ISO 20022 And The Future of Crypto
I first became interested in blockchain and cryptocurrencies in 2017 when I explored alternate methods to raise funding for my hardware startup in Nigeria. If you ask a founder of a hardware startup in Africa how difficult it is to develop a hardware startup on a scale of 1 to 10, they would most likely say it's a 12.
That was my experience in 2017 with my hardware startup, Honey Flow Africa, in Port Harcourt, Nigeria. We created a custom IoT device with patent-pending technology that provides an easier and gentler approach to enhancing beekeeping operations by integrating the power of IoT, A.I., and Big Data into the African beekeeping process to increase honey output processing and predictability.
I read every article I could find at the time to understand blockchain, cryptocurrency, regulations, etc., to help me discover a way forward to raise capital for my startup. Unfortunately, we did not raise money from blockchain, but I learned a lot over the years from my research. As I embark on this journey of launching my venture studio, Seraphim Venture Studios, I see opportunities to raise money via blockchain I previously did not see.
If you are reading this, chances are you have some idea of the financial and economic transformations in the financial markets. However, the global financial market is undergoing a meaningful change, and the average person has no clue about this monumental change.
So, What is ISO 20022?
From the ISO 20022 website, here is how they define it:
ISO 20022 is a multi-part International Standard that was developed by ISO Technical Committee TC68 Financial Services. It describes a shared framework for message creation.
ISO 20022 is a set of guidelines for developing financial standards. Beginning in November 2022, the way the SWIFT community exchanges payment messages will be altered by ISO 20022, which will create a common language for payments worldwide. This new standard will be built on the backbone of a few digital currencies and technologies. I'll get to that later in the post.
It will enable the transfer of all kinds of financial information — from payments and securities trading to settlement between financial institutions — and offer corporates a far better payments experience, not to mention a wide range of other benefits like greater interoperability, reduced costs, and the enablement of new services through real-time data. — National Westminster Bank.
Once these new standards are implemented, many digital cryptocurrencies will communicate with one another with interoperability. Keep an eye out for the term "interoperability," as it will be crucial to the future of digital currencies. Interoperability refers to the smooth execution of a business process by several stakeholders with varying levels of automation and time-to-market needs or capacity.
According to the World Economic Forum (WEF) and the Bank for International Settlements (BIS), interoperability for blockchain-based digital money should encompass both technical characteristics (such as the necessity for systems to be able to communicate information) and intended outcomes:
- From a business perspective: Interoperability for digital currency would aim to facilitate virtual currency issuers to communicate with various types of payment systems (possibly including systems from other countries) to provide end users with a robust digital payment infrastructure and efficient payment instruments that are open, standards-based, universally accessible, inexpensive, secure, and always available.
- From a technical perspective: Interoperability refers to using standard communications formats, protocols, and identifiers by digital currency systems to facilitate smooth payment transfers between users holding different digital currencies.
- From a regulatory perspective: Interoperability mandates regulatory exchange and a thorough examination of what regulatory variances and complexities exist outside of the boundaries where the technology and systems are being built. Differences in regulatory rules must be taken into consideration to maintain interoperability.
- From a legacy perspective: Interoperability in terms of compatibility with legacy systems should also be addressed since new approaches will need to interface with the current financial infrastructure where the value in the form of spendable assets exists today.
Standards For Digital Wallet Interoperability
Most customers will see interoperability at the level of a wallet application on their mobile device that stores at least one payment instrument, if not more. A mix of a unified experience, optionality, widespread and open standards compliance, and other characteristics may be the finest implementation of the previously stated interoperability design concepts. The interoperability of internet email systems and email clients is a valuable reference for understanding what consumers anticipate from the interoperability of their digital wallets. People can send emails to one another using a variety of email service providers.
Consumers will expect a global digital money system that is as interoperable as an email system
Most users use a single email app on their phone from which they can access several accounts from various mail providers and send email from any of those accounts to any other email account on the internet. While sitting in front of your laptop or using your mobile phone, you can access the same message storage and even the same settings when using a different email client on a separate device, such as a web-based interface or local mail client.
As the number of digital payment alternatives and providers grows, users will most likely wish to reduce the number of applications and wallets they use and have a uniform user experience whether purchasing items globally or traveling across borders. Customers will anticipate a worldwide digital money system as interoperable as email.
What is SWIFT?
SWIFT (Society for Worldwide Interbank Financial Communication) is today's most widely used cross-border remittance settlement system. SWIFT, based in Belgium and founded in 1973, connects 11,000 banks and organizations in over 200 countries. It delivers about 40 million communications daily and handles roughly $5 trillion in daily transactions between businesses and governments.
Although rival message systems such as Fedwire, Ripple, and the Clearing House Interbank Payments System (CHIPS) exist, SWIFT remains a prominent position in the market, according to Investopedia. We may explain its success to the fact that it introduces new message codes to transmit various financial transactions regularly and to the security of its platform.
What Were We Using Before SWIFT?
Before SWIFT, Telex was the only available means of message confirmation for international fund transfers. However, Telex was restricted by low speed, security concerns, and a free message format. Particularly, Telex did not have a unified system of codes like SWIFT to name banks and describe transactions. Every transaction had to be explained in sentences, which were then translated and completed by the receiver. This resulted in numerous human mistakes as well as delayed processing times.
What Messaging System Are We Using Now?
MT103 is the current SWIFT messaging system. Unfortunately, this system's data processing method is relatively old-fashioned, and its interface is not particularly user-friendly for individuals without a technical background. We can understand why this system must be updated by looking at Figure 4.1. The interface appears to be a jumble of random code with various keywords linked to other phrases. In addition, it is severely lacking in data and requires much user effort.
To avoid human involvement in data interpretation, the financial sector has developed message definitions, which are agreements on how to organize the data they wish to share in organized forms (syntax) and meaning (semantics).
When it comes to end-to-end integration, these varied terms are confusing. To grasp what the specialists mean and how to reconcile the facts, you need (expensive) professional expertise.
To understand the information transmitted in a certain business domain, you must be familiar with the relevant syntaxes and underlying semantics. This requires tremendous time and technological effort.
ISO 20022 is the agreed-upon approach used by the financial sector to provide uniform message standards across all of the industry's business activities. The ISO 20022 approach is built around the concept of diverse levels.
ISO 20022 applies to the whole financial industry, allowing for a common understanding and interpretation of data in fields as varied as foreign currency trading and credit card payments.
The essential idea here is that mapping simplifies life for everyone engaged in offering such interoperability: apps, translation services, etc. Moreover, this type of interoperability allows for automatic transfer and straight-through processing across whole processing chains.
What Type of Services Does SWIFT Offer?
The SWIFT system provides a variety of services to help organizations and people complete smooth and precise commercial transactions. Some of the services are listed below:
Alliance Cloud
Alliance Cloud is the new, unified, cloud-based channel for connecting to SWIFT's 11,000+ counterparts, as well as messaging services, standards, and solutions designed to answer the needs of the international financial ecosystem.
Banking Insights
A visual dashboard that provides immediate insights into your correspondent banking business for better decision-making. The worldwide footprint and portfolio analysis clearly show the evolution of your business by region, country, currency, and message type.
Daily Validation Reports
Your daily SWIFT transaction activity is reported independently. To assist you in promptly detecting suspect money movements. The Daily Validation Reports are supplied over a separate and secure route, giving you an unbiased and full perspective of your SWIFT transactions.
KYC Registry
Simplifying the Know Your Customer (KYC) process is a secure, global platform for sharing KYC due diligence. KYC is essential to protect the global financial system from money laundering and financing unlawful and criminal behavior.
The KYC Registry is a safe global platform that provides pre-defined data fields and document types to standardize and streamline data collection.
Almost 6,000 financial institutions have used SWIFT’s KYC Registry to post and receive KYC data from their counterparties. It is widely acknowledged as the gold standard for correspondent banking due diligence. SWIFT corporate users may now use the register to assist ease the KYC process between banks and corporations.
SWIFT and CLS
CLS is a unique market infrastructure of critical importance to the F.X. industry. SWIFT provides a secure, resilient network connectivity channel to reach CLS. In addition, the CLS Settlement service settles an average of $5 trillion daily in 18 currencies for 70 settlement members and over 24,000 third-party customers.
How Does SWIFT Make Money?
Every member pays a one-time joining fee as well as annual support fees that vary by member class. SWIFT also charges users for each message based on message type and length. These charges also vary depending upon the bank's usage volume; different charge tiers exist for banks that generate additional volumes of messages.
Fig 3: This shows the original timeline of the rollout of ISO 20022, but it has been delayed.
The U.S. Federal Reserve ISO 20022 Migration
On January 3, 2022, the American Bankers Association (ABA) reacted to Ann E. Misback, Secretary of the Federal Reserve System’s Board of Governors, about the acceptance of ISO 20022.
The migration of ISO 20022 for Fedwire on a single day no early than November 2023, rather than the phased method previously considered in 2018, is what's interesting about this letter. While the ABA agrees with the schedule, it says banks need a "clear implementation plan as soon as feasible" to form teams and dedicate resources to start planning and testing. The Fedwire migration is one of several big projects that U.S. banks must deal with in the next couple of years, including SWIFT's ISO 20022 migration in November 2022 and the FedNow real-time payments system's launch in 2023.
What is Fedwire?
Fedwire is a real-time gross settlement system for central bank money used by Federal Reserve (Fed) banks to settle final U.S. dollar payments electronically among member institutions. The Fed is in charge of distributing money and coins to banks and other financial institutions and ensuring enough cash and coins are in circulation to meet public demand. The system handles trillions of dollars daily and provides an overdraft protection system for participants with approved accounts. Although the Fedwire Funds Service performs only around 670,000 transactions per day, the average value of each Fedwire payment is $4 million, resulting in a daily total of $2.8 trillion.
When people need more money to spend, such as during the holidays or a natural disaster or crisis, a depository institution may request more currency and coins from its Reserve Bank or branch. For example, the Fed shipped more cash to depository institutions in response to the increased demand for money during the COVID-19 pandemic.
The U.S. Federal Reserve is not alone in adopting ISO 20022, as many governments and central banks are beginning to adopt digital currencies, as opposed to several years ago when it was only mentioned in high-level documents and by members of crypto-twitter. As a result, CBDCs (Central Bank Digital Currencies) will eventually gain widespread acceptance.
What Exactly is a CBDC (Central Bank Digital Currency)?
Issued by a central bank, digital currencies are digital tokens, similar to cryptocurrency. They are determined by the value of the country’s fiat currency. Many countries, such as the U.S. form of a digital dollar, are starting to explore the idea. Some ambitious countries, including China with its digital Yuan and South Korea, have already finished a demo and are piloting the technology.
Nigeria was one of just nine nations in the world to introduce the eNaira, making it the first African country to do so. eNaira, which went live on October 25, 2021, was created to supplement, not replace, Nigeria's actual currency.
Many central banks worldwide are doing pilot programs and research initiatives to see if a CBDC is viable and useful in their economy. Nine nations and territories have launched CBDCs as of March 2022.
- The Bahamas
- Antigua and Barbuda
- St. Kitts and Nevis
- Monserrat
- Dominica
- Saint Lucia
- St. Vincent and the Grenadines
- Grenada
- Nigeria
The Chief Innovation Officer at SWIFT, Thomas Zschach, said, "Facilitating interoperability and interlinking between different CBDCs being developed around the world will be critical if we are to realize their potential fully."
"If left unaddressed, this fragmentation could lead to 'digital islands' springing up across the globe," adds Nick Kerigan, Head of Innovation at SWIFT.
Crypto vs CBDCs
ISO 200222 migration, for example, is anticipated to be favorable for central bank digital currencies (CBDCs) but detrimental for many existing cryptocurrencies such as Bitcoin.
Standardizing electronic payment communication instructions would make trade across borders and between financial institutions easier and boost centralized payment providers like SWIFT. However, it may also prevent the usage of decentralized systems such as Bitcoin, Ethereum, and others.
A bank in Nigeria will be able to transmit cash in Naira to a bank in India, which naturally transacts in Rupees via SWIFT, and will be further enabled by working in tandem with real-time payment mechanisms in other markets. Another possibility is that ISO 20022 stimulates the growth of CBDCs.
With various central banks investigating the construction of a digital currency, the standardized language of payment requests and orders is anticipated to improve CBDC interoperability.
Move Swiftly, Move First
Bank payment systems, as well as various processes, will need to be modified. Furthermore, decisions regarding future business models will have to be taken during this migration. Schedules will be tight, with resource needs similar to previous significant projects. Waiting and seeing is not an option for banks since they would be shut off from international payment networks and central banks. Some central banks have already begun to examine migration policies. Many other organizations are establishing timetables, acquiring resources, assigning funds, and alerting top management.
Crypto Currency and ISO 20022
Institutional worldwide wire transfers and cryptocurrency have long been at conflict. The emergence of Bitcoin threatens to destabilize international money transfer as a centralized business. However, according to ISO 20022, both services may be able to coexist and provide the best of both worlds. But, what are the greatest crypto assets to invest in to get the most benefits from this new standard? Fortunately, there is a wide range of ISO 20022 cryptos to choose from.
ISO 20022 proposes combining all these message formats into a new language called eXtensible Markup Language (XML). Many organizations are beginning to support ISO 20022. Notably, in 2018, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) endorsed the standard.
The United States government is also assisting in hastening the implementation of ISO 20022. According to the Federal Reserve Board (FSR), Federal Reserve Banks will adopt the standard in late 2023. In addition, ISO 20022 has substantial support from FSR and SWIFT.
With SWIFT Adoption, ISO 20022-Compliant Cryptos Will See A Surge In 2022
The ISO 20022 standard does pose a significant threat to some cryptos. For example, many experts fear that the adoption of the standard will impede the growth of cryptos such as Bitcoin (BTC-USD) as international money-transfer platforms. However, this is not the case for a handful of ISO 20022 cryptos. Five digital currencies meet the compliance standards of ISO 20022, making them good bets (Not Financial Advice) for the coming year as SWIFT adopts the format.
Not only are two cryptocurrencies ISO 20022 compliant, but they are also members of the ISO 20022 Standards Body. The currencies at stake are Ripple (XRP-USD) and Stellar Lumens (XLM-USD).
Ripple (XRP)
The first of the two to join this group is Ripple (announced on their website), clearing the stage for standardizing Distributed Ledger Technology (DLT). In 2020, the organization behind XRP became the first "Distributed Ledger Technology (DLT)" member of the Standards Evaluation Group for Payments. This was a logical move for Ripple, given that XRP is the most well-known payments-focused cryptocurrency and has collaborated with institutions to enable speedier cross-border payments and rapid settlements.
Ripple has over 300 institutional clients, including Standard Chartered, Santander, and MoneyGram, which utilizes Ripple for 10% of its cross-border transactions with Mexico. In addition, the SEC has filed a lawsuit against Ripple for allegedly conducting improper securities offerings through the selling of XRP. After the litigation is resolved, CEO Brad Garlinghouse says he may explore taking the firm public.
Several high-profile organizations use Ripple's On-Demand Liquidity (ODL) service to avoid costly pre-funding for cross-border payments. ODL uses XRP to "bridge two currencies in less than three seconds, ensuring payments are swiftly transmitted and received in local currency on both sides of a transaction."
Stellar Lumens (XLM)
Stellar does not appear to have expressly mentioned whether it is ISO 20022 compliant. It does, however, have close links with IBM (which is according to their website). IBM's cross-border payment system is built on the Stellar Blockchain, with XLM as the bridge currency. In addition, IBM (NYSE: IBM) uses Stellar to power its stable coin-issuing business, which runs its stable coin-issuing business on Stellar.
Other ISO 20022 compatible cryptos include XDC (XDC-USD) and Algorand (ALGO-USD).
Xinfin Network (XDC)
XDC is a delegated Proof-of-Stake blockchain headquartered in Singapore that focuses on global trade finance. ISO 20022 compliance appears to be met by XDC. Xinfin's website claims that their private network "allows any type of organization to link their legacy systems with a Blockchain Network utilizing the XDC Protocol and messages consistent with the ISO 20022 standard."
To operate as a bridge and host dApps on the Corda Marketplace, Xinfin collaborated with R3, a partnership of over 200 financial institutions. As a result, Corda is compliant with existing and new regulations such as ISO 20022. It's also worth noting that Andre Casterman, former head of Corporate & Trade at SWIFT, joined Xinfin as an adviser in 2020.
Algorand (ALGO)
While Algorand has not said specifically whether it is ISO 20022 compatible, there are several reasons to expect that it will be when the standard is fully adopted.
Algorand is a member of the Digital Payments Institute (together with SWIFT, Mastercard, and others), which published "The Future of Payments." The necessity of ISO 20022 for a fully operational and interoperable global payments infrastructure is acknowledged in the article. The article states that improved data standards, particularly ISO 20022, will enhance the flow and hand-off of data throughout the global payments ecosystem and allow automation. The industry's migration to ISO 20022 messaging for all cross-border and cash management communications is set to begin at the end of 2022.
The focus on simplifying international wire transfers unites all of these cryptos and distinguishes them from non-compliant cryptos. As a result, they are among the first to implement the ISO 20022 standard, quickly gaining institutional support. In addition, three other cryptos are said to be compliant.
Conclusion
In summary, when it comes to integrating and using digital currencies, it's evident that the tokens chosen for ISO 20022 have one primary theme: efficiency. Gathering this knowledge over the years has convinced me that a digital economy is unavoidable. The fundamental structures of our global economy are undergoing tremendous transformations, and the average person is still uninformed. Studying what large corporations are developing is a simple way to see what technology will be running the planet alongside present infrastructure in the future.
At the end of the day, always do your own research and consult a qualified financial advisor.
