CBDCs: New Experiments Pave Way for Global Payments Using Central Bank Digital Currencies

 

SWIFT, in collaboration with Capgemini, is conducting new experiments to test how we can interlink domestic CBDCs and “take the next step towards seamless cross-border payments involving digital currencies.”

Interest in Central Bank Digital Currencies (CBDCs) is “on the rise.” A report from the Bank for International Settlements says that “nine out of 10 central banks are now exploring CBDCs – covering economies that account for more than 90% of global GDP.”

An increasing number of these central banks are in the advanced stages of their CBDC exploration, with nine countries already live with their own digital currency – “most notably Nigeria and The Bahamas.”

Thomas Zschach , Chief Innovation Officer, SWIFT, said:

“Facilitating interoperability and interlinking between different CBDCs being developed around the world will be critical if we are to fully realise their potential.”

While much of the current focus on CBDCs – digital versions of existing central bank money – is on how they “could help achieve domestic policy goals, there’s one potential blind spot: their use cross-border.”

Thomas Zschach, Chief Innovation Officer at SWIFT, added:

“Facilitating interoperability and interlinking between different CBDCs being developed around the world will be critical if we are to fully realise their potential. Today, the global CBDC ecosystem risks becoming fragmented with numerous central banks developing their own digital currencies based on different technologies, standards and protocols.”

Nick Kerigan, Head of Innovation at SWIFT, noted:

“If left unaddressed, this fragmentation could lead to ‘digital islands’ springing up across the globe. Different systems and different CBDCs will need to be able to efficiently work together, or it will hamper the ability of businesses and consumers to make frictionless cross-border payments using CBDCs.”

In 2021, SWIFT conducted a first set of CBDC experiments that “demonstrated we could successfully orchestrate a cross-border transaction between one entity on a DLT-based CBDC network and a second running on an established real-time gross settlement (RTGS) system.”

In collaboration with Capgemini, the team is “testing how SWIFT can interlink the multiple domestic-based CBDC networks emerging worldwide to make cross-border payments with CBDCs more seamless and frictionless.”

Sudhir Pai, Chief Technology & Innovation Officer, Financial Services at Capgemini, said:

“Navigating decentralisation is complex with many technology choices, operating models, and policy considerations. Our well-defined taxonomy has helped us accelerate our efforts to build CBDC interlinks with SWIFT. We look forward to continue to collaborate in building industry standards and frameworks with SWIFT.”

A range of obstacles, if not removed, “could limit the wider adoption of CDBCs.”

Kerigan added:

“While CBDCs offer many opportunities, we see several broad challenges facing their adoption that first need to be overcome. One is that there will be multiple CBDC platforms in development in parallel to the existing traditional payment systems. CBDCs are new forms of fiat currencies that have the potential to enable new or better payment capabilities. But they are not necessarily a replacement to traditional payment infrastructures and processes. CBDC and traditional infrastructures will need to co-exist and work together for some time to come.”

The emergence of CBDCs “raises many questions about how they will work with existing payments systems though.”

Not all CBDC initiatives will “adopt the same technology – for example, some national CBDC platforms are being built using a centralised architecture, whereas others are using distributed ledger technology.”

And just as different types of money are used in different payment systems today, the same will eventually “be true for CBDCs.”

Technically, the proof of concept ensures that, “regardless of the platform used (Corda and Quorum are adopted in the experimentation), SWIFT provides efficient orchestration of transactions.”

In collaboration with Capgemini, the team is “addressing three use cases – CBDC to CBDC, fiat to CBDC, and CBDC to fiat.”

Kerigan continued:

“If the experiments are successful, it will demonstrate that SWIFT has the capability and technical components to interlink different networks. This would help solve a huge technology and industry challenge facing CBDCs. And it could enable us to help central banks make their own CBDC networks cross-border payment ready.”

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