Ripple recently launched a central bank digital currency project in Montenegro, a country of only 630,000 people that could provide clues to how to make different countries' digital currencies work in harmony.
"There is no one-size-fits-all approach to CBDC," said Joe Vollono, director of business development for CBDC at Ripple. "Every country is pursuing a CBDC for specific reasons. We recognize how important it is to develop a custom solution for our partners."
To balance that need for a custom CBDC that can still work with other countries, Ripple is using open-source development, blockchain and standardized messaging. These technologies and methods are meant to streamline communication. They may also address the question of how payments involving two different CBDCs will work with one another and with traditional currencies.
"Ripple now has multiple
Montenegro's central bank will work with Ripple, banks, academia and others to create a digital currency and test the underlying blockchain's functionality, compliance with regulations and potential use cases. It will also analyze the risks and opportunities inherent in a CBDC, and how it will work with the European Union's CBDC project and similar initiatives in different countries.
"We have been developing standards for cross-border payments for over ten years, and have seen firsthand how complex and challenging this is," Vollono said, adding that Ripple was a contributor to the development of the
"To successfully achieve this interoperability, it cannot be done in silos but rather as a payments ecosystem," Vollono said.
Open for business
There are
There are several options at work to encourage interoperability among CBDCs, with one of the most promising being open-source development, Vollono said.
Building a digital currency with open-source technology is one of the best ways to address the challenges and create opportunities around interoperability, as it builds a path for the global community to collaborate and build standards by which CBDCs can function, Vollono contends.
Open-source development can be useful for achieving interoperability between different CBDCs, according to Nick Donarski, the founder and chief technology officer of ORE-System, a distributed ledger company.
"Open-source development allows for collaboration between different developers and communities, enabling the creation of common tools and frameworks used by different CBDC projects," Donarski said.
Global influence
Similar to most CBDC projects, the Montenegro initiative involves experiments and pilots of a CBDC that may never exist, since the government must make a final decision on whether to move forward.
The U.S. and most European countries are working on CBDCs while legislatures and central banks debate use cases and the potential impact CBDCs may have on existing financial systems and digital assets such as stablecoins. Whether most countries have a CBDC will depend on their legislators — whose votes could be years away.
But the work on interoperability for CBDCs could inform work on stablecoins or real-time processing, which are also challenged to find ways to enable transactions between different jurisdictions.
In the event that CBDCs gain traction, open-source collaboration and development among central banks will be key to guaranteeing compatibility and efficient communication between digital currencies, said Mark Fidelman, founder of SmartBlocks, a distributed finance technology company.
Fidelman, a private DeFi developer who is generally opposed to CBDCs, says interoperable payment systems could provide the necessary infrastructure for secure, scalable and cost-effective cross-border transactions.
"APIs can bridge the gap between different CBDCs, ensuring compatibility and seamless interaction," Fidelman said. "This approach may facilitate a smoother transition, should CBDCs become inevitable."
Ultimately, interoperability between CBDCs will be through blockchain technology, standardized technical specifications and protocols, open-source development and digital identity and authentication technologies, Donarski said.
"These approaches can help to create a more connected and interoperable financial ecosystem, enabling individuals and businesses to transact across borders with greater ease and at a lower cost," he said.
Building bridges between different blockchains is crucial for the success of the digital-asset ecosystem, said Aaron Rafferty, CEO of StandardDAO, a fintech company that specializes in underserved markets.
StandardDAO partners with blockchain-supported projects in local markets, as well as projects that support international transactions. "To achieve interoperability among CBDCs, it is important to maintain a consistent record of transactions and value across various blockchains," Rafferty said.
A practical example of digital-asset interoperability in action is
"This same concept can be applied to CBDC development, ensuring that no matter which blockchain a country chooses for its digital currency, the value and record of supply will be preserved across networks," Rafferty said.
Despite the uncertainty surrounding whether CBDCs will even exist in most countries, there is momentum in development.
"There will be progress this year building interoperability between the global patchwork of domestic faster or real-time interbank payment systems," said Eric Grover, a principal at Intrepid Ventures, adding that an important focus for most CBDC projects in the near term will be on launching and demonstrating use cases.
"Facilitating cross-border remittances would be an interesting use case," Grover said. "Improving cross-border B2B payments is being addressed by private systems, but CBDCs could support them as well. And moving funds between central banks would be a straightforward use case."
There has been incremental movement toward identifying interoperability models and scalability of technology with support from leading distributed ledger firms like Circle, Stellar, Swift and card brands like Visa and Mastercard, according to Nilesh Vaidya, global industry head for retail banking and wealth management at Capgemini.
"As the adoption of wholesale CBDCs continues to grow, it's becoming increasingly clear that cross-border functionality is essential for their success," Vaidya said. "However, until there is a global standard for creating CBDCs, interoperability between different chains and existing payment rails is crucial."
