Home Blockchain CBDC ‘connector’ has potential to ‘simplify and speed up’ global trade: SWIFT

CBDC ‘connector’ has potential to ‘simplify and speed up’ global trade: SWIFT

‘Connecting digital islands: Swift CBDC sandbox project – phase 2’: the 24-page report summarises six months’ of experimentation involving central and commercial banks as well as market infrastructures | Global Government Fintech screenshot of the report cover against a backdrop of a photo by Jason Goh (Pixabay)

The feasibility of automating trade payments using distributed-ledger technology (DLT) and central bank digital currency (CBDC) networks has been demonstrated in the latest stage of a technical experimentation project being spearheaded by global bank messaging network SWIFT.

Improving the speed and efficiency of trade finance has been one of four focus areas during the second phase of sandbox-style experimentation on a CBDC ‘interlinking’ solution that SWIFT (the Society for Worldwide Interbank Financial Telecommunication) has been working on for the past couple of years.

The results, announced this week after experimentation over six months (from July 2023), show that the ‘connector’ can enable financial institutions such as banks to carry out a wide range of financial transactions using CBDCs and other forms of digital tokens, ‘easily’ incorporating them into their business practices, according to a SWIFT announcement summarising its latest findings.

In one of the largest cross-border collaborations to date in the emerging field of CBDCs, 38 institutions – including central and commercial banks as well as market infrastructures – took part in experiments. SWIFT concludes that its solution has the potential to ‘simplify and speed up’ trade flows, as well as – in further use-case areas explored during the latest phase of experimentation – ‘unlock growth’ in tokenised securities markets and enable efficient foreign exchange (FX) settlement, while allowing banks to continue to use their existing infrastructure.

The Belgium-headquartered co-operative has been focusing its innovation-related agenda on interoperability between digital currencies and tokenised assets to overcome what it sees as the potential risk of fragmentation caused by the development of currencies on different technologies and with different standards and protocols.

RELATED ARTICLE SWIFT-led ‘CBDC connector’ project gets thumbs-up for next phase – a news story (14 March 2023) on a 15-page report published just over 12 months ago

Tackling ‘complexity and inefficiency’

SWIFT’s solution has already been shown to enable cross-border transfers and connect CBDCs on different networks with each other, as well as with fiat currencies.

The 24-page ‘Connecting digital islands: Swift CBDC sandbox project – phase 2’ report details the findings of this latest experimentation, which explored ‘more complex’ use-cases.

The mechanics of international trade payments ‘have long been characterised by complexity and inefficiency’, notes the section of the report focused on trade finance. ‘The current landscape for trade payments is fraught with delays, high costs and risks, primarily due to the reliance on legacy systems and paper-based processes.’

The report further sets the context of this specific use-case by pointing out the numerous industry initiatives are underway seeking to digitise global trade, including the adoption of electronic bills of lading, ‘which has the potential to speed up the transfer of documents and reduce associated fraud’. But, the report explains, the lack of technical interoperability between existing electronic bills of lading platforms presents a ‘significant obstacle’ to adoption.

The use-case sought to demonstrate how digital trade networks could be interlinked with other networks such as CBDCs. The experiment also explored the technical feasibility of automating complex ‘trigger-based payment events’ across different networks.

RELATED ARTICLE HK-Israel project highlights potential of ‘access enablers’ in retail CBDC – a news story (15 September 2023) on a CBDC project involving the central banks of Hong Kong and Israel (and co-ordinated by the Bank for International Settlements Innovation Hub’s Hong Kong centre) – the article included a section on SWIFT’s initiative (specifically that three central banks had begun beta-testing its CBDC interlinking solution)

‘Seamless’ integration achieved

To test the solution in SWIFT’s sandbox (test space), those involved simulated a digital trade platform (DTP) on Hyperledger Fabric (a blockchain framework that is part of the Hyperledger project hosted by the Linux Foundation). A core assumption was that a digital trade network could act as a trusted network for global trade, involving diverse participants such as buyers, sellers, carriers and financial institutions. It would also support the tokenisation of trade purchase orders (POs), enabling a digital representation of trade agreements on the blockchain.

The simulated digital trade network included corporate participants pre-configured as buyers, sellers, carriers and port authorities, along with a network authority such as the DTP operator. This set-up, integrated with ‘standard CBDC network configurations’, ensured a ‘comprehensive’ testing environment, the report explains. The ultimate focus was on facilitating exchange of goods and funds using DLT and smart contracts.

Integration between the DTP and CBDC networks through SWIFT’s connector was ‘seamless’, according to the report, facilitating real-time communication and transaction processing.

Outcomes of the experimentation included: the DLT-based DTP allowing the implementation of ‘effective smart contracts for capturing trade clauses in a typical trade contract’; that tokenising a PO, and managing the lifecycle of a PO token and associated payment events via smart contracts, ‘can reduce fraud and double financing issues’ (because the PO token is escrowed until a pending invoice is settled); and ‘seamless’ interoperability between digital networks across technology stacks via SWIFT’s connector.

‘Participants highlighted the potential of this solution to reduce trade payment delays, enhance trust among trade parties and significantly lower transaction costs,’ the report states.

RELATED ARTICLE UK electronic trade law comes into force to kick-start ‘new era’ of digital trade – a news story (24 September 2023) on the Electronic Trade Documents Act 2023 coming into force 

Trade payments: next steps

In respect of next steps for the trade payments workstream, SWIFT states that it will ‘continue to engage with our members, and with the broader trade industry, to address additional challenges in the areas of legal interoperability, technical accessibility, ecosystem-wide standards and adoption.’

The organisation plans to ‘bring together’ multiple trade initiatives and to ‘prioritise initiatives that could have a tangible near-term impact on the trade ecosystem’.

Areas to be explored include expanding implementation to include ‘more global trade participants’, integrating ‘advanced regulatory compliance features to navigate the complex landscape of international trade law’ and ‘ensuring deeper integration with existing financial systems and infrastructures to facilitate a smoother transition to this new paradigm of trade payments’.

Given that a significant proportion of global trade is conducted using English law documents, an important recent milestone on the legal side was the entry into force of the UK’s Electronic Trade Documents Act 2023 in September 2023. This put electronic bills of exchange, electronic bills of lading and other commercial documents on the same legal footing as paper-based equivalents.

On the technical side, it is just over three months since SWIFT reported (in December 2023) that – in collaboration with BNY Mellon, Deutsche Bank and four electronic bills of lading platforms – it had successfully tested a (different) interoperability solution capable of enabling the widespread use of electronic documents.

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‘Beta version 1.5’ of connector planned

The further three use-case areas featured in the report (and on which progress has also been achieved) are: FX, Delivery-versus-Payment (DvP) and Liquidity Saving Mechanisms (LSMs – sophisticated algorithms used in the financial industry).

Looking to the next steps of its overall experimentation, SWIFT reveals in the report that it will be working on two distinct initiatives. First, developing what is described as a ‘beta version 1.5’ of the connector and ‘a productisation roadmap for the Swift connector, based on market developments and readiness’ (beta-testing is testing before a planned general release); and, second, industry interoperability initiatives.

In respect of technology aspects of the overall project, the connector is described as having ‘technology-agnostic’ capabilities. As well as Hyperledger Fabric, two further DLT platforms used during phase two were R3’s Corda and Hyperledger Besu (an open-source Ethereum client also developed under the Linux Foundation-hosted Hyperledger project).

Participants during the second phase included central banks and monetary authorities from Australia, the Czech Republic, France, Germany, Singapore, Taiwan and Thailand.

Swift CBDC sandbox update: the organisation’s head of innovation Nick Kerigan promoted the new report and its findings on X (formerly Twitter)