – will soon allow permissioned bank-owned blockchains to not only talk to each other, Rather, it will test the methods of communication. With public blockchains like Ethereum.

Participants in this global experiment include more than a dozen financial giants including Citi, Lloyds Banking Group, BNP Paribas, BNY Mellon and Australia and New Zealand Banking Group. Chainlink, a decentralized oracle network, is developing technology to “bridge” these diverse blockchains.

“Institutional investors are increasingly considering investing in tokenized assets,” where did it go Belgium-based Swift, which links more than 11,000 financial institutions worldwide, in a June 6 blog. Its headline sums up the work neatly: “SWIFT Explores Blockchain Interoperability to Remove Friction from Tokenized Asset Settlement.”

The problem is that digital assets today are tracked across a wide range of blockchain networks that are not interoperable, Swift further explained. Each chain has its own functionality and liquidity profile, and there is a lot of technical “friction” when giant institutions try to interact with each other, let alone public blockchains like Ethereum or Polkadot.

According to Swift, this testing phase will look at three specific use cases:

“The first use case would involve the transfer of tokenized assets between two wallets on the same public blockchain network (the Ethereum Seppolia testnet). The second would involve the transfer of tokenized assets from a public blockchain (Ethereum) to a permissioned blockchain. And the third use case will test the transfer of tokenized assets from Ethereum to another public blockchain.

Chainlink, for its part, “will be used as an enterprise abstraction layer to securely connect the SWIFT network to the Ethereum Seppolia network, while Chainlink’s Cross-Chain Interoperability Protocol (CCIP) provides full connectivity between the source and destination blockchains.” will enable interoperability,” Swift said.

Not worried about SEC lawsuits

In an interview with Cointelegraph last week following the news, Chainlink co-founder and CEO Sergey Nazarov was asked about the fact that the news of two United States Securities and Exchange Commission lawsuits against crypto exchanges concurrent with SWIFT/ Chainlink announcements were being handled. Binance and Coinbase.

News about infrastructural development sometimes gets lost. Or maybe the industry is now developing on parallel tracks – the regulatory / market track and the technical / infrastructural?

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“Yes, these are two parallel worlds,” replied Nazarov. “Cryptocurrency markets go up and down. Historically, what I have seen is that when the crypto market contracts, banks lose interest in digital assets and blockchain technology.

“But I don’t see that this time,” he said, adding that banks are increasingly, quietly working on infrastructure solutions despite the “crypto winter” being permanent. Meanwhile, SWIFT and its client banks don’t think the blockchain industry will consolidate any time soon. “There is unlikely to be a single dominant blockchain network,” said Tom Zschach, SWIFT’s chief innovation officer.

“We would expect a multitude of different platforms to emerge, each serving different customer segments with their own capabilities and needs. In such a highly fragmented ecosystem, each platform individually for financial institutions It will not be possible to connect.

‘That’s the main problem’

Building “bridges” so that private and public chains can share information will not be easy. Historically, cross-blockchain bridges have been vulnerable to hacks, with nearly $2 billion stolen from the bridges in 13 separate robberies in mid-2022. According for a Chainalysis report. Is security still a challenge?

“I would say that is the main problem,” Nazarov replied, “because the bridges that exist today have not existed for a long time.” Fortunately, those hacked in 2022 did not have an exceptionally large amount of value, he said.

But looking ahead, “we’re talking about bridges that could move into the trillions of dollars in value.”

Transfers will have to be made in trillions de rigueur, Or standard practice, if “the blockchain industry should not be $1 or $2 trillion in market capitalization,” but something on the order of $10, $20 or $50 trillion, Nazarov said. And so interoperability is “really, the main infrastructure problem that our industry really has to solve.”

He added that Chainlink has been working on interoperability issues for years, so why should one expect Chainlink to succeed where others have failed with regards to cross-blockchain bridge security?

All cross-blockchain bridges built to date are basically “dumb bridges” that “do whatever you tell them to do, even if it’s fraudulent,” Nazarov said. By comparison, Chainlink has built an active risk management network, or ARM network, that “monitors that bridge, whether it is for information or value, or whether it is abused.”

Elsewhere, Nazarov compared the state of interoperability in the blockchain industry to that of email several decades ago by Internet developers. It’s really about improving the user experience.

Today, “a bank doesn’t want to ask its customers to integrate with their chain,” Nazarov said, “because it takes too long. Imagine you and I wanted to email each other, and I I was on Gmail, and you were on Yahoo Mail. And for us to communicate, I said to you, ‘Well, you have to get a Gmail account, then I can email you.’ It doesn’t make any sense. Right?”

The Internet solved the problem with the Transmission Control Protocol/Internet Protocol and some email protocols, allowing email users to communicate easily across different platforms. “It’s the same dynamic here,” he said.

“It’s about the ability for all chains to create value with each other. Because if you have one chain that can’t capture the value of all the other chains, then our industry is kind of moving at half the speed.” Is.

progress is still in the middle stage

what about timeline? When do Swift and Chainlink expect this all to be rolled out at scale?

It’s hard to say, Nazarov said. “It will be a gradual increase over time. As more and more banks start interfacing with private chains of other banks and those private chains connect to public chains, you will see a gradual increase over time. Now We are in the middle stage.”

Citing the example of French bank Societe Generale, which deployed its own euro-denominated stablecoin convertible (EURCV) on Ethereum in April, a larger institution could lead the way, “then the rest of them will follow in”. It was the first institutional stablecoin to be deployed on a public blockchain. “This has never happened before,” said Nazarov. “I’m seeing more and more (people) talking about it.”

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In addition to those previously mentioned, financial institutions and financial market infrastructure firms participating in the SWIFT interoperability project include Clearstream, EuroClear, Six Digital Exchange, and the Depository Trust & Clearing Corporation.

Overall, overcoming this fragmentation between blockchain networks “will be critical to the long-term scalability of the market,” Swift said, stressing the importance of “working with our community to remove friction in international transactions.” Taking the plunge” possible solution. ,

Of course the specifics are different in the global banking world. Banks generally prefer to talk about “digital assets” rather than “crypto” or “cryptocurrency,” Nazarov said, but no matter how one refers to it, the fact remains that “banks’ customers now constantly want to participate in the industry.”