What is ISO 20022 and How Will it Impact the Crypto Industry?

ISO 20022 Coins May Be Treated More Leniently By Regulators and Force Mass Adoption of the Standard 

ISO 20022 is an international standard for exchanging electronic messages between financial institutions via SWIFT, the Society for Worldwide Interbank Financial Telecommunication, the main financial messaging network used by banks across the world. ISO 20022 will dramatically change how banks communicate with each other by increasing the amount of information that can be communicated and improving interoperability. 

In addition to changing the traditional banking and financial services industry, the migration from traditional SWIFT messaging (referred to as MT messaging) to ISO 20022 could also dramatically impact the crypto industry. Specifically, coins that comply with the standard may be more rapidly adopted into the traditional financial system. In addition, if large-cap cryptocurrencies like Bitcoin or ETH are integrated into the SWIFT system and given official ISO numbers, this could radically change the way the crypto and fiat currency ecosystems co-exist. 

ISO 20022 Message Types

Right now, all swift messages are classified as “MT” messages. MT stands for (message type/text). This is followed by a three-digit number that denotes the message category, group, and type. MT messages are structured via the ISO 15022 standard, which the ISO 20022 standard is intended to replace. ISO 20022 compatible messages are referred to as MX format messages. The MX/ISO 20022 was developed in the early 2000s, but MT/ISO 15022 messages still remain the most common type of SWIFT messaging. 

SWIFT ISO 20022 Timeline and ISO 20022 and The Federal Reserve 

MX/ISO 20022 mandatory adoption is intended to occur in several stages. High-value, cross-border payments in the European Union will first transition to ISO 20022 in November 2022, particularly payments involving the Target2 system, the real-time financial settlement system used by central banks in the Eurosystem. The U.S. Federal Reserve will fully transition to ISO 20022 by November 2023. The old MT/ISO 15022 messaging system will continue to be partially used until 2025, after which the vast majority of MT/ISO 15022 messages won’t be permitted. 

SWIFT believes that if current timelines are met, 79% of high-value payments by volume and 87% of high-value payments by value will utilize the ISO 20022 messaging system by 2023.

ISO 20022 Coins and Cryptocurrencies 

A variety of cryptocurrencies are currently ISO 20022 compliant. These include: 

1. Ripple (XRP): Member of the ISO 20022 Standards Body. XRP is designed to be a bridge between the crypto and fiat worlds and is used for a variety of purposes, including cross-border settlements. XRP can currently process approximately 1,500 transactions per second. 
2. Stellar Lumens (XLM): Member of the ISO 20022 Standards Body. Like XRP, it is designed to be a bridge between the crypto and fiat worlds, with a specific focus on cross-currency conversions for individuals rather than institutions. According to developers, XLM can process up to 3,000 transactions per second, but real-life transaction processing times have historically been much slower. 
3. XinFin (XDC): Compliant. XinFin is an Ethereum Virtual Machine (EVM) compatible delegated proof-of-stake blockchain intended to function as a digital asset network for enterprises by combining public and private blockchains with interoperable smart contracts. XDC is XinFin’s native currency. XinFin offers up to 2,000 transactions per second and finality in as little as 2 seconds. 
4. Iota (IOTA): Compliant. IOTA is a centralized blockchain ledger intended to handle Internet of Things (IoT) based transactions. Many believe the network has a lot of potential, but it has also faced criticism due to its centralization, security flaws, and the high number of hacks and attacks it has suffered over the last several years. 
5. Algorand (ALGO): Compliant. Algorand is a major Layer-1 blockchain attempting to solve many of the problems inherent in competitors like Ethereum. It is reportedly able to process approximately 1,300 transactions per second. While it does promote decentralization, Algorand’s proof-of-stake consensus method has led to concerns about whales dominating the ecosystem. 
6. Hedera Hashgraph (HBAR): Rumored to be compliant. Hedera Hashgraph is a distributed ledger platform that is similar to a blockchain but operates somewhat differently. Hedera Hashgraph is intended to overcome many of the limitations of traditional blockchains and can perform 10,000 transactions per second (with some reporting speeds up to 500,000 transactions per second) with a high level of security. Unlike blockchains, Hedera Hashgraph does not use miners for transaction validation, instead, utilizing a feature referred to as a directed acyclic graph to sequence transactions without splitting them into blocks. HBAR is its native cryptocurrency. 
7. Quant (QNT): Compliant. The Quant Protocol is designed to solve interoperability issues between major blockchains like Bitcoin, Ethereum, and Ripple via its Overledger interoperability network, and intends to connect all blockchains via one comprehensive operating system. Quant Protocol is EVM compatible and considered by many to be an Ethereum Layer-2, but unlike other Layer-2s, it does not require any modifications to the base chain in order to become operational. QNT is the Quant Protocol’s native currency and is paid by developers in order to create and operate dApps on the network. 
8. Cardano (ADA): Rumored to be compliant. Cardano is a proof-of-stake, decentralized blockchain network founded by Ethereum co-founder Charles Hoskinson. It is currently the world’s largest proof-of-stake blockchain. ADA is its native currency. 

ISO 20022 and Ripple 

Ripple is now the second-largest Fintech firm in the United States. Its currency, Ripple (XRP), is also one of the largest cryptocurrencies by market cap and is the largest ISO 20022 compliant crypto today. Ripple even sits on the ISO 20022 Standards Body, which gives it a significant voice in how the standard is implemented and developed.  

Unlike traditional cryptocurrencies like Bitcoin, which are relatively slow and mainly used as a store of value, the Ripple ecosystem is designed as a digital payment network and protocol designed for near-instantaneous settlements between banks and other major financial institutions. In addition to providing collateral for settlements, XRP is often used for quick currency conversions and cross-border remittances. 

Instead of using the traditional mining consensus method, Ripple uses a poll-based consensus method via which nodes validate the authenticity of a transaction. This allows for nearly instantaneous consensus to be reached while retaining significant network decentralization. 

While Ripple’s major currency, XRP, is intended for use by the banking sector, Ripple’s secondary currency, Stellar Lumens (XLM) is designed for the development of central bank digital currencies (CBDCs). XLM is also specifically designed to act as a settlement layer for cross-currency conversions.

Currently, over 300 major banks and financial institutions in 45 countries currently use XLM as a settlement mechanism, including Santander and the Canadian Imperial Bank of Commerce, among many others in countries like Brazil, India, and Singapore. 

In addition, U.S.-based Ripple validators include Bank of America, American Express, TransferGo, and Xendpay. 

While it was initially intended as a replacement for SWIFT due to its increased speed and exponentially lower transaction costs, integration of the Ripple ecosystem with SWIFT via the ISO 20022 could lead to significant synergy between XRP and SWIFT, making XRP even more popular and a major alternative to traditional settlements. 

Unfortunately for Ripple and XRP/XLM investors, in December 2020, the SEC charged Ripple and two of its executives with conducting a $1.3 billion unregistered securities offering. The lawsuit alleges that XRP is a security due to the fact that it was directly intended to fund the company’s operations. The SEC, in part, defines a security as a financial vehicle that, when sold, has a clear benefactor. This is in contrast to cryptocurrencies like Bitcoin and ETH, where there is no clear benefactor to the sale of the currency. For example, while there is an Ethereum Foundation, they hold only around 0.3% of ETH and do not actively benefit from its current sales. 

Despite the lawsuit, which resulted in a significant devaluation of XRP, many commentators believe that Ripple will win, particularly due to the fact that cryptos like Bitcoin and ETH have been classified as commodities and are now regulated by the CFTC (Commodity Futures Trading Commission, rather than the SEC. If Ripple is also legally classified as a commodity or currency rather than a security, it will almost certainly win against the SEC. 

Pending a positive result of the SEC’s lawsuit against Ripple, the fact that Ripple is ISO 20022 compliant (and is also a member of the standards body) could lead to broader adoption of the cryptocurrency, particularly among U.S. banks and financial institutions. This could lead to an increased price and market cap– which is something that crypto investors may want to take note of (not financial advice). 

ISO Integration With Other Cryptocurrencies

While it may be difficult or impossible for cryptocurrencies like BTC and ETH to become ISO 20022 compliant, this doesn’t mean they will necessarily be left out of the new messaging system altogether. If these currencies do become compliant, they could be issued ISO codes, which would allow them to potentially integrate with central bank messaging systems and the databases of top financial companies like Visa and Mastercard. 

The ISO gives each currency an ISO 4217 standard identifier in the form of a three-letter code, a system that has been used since 1978. For example, the Euro’s code is “EUR.” Newly compliant cryptos could receive their own ISO 4217 codes, which would likely be similar to their current tickers. Some cryptos already have unofficial ISO 4217 codes, though these are not recognized by SWIFT. For example, Bitcoin’s ISO 4217 currency code XBT, though this is an unofficial designation. 

It should be also noted that ISO standards also assign International Securities Identification Number (ISIN) codes to securities including stocks, bonds, and derivatives. These codes are referred to as ISO 10962 classifications. Cryptocurrency derivatives, such as Bitcoin futures, may also receive their own ISO ISIN codes, which could integrate with the ISO 20022 system for faster settlements. 

ISO 20022 for Beginners

While it may seem very complex, ISO 20022 is simply a more detailed type of financial messaging protocol that should allow banks and financial institutions to prevent fraud, and interoperate more easily. Below, we’ll dive into the technical details of ISO 20022. 

The Technical Details of ISO 20022 Payments 

ISO 20022 is different from the previous ISO 15022 standard, as it provides organizations with rich data, including modeling methodology, a central dictionary, and a set of XML and ASN.1 design rules. Unless you’ve taken a computer science class, however, that may be difficult to interpret– so here’s a bit of an explanation: 

Rich data, unlike poor data, means that there is a large compilation of data with hundreds of thousands of pieces of information. 

‘Models’ are qualitative or quantitative descriptions of key components of a system and of relationships between those components. Many scientific theories are models. 

A modeling methodology, therefore, is a set of assumptions and perspectives to build a model of something (in this case, enterprise financial messaging software), as well as the analytical tools to create it, and the stages of the completion of the analytical process. 

Analytical tools are resources that allow access to information for research and evaluation purposes such as dashboards, and query builders. Query builders, for example, allow data analysts and software developers to search and filter objects in databases, select objects and columns, and create relationships between various objects in a database. 

XML (Extensible Markup Language) is a markup language that is similar to HTML. However, it does not have predefined tags. A markup language is a computer language that uses tags to define elements within a document. HTML, which is used to structure web pages and their content, has predefined tags. An HTML tag is a piece of the markup language used to indicate the beginning and end of an HTML element in an HTML document. For instance, <br> means “single line break” on a webpage. 

Unlike HTML, when working with an XML document, the tags are “invented” by the author of the XML document, which increases the flexibility as well as the complexity of the document’s formatting. 

An autonomous system number (ASN) is a unique identifier that is globally available and allows its autonomous system to exchange routing information with other systems. Routing information allows for funds to be sent from different accounts throughout the world. 

Benefits of ISO 20022 Specification 

While the ISO 20022 specification may seem like an extremely technical upgrade with little impact on the average banking client or investor, it will provide a variety of important benefits, at least for the institutions that use it– and some of those benefits could trickle down to lower banking fees for consumers. 

Some of the most impactful benefits of ISO 20022 adoption include: 

• Increased interoperability by supporting non-Latin alphabets
• Messages can be grouped based on data components from different payment methods
• Messaging can be used for a wide array of purposes, including domestic payments, cross-border payments, high-value payments, ACH, and real-time payments. 
• Increased data quality and automation will lead to easier fraud detection methods 
• Less human actions and more automation could lead to increased accuracy 

However, there are some downsides to the ISO 20022 specification. Specifically, many banks may not have the technology to easily migrate to the standard, and this could lead to additional costs, meaning that many banks may not meet the aggressive ISO 20022 adoption timelines proposed by SWIFT. 

In Conclusion: Investors Should Closely Watch Cryptos Using The ISO 20022 Standard

ISO 20022 is clearly the future of worldwide interbank communication– and, with many believing that cryptocurrency is the future of money, the fusion between these two systems could bring an explosion in the popularity and usage of cryptocurrencies between traditional and crypto-focused, decentralized financial entities. 

It’s too early to say how this will impact the crypto market. In some ways, if ISO 20022 is too successful, it could actually reduce the market need for crypto as a payment processing solution. However, it’s more likely that the TradFi and DeFi/crypto industries will begin to merge like never before. Therefore, investors may want to watch ISO 20022 compliant cryptos for potential price movements, and may also want to track whether existing (or brand new) cryptocurrencies and tokens begin to adopt the ISO 20022 standard. 

References: 

1. The New Era of MX Messages. Redbridge. 
2. TARGET2 for Central Banks. SWIFT. 
3. (2021, Dec.) Which Cryptocurrencies are ISO 20022 Compatible?. Ledgernomics. 
4. (2021, Feb.) Ripple Becomes Second-Largest Fintech Firm in the US, Sold $500,000,000 in XRP to Fund Crypto Startups: Report. The Daily HODL. 
5. (2021, Nov.) ISO for Crypto: Which Cryptos Are ISO-Compliant and Can Be Used by Banks?. Phemex. 
6. Sidelov, Pavlo (2021, Aug.) ISO 20022 for Dummies. SDK.Finance. 
7. Trąbka, J. (2018, Nov.) The Proposal for Modeling Methodology for Enterprise Content Management (ECM) Systems: Modeling Tools Selection. IntechOpen. 
8. Gibb, R. (2019, Jun.) What is an Autonomous System Number (ASN)?. Stackpath. 
9. Cryptos Getting Swifter with ISO 20022. BitIRA. 

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