The introduction of ISO 20022 in March 2023 will be a huge upgrade for the way banks will be able to exchange information about payments. ISO 20022 will allow much more structured data to be shared – upgrading SWIFTs 40-year-old messaging system and potentially giving fiat currencies the ability to compete with CBDC and other digital currencies.
Alternatively, will ISO 20022 enable cryptocurrencies, fintech companies and potentially TradFi firms to create their own ISO compliant digital currencies and provide a range of new value-added services to rival the incumbent banks and payment providers?
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was established in Belgium in 1973 and designed to replace telex as well as allow banks to exchange messages as to who owed what. In November 2022, SWIFT had planned to introduce ISO 20022 – a global standard for exchanging electronic messages – but this has now been delayed to March 2023.
The result of this is that the 11,500 banks and four billion bank accounts which have access to the SWIFT platform currently will have the ability to be able to receive ISO 20022 payment messages. The intention is that by November 2025, all messages (both sending and receiving) must be based on ISO 20022 and so usher-in a global standard in which to send messages and, indeed, transfer value.
SWIFT believes that 80% of global, high-value payments by volume will be then processed through ISO 20022. In the interim, JP Morgan has summarised the key benefits that ISO 20022 will offer, including that:
- it is a standard for exchanging electronic messages
- it uses XML syntax and offers structured, rich data
- this format is already used by many real-time, low-value/high-value clearing systems around the world
- it offers richer references and improved remittance information.
Furthermore, the publication centralbanking.com has reported: “The Payments Benchmarks 2022 found that 80.5% of participating central banks expect to implement the International Organisation for Standardization (ISO) 20022 messaging format for real-time gross settlements (RTGS) in their jurisdiction within the next three years”, implying that there will be considerably more structured data available about payments, so offering institutions and fintech firms far greater business information by using artificial intelligence.
Structured data will be accessible in the payment message, and payment information will be packaged into value-added services for customers, offering insights into business behaviour and performance. In turn, this will enable those firms involved in making payments (especially the growing fintech sector) to customise the services they offer and so provide greater competition to traditional banks. At the heart of this is the ongoing digitisation of financial services which, in turn, could well introduce a greater use of digital currencies.
Traditionally, financial institutions rely on the ISO 4217 standard to identify currencies when making transactions – for example, the US dollar (as defined by ISO 4217) has the code ‘USD’. If central bank digital currencies and other digital currencies are able to comply with ISO20022 there is the possibility that these alternative methods of making payments could be used by existing financial institutions around the world.
In October 2022, this possibility was recently highlighted by the SWIFT press release: “Ground-Breaking SWIFT Innovation Paves Way for Global Use of CBDCs and Tokenised Assets”.
Furthermore, SWIFT has confirmed it has “successfully shown that Central Bank Digital Currencies (CBDCs) and tokenised assets can move seamlessly on existing financial infrastructure”. It has also been running a project with 14 central banks, including Banque de France and Deutsche Bundesbank, and the commercial banks HSBC, Standard Chartered, UBS and Wells Fargo. Moreover, SWIFT “can provide CBDC network operators at central banks with simple enablement and integration of domestic CBDC networks into cross-border payments. And it can do so through a single Connector Gateway”.
Tom Zschach, Chief Innovation Officer at SWIFT, has reported: “Digital currencies and tokens have huge potential to shape the way we will all pay and invest in the future. We see inclusivity and interoperability as central pillars of the financial ecosystem, and our innovation is a major step towards unlocking the potential of the digital future. For CBDCs, our solution will enable central banks to connect their own networks simply and directly to all the other payments systems in the world through a single gateway, ensuring the instant and smooth flow of cross-border payments”, adding that, “tokenisation has great potential when it comes to strengthening liquidity in markets and increasing access to investment opportunities, and SWIFT’s existing infrastructure can ensure these benefits can be realised at the earliest opportunity, by as many people as possible.”
Professor Michael Mainelli, Chairman of Z/Yen Group, a City of London think-tank, believes that ISO 20022 could be transformational. “An upgrade to SWIFT messaging is long, long overdue. ISO 20022 will level the playing field between simple and complex transactions, between traditional currencies and CBDCs, and yes, perhaps between fiat and crypto. However, if your competitive ‘edge’ has been SWIFT’s clunkiness, beware.”
Currently, there are only seven cryptocurrencies (listed below) that are able to comply, but no doubt this list will expand over the coming months:
- XDC Network
Meanwhile, back in 2020 in the US, the Federal Reserve Board announced the ‘FedNow’ service as an alternative to the existing private-sector real-time payments system. The expectation is that ‘FedNow’ will go live mid-2023, enabling individuals and businesses in the US to send instant payments which, if successful, will go a long way in addressing the challenge from those digital currencies which have advocated their ability to offer real time settlement.
So, ISO 20022 may well render the use of cryptocurrencies as a form of payment to be redundant. However, given the growing evidence of TradFi/DeFi crypto industries merging, there is the possibility that digital currencies which become ISO20022 compliant will be more accepted as they adopt those global standards made use of by institutions.
Facebook has tried to launch its own digital currency but failed. But even so, maybe firms such as Crypto.com, which now has over 70million customers compared to only 10million in February 2021, or BNY Mellon with over $43trillion of assets under custody, will decide they do actually aspire to have their own form of digital currency. After all, it seems increasingly that the days for the US$ as the world’s reserve currency could be coming to an end.
But that is an article for another time,