Tokenisation in FX Settlement Could Save Banks $50 Billion: Report

A new report stemming from the work of Project Guardian, led by the Monetary Authority of Singapore (MAS), published by Ant International and ISDA, claims that industry-wide adoption of tokenised bank liabilities could save the industry $50 billion.

ISDA and Ant International are members of the industry group and lead the FX workstream to develop FX data specifications, risk management frameworks and FX documentation. Other contributors to the report include BNY, HSBC, OCBC and the Global Financial Markets Association’s Global Foreign Exchange Division. It proposes principles for leveraging tokenised bank liabilities and shared ledgers in transaction banking services.

The report lays out design principles for tokenised bank liabilities to standardise industry practices and enable interoperability; the key risks and mitigation actions for shared ledger-based payments; and provides use cases showcasing real-world shared ledgers and tokenised payments in transaction banking.

ISDA says FX-related risks and costs remain a “major hurdle” in cross-market and cross-currency payments, especially for businesses in the digital economy. On top of limited settlement windows, they also face time zone delays and different settlement assets and platforms. This results in slower settlement and higher fees, with an estimated $120 billion spent annually on cross-border transaction fees, it adds.

In contrast, use cases by the industry group in Project Guardian show that tokenised bank liabilities and shared ledgers can result in faster, more secure and efficient cross-border payments. “By enabling interoperability between bank solutions, payments can be completed 24/7 with FX settlement conducted in real-time,” the report states. “Payment settlement time is also reduced to minutes or even seconds, providing a more seamless payment experience for businesses and their customers.”

The report stresses, however, that a universally-accepted industry framework is needed for industry-wide adoption. If this is achieved, it could lower cross-border transaction costs by 12.5%, saving businesses more than $50 billion by 2030.

ISDA and Ant International say, together with the Project Guardian industry group, they will continue to broaden the applications of shared ledgers and tokenised bank liabilities by developing more use cases for the digital economy. This includes integrating with existing banking systems and supporting other digital assets so that businesses big and small can benefit from this innovative technology.

“Tokenisation has the potential to revolutionise cross-border payments and FX settlements, significantly increasing efficiencies and reducing costs and risks,” says Scott O’Malia, chief executive of ISDA. “Our work with MAS and the industry group has highlighted the critical importance of common standards and industry documentation to support the safe and efficient use of tokenised bank liabilities, and this will continue to be a focus for ISDA as we further develop the potential for tokenisation.”

Kenneth Gay, chief fintech officer, MAS, adds, “The use of tokenised bank liabilities marks a milestone in the evolution of cross-border payments and FX settlements. Underpinned by shared ledger infrastructures, tokenised bank liabilities can enable 24/7, real-time settlement across borders and help optimise liquidity management in transaction banking. Together with members of Project Guardian, we look forward to advancing efforts towards more efficient global financial markets.”