Asis Primo de Rivera

23 hours ago6 min read

The Bridge Between the Traditional Financial System and the Blockchain Ecosystem

In today's digital age, a quiet revolution is transforming the global financial landscape. Beyond the headlines about Bitcoin and the promises of instant wealth, a fundamental change is brewing at the very heart of our monetary system.

Imagine an invisible bridge connecting the traditional financial world with the emerging blockchain and cryptocurrency ecosystem. This bridge is called ISO 20022, a global standard that is redefining the way financial information is communicated and processed around the world.

In an environment where efficiency and standardisation are crucial, ISO 20022 emerges as a catalyst for change, promising not only to improve existing financial operations, but also to pave the way for the integration of blockchain and cryptoasset technologies into the mainstream financial system.

This article explores how ISO 20022 is quietly revolutionising global finance, creating a common language that could unite two seemingly disparate worlds and lay the foundation for a more inclusive, efficient and future-proof financial system.

¿What is ISO 20022?

ISO 20022 is an international standard for the exchange of electronic messages between financial institutions. It functions as a universal language that allows different financial systems to communicate with each other in a clear and efficient manner. This standard defines a common format for financial information, covering a wide range of transactions, including payments, securities, merchant services, cards and foreign exchange.

The main functions of ISO 20022 include:

1. Improving the quality and consistency of financial information.

Reducing errors in transactions

3. Increasing the speed of payments

4. Improve transparency in financial transactions

5. Facilitate regulatory compliance

6. Encourage innovation in financial services

Advantages and Disadvantages of adopting ISO 20022

The adoption of ISO 20022 brings with it numerous benefits:

1. Greater data richness: Messages can contain more detailed information about transactions.

2. Improved traceability: Facilitates end-to-end tracking of transactions.

3. Faster processing: Standardisation allows for more efficient automation.

4. Reduced costs: Fewer errors and less manual intervention mean lower operating costs.

5. Improved fraud detection: Richer data helps identify suspicious activity.

6. Facilitation of cross-border payments: Improved efficiency and security of international transactions.

However, there are also significant disadvantages:

1. Implementation complexity: The adoption of ISO 20022 can be a complex process requiring significant resources and changes to existing systems.

2. High costs: Implementation can be costly, especially for smaller financial institutions.

3. Need for specialised training: A high level of technical expertise and experience in the financial sector is required to effectively implement and manage the standard.

4. Resistance to change: Adoption may generate resistance from some organisations and professionals accustomed to current systems.

5. Potential loss of privacy: The increased richness of data and traceability could compromise the privacy of users' financial transactions.

ISO 20022 adoption timeline

Migration to ISO 20022 is a gradual process that is already underway:

- 2022 - 2023: Start of migration in several major markets, including SWIFT.

- 2023-2025: Coexistence period with legacy formats.

- November 2025: Most financial institutions are expected to have fully adopted ISO 20022 and SWIFT will withdraw its existing MT standard.

Entities contributing to ISO 20022

Numerous financial and technology organisations are collaborating on the implementation of ISO 20022, including:

1. SWIFT: Leading the global adoption of the standard.

2. Central banks in several countries: Implementing the standard in their national payment systems.

3. Large global financial institutions: Adapting their systems to comply with the new standard.

4. Payment service providers: Upgrade their platforms to be ISO 20022 compliant.

5. Financial technology organisations: Develop solutions based on the new standard.

What are the differences between DLT and Blockchain?

DLT stands for Distributed Ledger Technology. It is a digital system that allows users and systems to record asset-related transactions. A distributed ledger technology stores information in multiple locations at any given time. Unlike traditional databases, DLT does not have a central place to store information.

Blockchain is a DLT technology that allows peers to send and receive digital currencies without the need for a centralised entity. The inception of blockchain occurred in 2008 with the birth of Bitcoin.

Blockchain and DLT are related concepts but with some key differences:

1. Data structure:

- Blockchain: Uses a cryptographically linked blockchain structure.

- DLT: Can use a variety of data structures, not necessarily a blockchain.

2. Order of transactions:

- Blockchain: Maintains a strict sequential order of transactions.

- DLT: Can have a more flexible order, depending on the implementation.

3. Decentralisation:

- Blockchain: Typically completely decentralised.

- DLT: Can be partially centralised or decentralised.

4. Consensus:

- Blockchain: Uses consensus mechanisms such as Proof of Work or Proof of Stake.

- DLT: Can employ a variety of consensus mechanisms, some more energy efficient.

5. Applications:

- Blockchain: Commonly used for cryptocurrencies and smart contracts.

- DLT: Has wider applications in various business sectors.

In short, blockchain is a specific type of DLT, while DLT is a broader term that encompasses various distributed ledger technologies, including blockchain.

Centralisation of the crypto industry

The adoption of ISO 20022 has significant implications for the world of cryptocurrencies and blockchain technology. Some cryptocurrencies are adapting their protocols to be ISO 20022 compliant, which could facilitate their integration with the traditional financial system.

Cryptocurrencies that comply with the ISO 20022 standard:

1. XRP (XRP): stands out in the financial world as a leading solution for cross-border payments and for developing technology for CBDCs. Operated by US-based Ripple, XRP is distinguished by its highly efficient transaction capabilities and its strategic role as a bridging currency that facilitates liquidity between various fiat currencies. Ripple joined the ISO 20022 standards body in May 2020, becoming the first distributed ledger technology (DLT) company to do so.

2. Quant (QNT): Facilitates interoperability between different enterprise blockchains. Its Overledger network aims to connect different blockchain networks and ISO 20022-compliant systems. This capability is crucial for developers and companies looking to create decentralised applications (mDApps) that operate on multiple platforms.

3. Stellar (XLM): Focused on payments between individuals, similar to PayPal or Bizum in the blockchain world. Stellar's main mission is to bridge the gap between financial institutions and provide services to the unbanked. The integration of ISO 20022 positions Stellar as a leading platform in the global financial ecosystem, particularly for organisations looking to optimise and modernise their payment systems.

4. Cardano (ADA): Offers banking services and access to Decentralised Finance (DeFi). Features include: Smart contract functionality, Expansion of the DeFi ecosystem, Innovative consensus algorithm and significant market presence. Its focus on interoperability and scalability positions it well for ISO 20022 adoption.

5. Hedera Hashgraph (HBAR): Optimised platform for micro-payments, noted for its speed, efficiency and security. Its governance model, involving large corporations, positions it as a bridge between business needs and blockchain innovation. Its Hashgraph technology has the capacity to process more than 10,000 transactions per second with fees as low as $0.001, completing transactions in as little as 3 to 5 seconds.

6. XDC Network (XDC): Hybrid blockchain designed to support and optimise global trade and supply chain finance. XDC focuses on key sectors such as finance, healthcare, trade finance and supply chain management. It has positioned itself as an ISO 20022 compliant blockchain solution.

7. IOTA (MIOTA): Dedicated to the Internet of Things (IoT). Employing the innovative Tangle architecture, IOTA transcends traditional blockchain methods to offer fee-free transactions and fast processing suitable for the high-volume micro-transaction environments typical of IoT applications. Its high-performance distributed ledger technology could align with the speed and efficiency requirements of ISO 20022 compliant systems.

8. Algorand (ALGO): Algorand is a cutting-edge blockchain platform known for its pure proof-of-stake (PoS) consensus mechanism, which distinguishes it for its energy efficiency and its ability to process transactions quickly. In addition, its blockchain is associated with FIFA, with applications in NFTs. Its focus on scalability and speed makes it compatible with ISO 20022 requirements.

Compatibility with ISO 20022 could allow these cryptocurrencies to integrate more easily with traditional financial systems, potentially increasing their adoption and use in the real world.

Consequences and future impact of ISO 20022

The adoption of ISO 20022 will have a significant impact in the coming years:

1. Financial globalisation: It will facilitate international transactions by providing a common language.

2. Innovation in financial services: Standardisation will allow for the development of new products and services.

3. Improved fraud detection: The greater wealth of data will help to identify suspicious activity.

4. Integration with new technologies: ISO 20022 is designed to be compatible with emerging technologies such as blockchain and artificial intelligence.

5. Transformation of payment infrastructure: It will enable the creation of faster and more efficient payment systems.

6. Improved customer experience: Customers will benefit from faster and more transparent transactions.

In conclusion, ISO 20022 represents an important step towards standardisation and efficiency in global financial communications. Its adoption will not only improve the traditional financial system, but could also act as a bridge between it and the emerging world of cryptocurrencies and blockchain technology, paving the way for a more integrated and efficient financial ecosystem in the future.