The second phase of experimentation in Central Bank Digital Currency (CBDC) implementation by Swift has concluded that the national digital currencies can be effectively integrated into existing financial infrastructures.
This implies that CBDCs – further development of which is being pursued by several governments and central banks – can be adopted by financial institutions without the need to make drastic changes and completely reinvent the wheel.
Although Swift’s experiments concerned its own CBDC interlinking, the firm has engaged in an extensive six month sandbox experimentation. This saw 38 global institutions participate, with 125 sandbox users conducting more than 750 transactions.
This has enabled the company to make some observations about the broader use of CBDC’s across the financial system. Swift has identified use cases in digital trade, securities and foreign exchange (FX)..
Tom Zschach, Chief Innovation Officer at Swift, said: “Swift is a community – a convener of and for our industry – and I’m delighted that we’ve been able to facilitate these critical innovation experiments.
“They show that institutions can continue to use much of their existing infrastructure alongside new, innovative technologies.”
Breaking down the three above mentioned sections, Swift found that its interlinking solution was interoperable between different digital networks and trade platforms. This could enhance trust, reduce delays in global trade and lower transaction cost, the firm argues.
It was used to facilitate atomic trade payments, whilst smart contracts and event-driven programming enabled payment automation following certain conditions being met. This subsequently enabled potential 24/7 trade flow automation.
Regarding securities, Swift believes that its connector can offset the challenge of interoperability between tokesnied platforms, which has held back the full potential of tokenization to improve liquidity, lower transaction costs and hence transparency and security.
“Our experiments showed that the Swift connector was able to interlink multiple asset and cash networks, and could facilitate atomic delivery versus payment (DvP) across those platforms,” the firm’s statement explained.
Lastly, Swift found that its connector was interoperable with existing foreign exchange market infrastructures, facilitating FX and netting and settlement via CBDCs. As the digital currencies become more widespread, this could be significant.
As noted above, CBDC development and adoption has become an area of interest for some of the world’s leading economies and their respective central banks. China is one of the most notable examples of a major economy which issues a CBDC, the digital yuan.
Other economies, both developed and developing, have eyed up similar moves. In the UK, the Bank of England is evaluating a digital pound, whilst the European Central Bank (ECB) has been active in making its case for a digital euro to EU legislators.
Against this backdrop of both financial institutions and national governments exploring CBDC launches, Swift believes the major challenge will be fragmentation due to the differing technologies, standards and protocols in place. This will require interoperability to solve.
“Fragmentation is a challenge for the entire industry,” Zschach continued. “And ensuring interoperability between networks is vital to addressing this while also enabling new technologies to scale and reach their full potential.”
