Blockchain Integration in Swiss Banking: A Major Step Towards Digital Finance

• Swiss banks UBS, PostFinance, and Sygnum completed a first-of-its-kind legally binding payment using blockchain.
• The test demonstrated interoperability between traditional bank deposits and public blockchains for the first time.
• The successful trial signals a potential shift toward blockchain-based payment systems in traditional banking.

The biggest banks in Switzerland took a major step toward integrating blockchain into their system. UBS, PostFinance, and Sygnum Bank tested out blockchain for interbank payments in a proof-of-concept (PoC) held by the Swiss Bankers Association (SBA). The research is the first time that a legally binding payment has been made using a public blockchain. 

The payment instructions were tokenized as a “deposit token” on the blockchain. The second scenario was modeled to emulate an escrow-type of procedure. In this example, the deposit tokens was traded for a single form of real-world assets (RWAs), with transactions having been processed automatically.

Blockchain Bridges DeFi and Traditional Banking

More importantly, it is noteworthy that this was the world’s first trade finance transaction that exercised third party payment in a legally binding manner across banks on a public DLT. The SBA highlighted smart contracts, which guaranteed the safety of technology and compliance with the regulation. Public blockchains taking permissioned applications potentially could allow legally binding payments SBA, providing novel prospects for digital finance.

Also Read: IOTA and Salus Unveil Bold Blockchain Solution to Fix $2.5 Trillion Trade Finance Gap

While successful, the SBA observed that scalability is still an issue. Further design changes and greater collaboration with banks, infrastructure providers and governments are necessary. The research affirms the potential for DLT based payments and underscores the work that still needs to be done to further this technology.

This trial could generate increased interest in Distributed Ledger Technology based payment systems from other big financial companies. It is indicative of increasing mergers between traditional banking systems and DeFi. The testing demonstrated that interoperability between traditional bank deposits and public blockchains is no longer a pipe dream. 

“This is an important step for our bank,” said Christoph Puhr, digital assets lead at UBS Group. He said that the proof of concept established that bank money could be made compatible with public DLT.

Source: BIS

Blockchain to Shape the Future of Global Financial Systems

In his opinion, it could speed up innovation around tokenized assets and help shape the future of financial systems globally. Puhr said the project promised to offer considerable contributions to national and international financial systems.

The SBA is the representative body of Switzerland’s banking industry, which was founded in Basel in 1912. The association encompasses some 265 institutions and more than 12,000 members. 

By conducting this study, the SBA is announcing the initiation more DLT-related initiatives for Switzerland’s banking industry. Other banks may be encouraged to examine Distributed Ledger Technology solutions for cross-border payments and for tokenizing assets.

In world figure, other countries are looking at Distributed Ledger Technology and smart contracts too. A joint research investigation was conducted in the United States by the Federal Reserve Bank of New York and the Bank for International Settlements (BIS) Innovation Hub Swiss Centre also in May. Smart contracts might provide central banks with flexible and nimble-response tools in relation to a tokenized financial system, the study concluded.

Source: BIS

The U.S. study found that there were infrastructure issues for central banks, as well. The majority of current financial systems are not set up to accommodate the more advanced Distributed Ledger Technology uses being researched. But that doesn’t mean DLT can’t provide benefits for modernizing financial infrastructure.

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