Germany’s SWIAT, the DLT tokenization network founded by DekaBank, is proposing a trigger payment solution, Cycros, to use central bank money to settle digital asset transactions. One of the benefits of distributed ledger technology (DLT) is the reduction in risk by enabling the simultaneous transfer of money and tokenized securities in delivery versus payment (DvP) transactions. Ideally, this would be done with central bank digital currency (CBDC).
However, a CBDC digital euro will not likely come online soon, so a trigger payment solution provides an alternative in the interim. Particularly as March 2023 sees the launch of the Eurozone DLT Pilot Regime, which supports blockchain-based securities trading and settlement infrastructures.
The Banque de France has already demonstrated a willingness to get involved in projects using its pilot wholesale CBDC. However, it remains to be seen at what scale this will be available, given the Pilot regime should be many tens of billions or even hundreds of billions in volume.
Regarding trigger payments, the Deutsche Bundesbank tested a similar solution with the Deutsche Börse last year. Now SWIAT is planning a proof of concept for Cycros with a prototype targeting securities buy and sell transactions as well as repurchase agreements.
“The most interesting, innovative, and effective aspect of this proposal is to leverage the existing cash infrastructure to quickly bring Delivery vs. Payment with central bank money to the DLT,” said Dr. Timo Reinschmidt, European Head of Banks and Broker- Dealers, Standard Chartered. “Intraday risks are mitigated by the simultaneous delivery of digital securities against the exchange of central bank money.”
However, when we spoke to DZ Bank’s Holger Meffert a few months ago, he viewed a trigger solution as a short term option. “This would be a solution that would be a temporary one. Because really doing it the right way would need to have a coin on ledger which is able to settle on ledger,” said Moffert.
How the trigger payment works
Under the Cycros solution, the trigger initiates a central bank money payment in the upcoming Target2 RTGS (real-time gross settlement) upgrade using ISO 20022 messages and SWIFT public key infrastructure.
It involves an escrow-like behavior. Once a security transaction is agreed, the smart contract associated with the digital security token will lock the security until payment is made. The digital security is transferred to the buyer when the payment is final and communicated to the smart contract.
Meanwhile, DekaBank launched the SWIAT network in 2021. It uses an enterprise version of the Ethereum blockchain. To date, it has implemented securities lending, German-compliant bearer bonds and tokenizing existing traditional assets.