SWIFT Research Report: Smart contracts and distributed ledger technology require standard terminology to enable interoperability between systems (Download the full report)

In April this year, SWIFT began to study distributed ledger technology (DLT) and smart contracts (SC). Recently, SWIFT released its latest research report (download the full text of Coin Library). The report pointed out that DLT and smart contracts need to establish a standard language. It also mentioned the challenges that the application of the two in the mainstream financial field will face.

SWIFT is a symbol of mainstream finance. Its full name is Society for Worldwide Interbank Financial Telecommunication. It mainly handles transactions between some banks and financial institutions. There are more than 11,000 financial institutions using SWIFT. In 2014 alone, they processed as many as 5.6 billion financial messages.

The banking industry has recently begun to study DLT. Blockchain is the underlying technology of Bitcoin, and DLT is a derivative technology of blockchain. DLT is different from the public chain and shared or distributed ledger used by digital currencies. DLT can work normally even if there is no digital currency, and it is not completely public.

SWIFT believes that a number of challenges must be addressed for DLT and smart contracts to be more successful and advocates for the use of ISO 20022.

Every country's financial industry has its own professional terminology. When financial institutions from different countries communicate with each other, financial terminology barriers inevitably cause some confusion. ISO 20022 is specifically designed to standardize financial language around the world. Anyone can make suggestions for its updates and edits. There is a management team behind it that selects appropriate updates to add. In a strict sense, ISO 20022 is not open source, but it has the open spirit of Wikipedia.

SWIFT believes that standardized terminology is beneficial for DLT and recommends using ISO 20022. This is not surprising, as SWIFT is a major contributor to ISO 20022. They believe that different financial institutions will use different DLTs, and standard terminology will enable multiple different DLTs to be connected. Smart contracts are no exception.

ISO 20022 can serve as a reference for standard terminology for DLT and smart contracts, enabling interoperability between DLT and smart contracts and other automated mechanisms.

DLT and smart contracts are a great advantage in that they enable communication without human intervention. However, SWIFT also believes that they face some challenges.

Unfortunately, upon further investigation, we found that this model was ‘tainted.’ It was not the communication method that was limited, but the way bonds are issued and processed today… (these processes) may not be suitable for use in a DLT environment.

SWIFT also listed five requirements for the standardization of DLT and smart contracts in the financial world. From one of the points, it can be seen that SWIFT seems to prefer private DLT. Private DLT is also a distributed ledger, but it is only open to a few designated parties.

It is necessary to determine the responsibilities of the transaction participants. The permissions of each party must be set according to regulations. In order to clarify these permissions during operation, the DLT platform must have strong identity authentication management and access control capabilities.

However, SWIFT did not specify what permissions should be set or what kind of identity authentication management system should be developed. Obviously, their vision is still a long way from Bitcoin's semi-anonymous system.