Leading financial institutions in Switzerland have successfully completed a proof-of-concept (PoC) exploring the use of blockchain technology and smart contracts for interbank transactions. This pilot program is reported to be the first instance of a legally binding bank payment executed using a public blockchain.
The initiative, conducted under the guidance of the Swiss Bankers Association (SBA), involved collaboration between UBS, PostFinance, and Sygnum Bank. On Tuesday, the SBA publicly announced the completion of this study, which focused on the viability of using blockchain-based deposit tokens and payment infrastructure.
The core of the test involved an off-chain transfer of fiat currency, initiated by payment instructions that were represented as “deposit tokens” on the blockchain. The initial test case demonstrated a payment between bank customers of the participating banks. The second scenario examined a process similar to escrow, where deposit tokens were exchanged for tokenized real-world assets (RWAs), with transactions executed automatically.
The SBA emphasizes that this proof-of-concept marks a significant milestone, representing the first time banks have successfully processed a legally enforceable payment across institutions utilizing bank deposits and a public blockchain.
Scalability Hurdles Remain
According to the SBA, the smart contracts that underpin the system provide “verifiable processes, robust technical security, and adherence to regulatory requirements.” They also highlighted the potential of public blockchains, when combined with permissioned applications, to facilitate “legally binding” payments.
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While the study demonstrates the “feasibility” of using blockchain technology for institutional payments, the SBA acknowledged that achieving scalability requires “further design adjustments and greater collaboration with other banking institutions, infrastructure providers, and regulatory bodies.”
This successful experiment could generate heightened interest in blockchain-driven payment solutions among major financial players, potentially accelerating the integration of traditional finance and decentralized finance (DeFi).
The Swiss Bankers Association, established in Basel in 1912, is an umbrella organization representing the interests of Swiss banks. It encompasses approximately 265 organizations and over 12,000 individual members.
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UBS Highlights Interoperability Potential
Christoph Puhr, the Digital Assets Lead at UBS Group, commented that the study suggests interoperability between traditional bank deposits and public blockchains is increasingly within reach. He stated:
“The PoC demonstrates that interoperability of bank money via public blockchains can become a reality, enabling innovation around tokenized assets.”
Puhr added, “This accelerates innovation in tokenized assets and makes it possible to actively shape the future of financial systems – both nationally and globally.”
Similar explorations are underway in the United States, where central banks are also investigating smart contracts and blockchain infrastructure.
In May, a collaborative research project involving the Federal Reserve Bank of New York’s Innovation Center and the Bank for International Settlements (BIS) Innovation Hub Swiss Centre concluded that smart contracts could provide central banks with versatile and adaptable tools in a tokenized financial ecosystem.
According to the BIS, “The smart contract toolkit was fast and flexible. In hypothetical scenarios, the central bank was able to add and change tools instantly.”
The BIS report also noted that central banks are likely to encounter infrastructure challenges, as the majority of existing systems lack the capabilities to support advanced use cases.
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