What impact will ISO 20022 have on cryptocurrencies?

It can be hard to have confidence in cryptocurrency when the former reigning ‘King of Crypto’ has just been found guilty of a multi-billion dollar fraud. Sam Bankman-Fried’s trial, coming mere years after his company, FTX, spent an estimated $6.5 million on a Superbowl ad, has undoubtedly shaken many people’s trust in crypto, even though the fraud itself didn’t involve crypto and could have been carried out at many traditional financial services companies.

However, moves are being made that could significantly improve the trust between the public, financial institutions, and the crypto world. The incoming ISO 20022 standard can apply to virtually any financial product but will have particularly interesting applications in the crypto space that could be part of a larger push to -finally- make cryptocurrency trustworthy.

What is ISO20022?

ISO standards are everywhere – you might be currently sitting on an ISO 24496:2021 chair and reading this on an ISO 9241-307:2008 monitor. ISO 20022 is a global standard for financial messaging and data exchange – financial services companies exchange billions of ‘messages’ each day. For example, the message that investor X has bought stock Y for price Z. It serves as a common language for the global financial services industry, facilitating interoperability and efficient communication between financial institutions, corporations, and other entities.

ISO 20022 is not limited to a specific region or type of financial transaction; rather, it encompasses a wide range of financial services, including payments, securities, trade finance, and more.

The key features of ISO 20022 include a standardized data model, a rich set of message types, and the use of XML-based syntax for messages. This standard is designed to replace older, proprietary messaging formats that were limited in their flexibility and interoperability. By adopting ISO 20022, financial organizations can enhance their data quality, reduce operational risk, and improve straight-through processing.

ISO 20022 is gaining global adoption as more financial institutions and payment systems transition to this standardized messaging format. The benefits of ISO 20022 include improved data accuracy, enhanced automation, and the ability to meet evolving regulatory and compliance requirements. Its flexibility allows for the inclusion of additional data fields, making it adaptable to changing business needs and future innovations in the financial industry.

What does it mean for cryptocurrency?

Potentially, a lot. There are already ISO 20022-compliant cryptocurrencies available, but once the standard is adopted more widely, we could potentially see major benefits to trust and transparency:

1. Standardized communication: Because ISO 20022 introduces a standardized format for financial messaging, cryptocurrency exchanges and businesses can benefit from clear and consistent communication, reducing the risk of errors and misunderstandings during transactions.
2. Data quality and accuracy: The standard’s data model and XML-based syntax ensure high data quality and accuracy, reducing the likelihood of fraudulent or erroneous transactions. This, in turn, can boost trust in the cryptocurrency ecosystem, as users have greater confidence that their transactions will be executed as intended.
3. Compliance and regulation: As governments and regulators increasingly scrutinize the cryptocurrency industry, adhering to standardized formats like ISO 20022 can help businesses meet evolving compliance requirements. Compliance measures can improve the industry’s reputation and foster trust among investors and users.
4. Reduction of operational risk: By using a well-established standard, cryptocurrency businesses can minimize operational risks associated with manual data entry errors and inconsistent data formats. This, in turn, can enhance trust in the reliability and security of cryptocurrency operations.
5. Interoperability: ISO 20022 promotes interoperability between different financial systems, including traditional and cryptocurrency platforms. This can enable smoother and more secure transfers of value between fiat currencies and cryptocurrencies, reinforcing trust in cross-border transactions.

The last point is particularly important. Currently, cryptocurrency exchanges can ‘talk’ with other financial institutions such as banks in any meaningful sense. Under ISO 20022, if a company in one country wanted to transfer funds to a company in another country, then their banks could use cryptocurrency as an intermediary ‘route’ instead of traditional SWIFT payments, potentially making the process much faster and lowering fees.

Ultimately, this will complement the work being done to regulate crypto across the world to increase trust: consumers will be able to know that their digital asset providers are able to communicate transparently with other organizations so that users can be assured that they are getting a mainstream financial instrument. This transparency extends to the reporting functions that will allow investors and analysts to compare and contrast different cryptocurrencies – currently we can look at two stocks and see standardized information like price, EBITDA, Market Cap and so on, but no such equivalent exists in crypto. This will mean greater competition between currencies, further improving the ecosystem.

ISO 20022’s adoption in the cryptocurrency industry has the potential to bolster trust by improving communication, data quality, compliance, and interoperability, while reducing operational risks. These factors can contribute to a more stable and trustworthy environment for cryptocurrency users and investors.