Swiss banks complete first blockchain-based legally binding payment

Some of Switzerland’s largest banks have completed a proof of concept (PoC) that tested blockchain technology and smart contracts for interbank payments, marking what they say is the first legally binding bank payment via a public blockchain.

Under the umbrella of the Swiss Bankers Association (SBA), UBS, PostFinance and Sygnum Bank have conducted a feasibility study on blockchain-based deposit tokens and payments infrastructure, the SBA announced Tuesday.

The test initiated an offchain fiat money transfer triggered by payment instructions tokenized on the blockchain as a “deposit token.” The first use case executed a payment between bank customers of the participating banks, while the second tested an escrow-like process that exchanged deposit tokens for tokenized real-world assets (RWAs) with automatically processed transactions.

The announcement touts the test as the first time banks have carried out a legally binding payment across institutions using bank deposits and a public blockchain.

Scalability challenges remain

The system’s underlying smart contracts enable “verifiable processes, technical security, and compliance with regulatory requirements,” said the SBA, adding that public blockchains with permissioned applications can trigger “legally binding” payments.

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While the results confirm the “feasibility” of institutional payment using blockchain technology, scalability requires “additional design adjustments and increased cooperation with other banks, infrastructure providers, and authorities,” added the SBA.

The successful study may signal more interest towards blockchain-based payment rails from large financial institutions, accelerating the convergence of traditional and decentralized finance (DeFi).

Founded in Basel in 1912, the SBA is an umbrella organization of the Swiss banks that comprises around 265 organizations and over 12,000 individuals.

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UBS says interoperability possible

The study signals that interoperability between traditional bank deposits and public blockchains is becoming a “reality,” said Christoph Puhr, digital assets lead at UBS Group.

“The PoC demonstrates that interoperability of bank money via public blockchains can become a reality, enabling innovation around tokenized assets.”

“This accelerates innovation in tokenized assets and makes it possible to actively shape the future of financial systems—both nationally and globally,” he added.

Over in the US, central banks are also experimenting with smart contracts and blockchain infrastructure.

Project Pine system overview. Source: BISIn May, a joint research study by the US Federal Reserve Bank of New York’s Innovation Center and the Bank for International Settlements (BIS) Innovation Hub Swiss Centre, found that smart contracts could offer central banks flexible and rapid-response tools in a tokenized financial system.

“The smart contract toolkit was fast and flexible,” the BIS wrote. “In hypothetical scenarios, the central bank was able to add and change tools instantly.”

Smart contract testing scenario. Source: BISThe BIS report also acknowledged that central banks will likely face infrastructure challenges, as most existing systems lack advanced use cases.

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