EXCLUSIVE: “Weaving the Golden Thread” – Sergey Nazarov, Chainlink in ‘The Fintech Magazine’

If the world’s major financial institutions had blockchain back in 2007, could we have avoided The Crash? Sergey Nazarov thinks so, which is why Chainlink is so keen to smooth the path to adoption

“When the buy-side starts to adopt certain technologies, the rest of the financial system pays attention,” says Sergey Nazarov, co-founder of Chainlink, a decentralised Oracle network that connects off-chain data and systems to blockchains.

By that logic, if Larry Fink, the CEO of BlackRock, the largest investment manager in the world, says (as he did last month) that the next generation of the financial market will be the tokenisation of everything on the blockchain, you can expect a reaction. And it came immediately for Chainlink with a sharp spike in its share price. Fink’s comments in October came as BUIDL, BlackRock’s seven-month-old institutional liquidity fund, hit a market capitalisation of $547.7 million, making it one of the biggest uses of asset tokenisation on the blockchain.

Only available to qualified institutional investors with a minimum stake of $5million, BUIDL could help fundamentally change the way investment works as regulators in the US consider allowing digital assets to be used as collateral for commodities and derivatives trading. BUIDL, built on the Ethereum network, is already accepted as collateral by FalconX and Hidden Road, two of the largest crypto brokers. Nazarov hopes this ‘tokenisation movement’, as he describes it, will ultimately result in riskless payment methods like central bank digital currencies or bank-issued stablecoins backed by central bank deposits, being used to acquire the underlying assets.

But until, and even when, that time comes, there still needs to be a bridge where the hard edges of a temporal payment system connect with the infinite fungibility of the blockchain. Chainlink has made big strides towards achieving that in its partnership with Swift, the world’s biggest legacy money mover and a highly centralised one at that. Nazarov recently highlighted a breakthrough in their joint effort with Swift to use its payment messaging system – which is baked into the back-office technology of 11,000 financial institutions and corporations – to create blockchain events, allowing participants to lock assets on chain and execute a transaction.

The concept is ready to move to the next phase, pending additional discussions and demonstrations with Swift and its community, from which the feedback has been positive. It’s a groundbreaking effort, but there is more work to do.

“There are a number of key problems that need to be solved in order for institutional grade, smart contracts and institutional levels of value to flow on chain,” says Nazarov. “The amount of data that’s necessary for institutional transactions to happen is larger than the amount of data you find in decentralised finance – there’s reference rate, net asset value, assets under management, various metrics, accounting, principle satisfying pieces of data, all kinds of information. So, there are a large
number of data problems to solve.

“You also need to solve for privacy, to meet certain legal conditions. And then you need to solve for interoperability, which has two dimensions,” Nazarov continues. “Number one is how do you interoperate between chains? How does the chain where I issued my digital asset or my tokenised fund as an asset manager, access the purchasing powerof all the other chains?

“The second question, which is where our work with Swift starts to become very relevant, is how do I interface my existing systems with all of these different blockchains so that my existing systems can manage, understand and interact with all of the blockchain events going on?

“We’ve demonstrated how Swift messages can be converted to blockchain events, which then trigger key movements of assets, movements of value, and we’ve shown the movement of that value being represented back into people’s systems through Swift messages. This is something we’ve been working on for many years in close collaboration with Swift and the Swift community and various bank members.

“From what I have seen, this approach is the most efficient way for many banks, asset managers and financial market infrastructures to interface with blockchains. They can continue to use the Swift messages, and Swift secure signing keys, to trigger blockchain events and to receive updates about blockchain events in the format that they are used to.

“Risk appears when all of the participants in a market don’t have the same information. If you look at the financial crisis, there was a lot of siloing of information”

“The goal of this is to get those 11,000 Swift members on chain with the minimal amount of friction and cost for them, but with the maximum amount of value going on chain as a result. It allows existing payment systems and existing payment flows to be utilised to flow value into digital asset transactions, solving partly the problem of merging the paymentsworld and the digital asset world into a more active market.”

Interoperability is just one critical piece of the puzzle. Chainlink is busy solving others, too. And one sits at the foundation of financial processes: clean, transparent data.

“We’ve chosen to work first on a set of unstructured data called corporate actions that are generally written in different formats and hard for machines to understand,” says Nazarov. “We’ve applied multiple large language models (LLMs) to verify a single result through consensus on the Chainlink Network. That consensus creates an authoritative result, which is considered more reliable than the response of any one AI model.”

Working with market infrastructures Euroclear, Swift and major financial institutions, UBS, Franklin Templeton, Wellington Management, CACEIS, Vontobel, and Sygnum Bank, through the use of Chainlink’s Cross-Chain Interoperability Protocol (CCIP), it’s shown that the integrity of the unified golden record can be preserved and updated across multiple chains simultaneously. That’s big news, says Nazarov, which potentially impacts everyone by solving one of the biggest weaknesses in the global financial system: transparency.

“Risk appears when all of the participants in a market don’t have the same information. If you look at the 2007/8 financial crisis, there was a lot of siloing of information about the quality of mortgage-backed baskets of assets.

“There was a small group of people who understood what was actually going on, but for the vast majority of the market, that information was unknown because it was packaged behind layer upon layer of systems and permissions and repackaged in many different data standards. It was just extremely complex. That’s what the reports that reviewed the crisis showed.

“But if you had a single smart contract to represent every mortgage holder, and a million of those smart contracts rolled under another larger smart contract that managed them, you wouldn’t need to be a chief data officer to understand what’s going on.
Every time a mortgage holder’s profile changed, that update would be made so we can all analyse it. This is what we mean by a unified golden record in the financial markets.
And it has extreme benefits to the compliance system because now everyone doesn’t have to keep 15 copies of everything. It has benefits for the back office and middle office world where errors and the managing of errors is a very costly process because nobody really knows what the truth is.

“And for risk management, it’s extremely valuable because if you don’t have access to information, you can’t manage the risk. The whole financial system becomes more efficient, more transparent and safer, with less of these weird opaque boom and bust cycles where the fundamental problem was that the information had an error, was inaccurate, and there wasn’t wide access to the market participants. All of these problems pretty much go away if you can transition to this single source of truth, unified golden record world.

“In the Chainlink community, we have multiple systems integrators, different groups that can help people implement the blockchain privacy manager, the CCIP private cross-chain transactions, the identity solutions, the data solutions, and the Swift solutions. All of these are things that I think need to exist.

“And once they get integrated into a bank and an asset manager, it really accelerates their ability to participate in the digital asset economy.”

This article was published in The Fintech Magazine Issue 33, Page 18-19