Unfazed by SEC tumult, top banks work to make blockchains interoperable

Amid the commotion in the crypto space, some of the world’s biggest banks have been quietly contemplating how to bring digital assets to institutional clients. Last week, a strategy was unveiled.

Under the direction of the Society for Worldwide Interbank Financial Telecommunication (more commonly known as Swift – the global financial communication and payments network), a collaboration is soon to commence testing methods for bank-owned blockchains with permission to interact not only among themselves, but also with public blockchains such as Ethereum.

Participants in this worldwide endeavor comprise of more than a dozen financial giants, including Citi, Lloyds Banking Group, BNP Paribas, BNY Mellon, and the Australia and New Zealand Banking Group. Chainlink, the decentralized oracle network, is constructing the technology to link these different blockchains.

The Belgium-based Swift, which links more than 11,000 financial institutions around the world, declared in its June 6 blog post that “institutional investors are increasingly looking into investing in tokenized assets.” The headline concisely outlined the mission at hand: “Swift investigates blockchain interoperability to reduce friction from tokenized asset settlement.”

The issue is that digital assets are currently monitored on a variety of blockchain networks that are not compatible with each other, as Swift explained. Each blockchain has its own features and liquidity, and there is a lot of technical difficulty when large organizations try to interact with one another, not to mention public blockchains such as Ethereum or Polkadot.

This test phase, as per Swift, will be examining three particular use cases.

Chainlink, in turn, will serve as an enterprise-level layer to securely link the Swift network to the Ethereum Sepolia network. Additionally, the Cross-Chain Interoperability Protocol (CCIP) provided by Chainlink will ensure full compatibility between the source and target blockchains, as per the statement of Swift.

Unfazed by SEC lawsuits

In an interview with Cointelegraph last week, after the news was released, Chainlink co-founder and CEO Sergey Nazarov was questioned about the fact that the concurrent announcements of Swift and Chainlink were overshadowed by the news of the two lawsuits filed by the United States Securities and Exchange Commission against crypto exchanges Binance and Coinbase.

News regarding advancements in infrastructure can sometimes seem to go unnoticed. It is possible that the industry has now split into two distinct paths – one of regulation and markets, and the other of technology and infrastructure.

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Nazarov responded, “Yes, there are two distinct universes. The cryptocurrency markets fluctuate. Generally, I have noticed that when the cryptocurrency markets decline, banks lose enthusiasm for digital resources and blockchain technology.”

“However, he remarked that the banks are staying put, quietly developing infrastructure solutions, despite the ongoing ‘crypto winter’,” he said. At the same time, Swift and its customer banks do not appear to anticipate that the blockchain sector will be converging soon. Tom Zschach, Swift’s Chief Innovation Officer, commented, “It’s improbable that there will be a single prevailing blockchain network.”

‘It’s the main problem’

Constructing “bridges” to enable private and public chains to exchange data won’t be a simple task. Historically, cross-blockchain bridges have been prone to hacks, with around $2 billion stolen via bridges in 13 different robberies by the middle of 2022, as per a Chainalysis report. Is security still an issue?

Nazarov responded, “I believe that is the primary issue since the bridges that exist now are relatively new.” Fortunately, he added, the ones hacked in 2022 did not contain a great deal of value.

Looking to the future, “we are discussing bridges that can transfer trillions of dollars in worth.”

Transfers in the trillions will have to become commonplace if the blockchain industry is to reach its potential, according to Nazarov. Market capitalization would have to be on the scale of $10, $20 or $50 trillion, rather than the current $1 or $2 trillion. Interoperability is the key infrastructure challenge that must be solved for this to occur.

He questioned why one should anticipate Chainlink to be successful in cross-blockchain bridge security, given that it has been tackling interoperability issues for years, and others have not been successful in the same area.

All the cross-blockchain bridges constructed thus far are essentially “passive bridges” that will “execute whatever command they are given, even if it is fraudulent,” according to Nazarov. In comparison, Chainlink has developed an Active Risk Management Network (ARM Network) that “surveys that bridge, regardless of whether it is for data or for value, or if it is exhibiting wrongful behavior.”

Elsewhere, Nazarov likens the lack of interoperability in the blockchain industry to the challenges faced by internet developers in the past with email. It’s all about enhancing the user experience.

Nazarov commented, “A bank doesn’t want to instruct its clients to connect to their network because it takes too long. Think about it, if I was using Gmail and you had Yahoo Mail, and I told you that you had to get a Gmail account in order for us to communicate, it wouldn’t make sense, would it?”

The internet addressed the issue of the Transmission Control Protocol/Internet Protocol and some email protocols which enabled users of different platforms to communicate without difficulty. “This is a similar kind of situation,” he remarked.

“If one chain is unable to benefit from the value of the other chains, then our industry will be operating at a reduced capacity.”

Progress still in a middle stage

When do Swift and Chainlink anticipate that their rollout of this will be at scale?

“It’s difficult to predict,” Nazarov remarked. “We will experience a steady rise as more and more banks begin to interact with the private networks of other banks and those private networks are linked to public networks. We are currently in the middle stages of this process.”

He speculated that if a single large institution took the lead, the others would follow, citing the example of French bank Société Générale’s deployment of its euro-denominated stablecoin CoinVertible (EURCV) on Ethereum in April as the first institutional stablecoin to be launched on a public blockchain. “That has never happened before,” Nazarov commented. “I’m seeing more and more [people] talk about this.”

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In addition to those already mentioned, other financial institutions and financial market infrastructure firms participating in the Swift interoperability project include Clearstream, Euroclear, Six Digital Exchange, and the Depository Trust and Clearing Corporation.

Altogether, Swift stressed the significance of eliminating obstacles in global transactions and declared their commitment to collaborating with their associates to investigate a possible answer for the division among blockchain networks, which “will be imperative for the market’s long-term scalability.”

The peculiarities of the international banking sector are somewhat distinct, of course. Banks usually favor to converse about “digital resources” rather than “crypto” or “cryptocurrencies,” as Nazarov pointed out, but regardless of how it is referred to, the reality is that “customers of the banks presently consistently desire to participate in that industry.”

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