Swift works to bridge 'digital islands' of CBDCs

SWIFT

While Swift isn't directly creating a central bank digital currency, it is providing space for others to build support for cross-border payments involving different CBDCs as well as transactions that bridge CBDCs and traditional currency.  

CBDC projects or experiments are underway in nearly 100 countries. But almost all of the work is focused on domestic payments.  

Swift, which provides messaging standards for international payments, plans to launch a product in its sandbox for CBDC developers that will enable central banks, commercial banks or a mix of organizations to develop use cases for CBDCs to work across borders. Swift's initiative comes as CBDC proponents try to develop international networks to boost efficiency for cross-border payments while allowing digital currencies to reach more markets. 

"Our sandbox is part of a way to avoid digital islands," said Tom Zschach, chief innovation officer at Swift, speaking about the concept of digital currencies that can only work in their native country.  

Swift's model to enable cross-border CBDC payments is based on how banks already conduct account-to-account transfers using the ISO 20022 messaging standards. ISO 20022 enables banks and other parties to process international transactions with more information than in the past, allowing support for digital payments and real-time processing. 

ISO 20022 has become popular with banks that use it to execute real-time payments across borders. 

Swift will also develop a beta version of its interlinking product, with a goal of enabling instant CBDC cross-border payments. The interlinking product supports multi-currency international payments in line with multi-CBDC payment parameters set out by the Bank for International Settlements. 

Processing payments involving different CBDCs will be a challenge, according to Stefan Rust, CEO of independent data aggregator Truflation.  

CBDCs most likely will not be on a public blockchain, but instead will be written in proprietary formats on private chains, Rust said. "This will result in significant challenges when trying to combine them with other crypto assets, and when it comes to interoperability with other blockchains and wallets," he said. 

Today, CBDCs are limited to mostly smaller countries like the Bahamas. Juniper Research reports CBDC payments are on pace to reach $100 million globally in 2023. That's expected to increase to $213 billion by 2030 as larger countries introduce digital versions of their currencies. Also, 100% of all current CBDC payments are domestic, according to Juniper. That's expected to fall to 92% by 2030. 

CBDC projects will focus on domestic priorities initially, then turn to links between CBDCs, according to Juniper.   

Payments

CBDC projects pick up the pace as 2023 kicks off

January 2, 2023 10:00 AM

"As CBDC adoption will be very country specific, it will be incumbent on cross-border payment networks to link schemes together, allowing the wider payments industry to benefit from CBDCs," said Nick Maynard, head of research for Juniper, in a research note. 

Swift is not taking a position on whether a CBDC is necessary, but is focused on how a CBDC can work, especially involving parties in two countries.

"It will be left to the banks that work in the sandbox to devise how and what to test with each other, with Swift providing the technical capabilities to perform the experiments," Zschach said.

The payments messaging organization just finished work on a project that found it is possible to achieve interoperability between CBDCs and non-CDBC payment networks using existing bank payment systems and messaging structures. Swift's earlier tests used the Quorum and Corda blockchain networks and a simulated network. Swift tested wholesale CBDCs, which are designed for payments between large entities such as banks, and retail CBDCs, which are intended for consumers. 

"We're starting to see some good ideas of how CBDCs can be used between countries,"Zschach said, noting that supply-chain management is one potential use case. "As shipping becomes more digital, there is an opportunity to use digital currency to automatically trigger a payment when a shipment arrives." 

Other firms are also looking to enable international CBDC payments. Ripple is using a mix of open-source development, blockchain technology and standardized messaging — using the same ISO 20022 standard as Swift and other organizations. Ripple is working with Montenegro's central bank, and with other projects such as the European Union's potential digital euro. 

The Monetary Authority of Singapore is working with several central banks or units of central banks, such as The Federal Reserve Bank of New York, which is investigating how corporate-focused wholesale CBDCs can support faster, more accurate payment processing for international transactions. 

The New York Fed is also operating a proof-of-concept test that will determine the feasibility of digital currencies in a network of banks. 

Yet there are still questions as to whether many countries, including the U.S., will digitize their currencies. The U.S. Congress has yet to vote on a digital dollar, and there is a opposition to a CBDC based on concerns a digital dollar could impede other bank services.

The reason there are diverging approaches on CBDCs is due to each country considering its own unique context, economic model and social constructs, said Gabby Kusz, CEO of the Global Digital Asset and Cryptocurrency Association. 

"For the most part, in more economically open and democratic societies, CBDC development recognizes the need to embody issues of economic freedom, privacy, security, technological sophistication, and interoperability," Kusz said.