Top banks work on blockchain interoperability despite SEC issues.

Amidst the chaos in the cryptocurrency industry, some of the world’s biggest banks have been quietly considering how to bring digital assets to institutional clients. Last week, a plan emerged. A collaboration led by the Society for Worldwide Interbank Financial Telecommunication (Swift), the global financial communication and payments network, will soon test ways for permissioned bank-owned blockchains to communicate with each other and with public blockchains like Ethereum. More than a dozen financial heavyweights, including Citi, Lloyds Banking Group, BNP Paribas, BNY Mellon, and the Australia and New Zealand Banking Group, are participating in this global experiment. Chainlink, the decentralized oracle network, is developing the technology to “bridge” these diverse blockchains.

“Institutional investors increasingly are considering investments in tokenized assets,” said Belgium-based Swift, which connects more than 11,000 financial institutions worldwide, in its June 6 blog. Its headline neatly summarized the task at hand: “Swift explores blockchain interoperability to remove friction from tokenized asset settlement.”

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

This test phase will look at three specific use cases, according to Swift:

“The first use case will involve the transfer of tokenized assets between two wallets on the same public blockchain network (Ethereum Sepolia testnet). The second involves the transfer of tokenized assets from a public blockchain (Ethereum) to a permissioned blockchain. And a 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 Sepolia network, while Chainlink’s Cross-Chain Interoperability Protocol (CCIP) will enable complete interoperability between the source and destination blockchains,” Swift stated.

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

“Yes, there are these two parallel worlds,” answered Nazarov. “The cryptocurrency markets go up and down. Historically, what I’ve seen is that when the cryptocurrency markets contract, banks lose interest” in digital assets and blockchain technology.

“But I’m not seeing that this time,” he said, stating that the banks are holding fast, quietly working on infrastructure solutions, despite the enduring “crypto winter.” Meanwhile, Swift and its client banks don’t seem to think that the blockchain industry will be consolidating anytime soon. “There’s unlikely to be a single prevailing blockchain network,” said Tom Zschach, chief innovation officer at Swift.

“Building “bridges” so private and public chains can share information won’t be easy. Historically, cross-blockchain bridges have been vulnerable to hacks, with some $2 billion stolen from bridges in 13 separate heists by mid-way through 2022, according to a Chainalysis report. Is security still a challenge?” “I would say it’s the main problem,” answered Nazarov, “because the bridges that exist today haven’t been around for long.” Fortunately, those hacked in 2022 didn’t hold extraordinarily large amounts of value, he added. But looking ahead, “we’re talking about bridges that can move around trillions of dollars of value.”

Transfers in the trillions will have to become standard practice if the blockchain industry is to grow beyond a market capitalization of $1 or $2 trillion and reach $10, $20, or $50 trillion, according to Nazarov. Interoperability is the main infrastructure problem that the industry must solve to achieve this.

Chainlink has been working on interoperability issues for years and has built an active risk management network to monitor cross-blockchain bridges for misbehavior to succeed where others have failed.

Nazarov compares the state of interoperability in the blockchain industry to the problem faced by internet developers several decades ago with email. The challenge is to improve the user experience.

Progress is still in a middle stage, and it is difficult to predict when it will be rolled out at scale. As more banks begin to interface with the private chains of other banks and those private chains connect to public chains, there will be a gradual increase in progress.

Overcoming fragmentation among blockchain networks will be key to the long-term scalability of the market, said Swift. The company is working with its community to explore a potential solution.

The nuances in the global banking world are different, but clients of banks consistently want to take part in the industry, according to Nazarov.