- Key insight: Working with Swift's new blockchain gives Citi a way to extend its tokenized deposits to other banks.
- Expert quote: "We envisage a future where more and more banks are able to use the ledger, that then enables velocity of movement of settlements of payments at a much higher scale."--Debopama Sen, global head of payments at Citi.
- Forward look: It may take some time for all Swift members to integrate their systems with its new distributed ledger.
Citi began using Swift's new distributed ledger this week to make its tokenized deposits work beyond its own network of branches and clients.
The New York bank began offering Citi Token Services two years ago; it was one of American Banker's
Citi and other banks that have developed their own tokenized deposits face a challenge: these digital deposits work only on a bank's own proprietary distributed ledger, unless it joins a network that somehow connects them.
"A tokenized deposit works most easily when payer and beneficiary are customers of the same bank," Harvey Li, founder of consultancy Tokenization Insight, said in a LinkedIn post. "Once money needs to cross into another bank, the advantage of a proprietary ledger becomes its central limitation: each institution maintains a distinct deposit liability, technology stack, compliance perimeter and settlement relationship. Without a common coordination mechanism, banks either build repeated bilateral connections or try to persuade counterparties to join their own networks."
Working with Swift is one way to expand beyond a bank's internal network. The payment messaging organization has 11,500 bank and securities firm members in 200 countries. It moves messages about payments through its vast network. Banks keep de nostro (or "on us") accounts at other banks. When a receiving bank gets a message about a payment being sent to one of its customers, it deducts from the paying bank's de nostro account to pay that local customer.
Swift's messaging network can be used to coordinate activity across bank-owned ledgers.
"Swift can make separate systems interoperable; institutions such as Citi can make that interoperability commercially useful," Li said. "Together, they point toward a two-tier hub-and-spoke architecture — effectively a hub of hubs."
Swift first announced the permissioned blockchain network, which runs on a layer-two protocol that works with Ethereum's blockchain and was developed with Consensys,
That one-year turnaround is "a good indication that it hasn't taken that long, and it integrates well with our Citi Token Services," Debopama Sen, head of global payments at Citi, told American Banker.
Swift's blockchain uses the same standards and structured data as the traditional Swift network, "which will make it easier for the larger community of banks to adopt it," Sen said.
Because Citi is already a high volume user of Swift's traditional network and it already offers tokenized deposits, connecting to Swift's distributed ledger was not a heavy lift, according to Sen.
"The technology exists today; the technology is the easy part," Sen said. "Even the integration is not that hard if you have a level of sophistication, security and experience. But I think the real test is how do you get network adoption and Swift has that network effect, so I can go bilaterally and tie up with all my counterparties and big banks."
Swift's 11,500 users give it a major network size advantage. The correspondent banking model it uses in its traditional messaging system — in which banks that don't have direct relationships with other banks in a specific country place payment messages through "hops" at member banks in the middle — has at times been criticized for transaction delays and difficulties in knowing where a payment is in the process. In recent years, Swift has released a dashboard that shows where payments are in the process and it's worked on speed — Swift executives say 75% of payments reach their final destination within 10 minutes.
Swift's new blockchain technology provides immutable payment messaging, Sen said. It already has trust and resilience and "it operates with lots of experience of handling challenges, issues built over many years," she said.
Sometimes when a new blockchain launches, two companies will do a pilot transaction, and the project is never heard about again.
In this case, Citi has done multiple transactions with other banks in other countries and it's getting ready to do more, Sen said.
"This is obviously a pilot stage, but the whole point of the pilot stage is to get everybody used to the system so that we can ramp it up," Sen said. "The adoption is more likely if it is interoperable with fiat and with everything else."
There are other bank consortia working on blockchain-based payments, such as
Some of these efforts are still exploratory, Sen said. Citi is looking to provide different options to meet clients' use cases.
"We do see a world where clients will need multiple options, but again, interoperability between these options is very important," Sen said.
If a client needs Citi to use the Swift ledger for some of its business models, and a stablecoin or tokenized deposit for other purposes, the bank wants to support it all.
"Clients look for one integration point, and they want you to deal with the complexity so that they can focus on their commercial business model," Sen said.
Instant payment settlement during off hours presents new fraud risks. But Sen said Citi has been operating around the clock for a long time. For instance, Citi Payments Express was announced a few years back and now operates in more than 20 markets, she said.
"We do close to 10 million transactions a day, and a large part of that happens after hours because these are supporting e-commerce business models," Sen said. "So we do cater to that, and our risk management also caters to that. And I think that is where the world is going. It is a 24/7 world, so your risk management has to keep up, but you have to have a high level of automation to be able to deliver that and flexible scale. So if you have a big shopping day or you have [heavy] volumes after a three-day weekend, which we will see very soon, you have to have the level of flexible scale to be able to cater to that."
Swift's blockchain ledger and its more traditional network run concurrently and may continue to do so for some time.
"We envisage a future where more and more banks are able to use the ledger, that then enables velocity of movement of settlements of payments at a much higher scale," Sen said. But I think it's going to be a journey."
