How Swift's blockchain could boost bank stablecoins

• Key Insight: Swift is adding scale to stablecoins and other digital payments. 
• What's at Stake: The stablecoin market is growing quickly, adding a need for simpler processing. 
• Forward Look: The number of digital asset options means the market will get more complicated.

As stablecoins expand, there's a related trend that includes efforts to link the cryptocurrency to other forms of payments to encourage adoption.
Swift, which oversees an international transaction messaging system, has formed a consortium to build a distributed ledger that will support stablecoins, other forms of cryptocurrency and more traditional transactions. 

Swift is envisioning an infrastructure for stablecoins  that also includes other forms of digital payments that are expected to co-exist with stablecoins. The expected stablecoin boom due to the passage of the GENIUS Act is drawing hundreds of banks, fintechs and even states, which have developed or are considering stablecoins, creating a potential interoperability and ease of use problem. 

"Digital payments and stablecoins are not just optional enhancements, they're forcing mechanisms," said Deepak Gupta, executive vice president of product, engineering and services at the fintech Volante and member of the Faster Payments Council board advisory group.  

Swift's consortium

Swift's existing network includes more than 11,000 banks in 200 countries, creating a large addressable market for its distributed ledger. 

"Stablecoins set new expectations for always-on settlement, programmability, and global reach, pushing legacy networks to modernize," Volante's Gupta told American Banker.

The banks in Swift's distributed ledger consortium at launch will focus on building interoperability for real-time payments and adoption of the ISO 20022 messaging standard, which lets members add data and detail to their Swift messages to verify digital transactions. ISO 20022 is considered a key piece in supporting international real-time payments. That also fits with the stated goal of many stablecoins to provide access to U.S. dollar-backed digital currencies as a hedge against volatile currencies in emerging markets.

Swift did not comment beyond its initial release. At least two of Swift's partners, Deutsche Bank and Bank of America, are considering issuing stablecoins, either individually or as part of a group, or both. "As the environment for international payments continues to evolve with new technologies and innovations, our clients have an even greater need for solutions that make payments more efficient," AJ McCray, global head of payments in global payments solutions at Bank of America, said in materials released by Swift.  

Read more about stablecoins. Stablecoins | American Banker

The development of a shared digital ledger combines the strengths of global financial institutions and technology partners, Ole Matthiessen, global head of cash management and corporate banking in Asia Pacific, the Middle East and Africa at Deutsche Bank, said in Swift's materials. 

"We are laying the foundation for a more interoperable, resilient, and future-ready financial ecosystem where innovative payment solutions can scale on a global level and benefits of digital finance solutions can be realised across the entire industry," Matthiessen said.

Banks have more on their plate than just stablecoins. They are also building products for real-time settlement, embedded banking and other forms of digital commerce.  

By layering a blockchain-based shared ledger that can interoperate with stablecoins, tokenized deposits, and traditional payment rails, Swift is embracing a necessary transition by not just replacing payment rails, but enabling them to coexist in a multirail network, according to Gupta.

"In this context, real-time payments become less about speed alone and more about seamless connectivity, money that moves as flexibly as data," Gupta said.

Banks will increasingly require infrastructure that is flexible, easy to deploy, and protocol fluent, capable of connecting to both traditional and tokenized rails, Gupta said, adding the needs of corporate treasurers for faster liquidity and richer data is also pressuring banks to accommodate all new payment options in a single experience. "Corporates are not looking for another option in isolation." 

A lot of buzz

As stablecoins and stablecoin-related projects accelerate, use cases will also expand, according to Will Beeson, founder digital asset technology company Uniform Labs, who earlier in his career was co-founder of challenger banks Allica and BELLA and oversaw development of a digital asset unit at Standard Chartered. 

"The ability to send payments instantly and nearly for free is incredibly powerful," Uniform Labs' Beeson told American Banker, noting an expansion in stablecoin uses from P2P transfers to cross-border transactions and treasury management. "It's not surprising that Swift is seeing this trend and responding accordingly." 

Stablecoins are generating a lot of buzz, creating momentum for technology development. At reception events before the recent Sibos financial services officially opened, stablecoins and ledgers were the big topic of discussion, Gareth Lodge, a senior analyst at Celent, told American Banker. 

"Change requires not just technology, but changes in people, processes, and most of all, mindset," Lodge said. "Perhaps more than any other time in banking, it feels as if all those things are coming together, creating the conditions for change. Many banks confessed that they didn't have a 'killer' use case, but there was a silent but clear 'yet,'"

But Swift isn't acting in isolation as other companies and organizations pursue the same goal of providing scale for stablecoins. Since there are many stablecoin initiatives underway there will be even more complexity as these initiatives seek to defend, improve or displace other options, according to Lodge. "Things are going to get more complex in the short-term as we see a plethora of choices and approaches, as 'best' is increasingly subjective, and dependent on for who."