- UBS, Sygnum, and PostFinance, under the umbrella of the SBA, displayed the technical and legal feasibility of integrating blockchain technology for interbank payments via deposit tokens.
- The group, however, admitted that scalability issues could become a hurdle in its broader rollout.
Switzerland’s largest banks, UBS, Sygnum Bank, and PostFinance, have recently achieved a new milestone in the realm of blockchain. On Tuesday, the Swiss Bankers Association (SBA) told Reuters that the institutions completed the first legally-binding bank payment using bank deposits and a public blockchain.
A Successful Proof-of-Concept of the Use of Blockchain for Cross-Bank Transactions
The feat was part of the proof-of-concept (POC) for the application of blockchain technology and smart contracts for interbank payments. UBS, Sygnum, and PostFinance conducted the pilot under their joint feasibility study.
“The results confirm the feasibility of payments between different institutions using blockchain technology,” said SBA.
A Two-Pronged Test
The blockchain-based test occurred on the Ethereum (ETH) chain. It demonstrated two different functions:
- The first showcased how customers of participating banks could utilize a tokenized “deposit token” to initiate an off-chain money transfer. A deposit token is a digital representation of a traditional bank deposit. The process involved the transfer of funds off-chain or outside the blockchain. However, the instructions for the payment were recorded on-chain.
- Meanwhile, the other executed an automated, escrow-like process. It facilitated the exchange of these deposit tokens for tokenized real-world assets (RWAs). This part of the test showcased how the system could automatically process the transfer of a digital asset once the payment was confirmed.
Underlying Challenges
Despite the success of their pilot, SBA and the participants admitted in a subsequent interview with Coindesk that there are underlying challenges that they should address before rolling out the solution to a broader customer base. The main issue lies in scalability, which will require a higher level of participation from banks, infrastructure providers, and regulators. There are also possible hurdles in jurisdictions with more stringent regulatory environments than Switzerland.
Nonetheless, the results indicate both the technical and legal feasibility of using blockchain for transactions across banks. Financial institutions could particularly use the insights gleaned from the experiment to accelerate their adoption of distributed ledger technology (DLT) or smart contracts to boost the efficiency, speed, accessibility, transparency, and security of individual or business-to-business settlements. Furthermore, this could effectively bridge traditional finance (TradFi) and decentralized finance (DeFi) to eliminate the rails limiting the capabilities of conventional payment frameworks.
