An experimental ‘interlinking’ solution for connecting central bank digital currencies (CBDCs) has been given the thumbs-up for further development after tests involving the Monetary Authority of Singapore, Banque de France and Deutsche Bundesbank.
SWIFT (the Society for Worldwide Interbank Financial Telecommunication) – the Belgium-headquartered organisation operating the financial messaging arteries linking more than 11,000 banks and institutions across 200-plus countries – has been working with 18 central and commercial banks in total on the tests. The experimentation comes as an increasing number of monetary authorities worldwide face up to – and co-operate to address – the opportunities and challenges of CBDC interoperability.
Twelve weeks of testing in a technical sandbox (test space)-style environment saw 4,736 transactions simulated between two blockchain networks and with existing fiat-based payment systems (so, both CBDC-to-CBDC and CBDC-to-fiat transactions).
Participating organisations have expressed ‘strong support’ for the solution’s continued development after it enabled ‘seamless’ exchange of CBDCs, including those built on different platforms, during the testing, SWIFT has announced.
The next step is to develop a beta version of the solution that can be tested further by central banks. A second phase of sandbox testing will also take place, with a focus on new use cases, including in securities settlement, trade finance and conditional payments. Ultimately, SWIFT’s aim is to deliver a ‘production-ready’ solution capable of supporting instant and frictionless cross-border payments using CBDCs.
CBDC interoperability challenge
The SWIFT-convened project’s journey to date and next steps are detailed in a 15-page report titled ‘Connecting digital islands: Swift CBDC sandbox testing’.
‘Digital islands’ is a reference to the different ways that nations are approaching CBDCs. ‘Central banks are looking to use this new type of money to solve different economic and social challenges, and are employing a wide variety of technologies, standards and protocols in their implementations,’ the report notes. ‘This could lead to continued fragmentation, which if not tackled at the global level, leads to a risk that businesses and consumers won’t be able to exchange CBDCs across borders, and the benefits of new technologies not being realised.’
The Bank for International Settlements (BIS) Innovation Hub, BIS-housed Committee on Payments and Market Infrastructures (CPMI), International Monetary Fund (IMF) and World Bank jointly published a report in July 2022 titled ‘Options for access to and interoperability of CBDCs for cross-border payments’. This set out how central banks face important decisions on interoperability and cross-border usage ‘if CBDCs are to fulfil their potential’.
The BIS Innovation Hub’s Nordic centre has just reported the conclusions of a collaboration (dubbed ‘Project Icebreaker’) with the central banks of Israel, Norway and Sweden exploring the potential benefits and challenges of using retail CBDC for cross-border transactions. The technical project explored a specific method to interlink domestic systems (a so-called ‘hub-and-spoke’ solution) with a cross-border transaction broken down into two domestic payments, facilitated by a foreign exchange provider active in both domestic systems.
A nod to the nodes
The SWIFT-convened experimentation involved infrastructure from Amazon Web Services (AWS) and blockchain and digital assets platform Kaleido (leveraging Hyperledger FireFly). The sandbox used Quorum and Corda (created by R3) as representative distributed-ledger technologies that could be used to run CBDCs, as well as a simulated Real-Time Gross Settlement (RTGS) network.
Incorporated into each network were the required regulator nodes and bank nodes, as well as an experimental SWIFT application programming interface (API)-based CBDC connector.
Swift announced six months ago that it had developed a solution to enable CBDCs to move between DLT-based and fiat-based systems using existing financial infrastructure. At the time (October 2022) 14 central and commercial banks were involved. The sandbox testing enabled the central and commercial banks to ‘experiment with the solution to validate its effectiveness and share insight to steer its development’.
Participating commercial banks included BNP Paribas, HSBC, Intesa Sanpaolo, NatWest, Royal Bank of Canada, SMBC, Société Générale, Standard Chartered and UBS. An additional four unnamed central banks are described as taking part as observers.
Senior SWIFT figures leading the project include chief innovation officer Tom Zschach and MD/head of innovation Nick Kerigan. “Many participants have made clear their desire for continued collaboration on interoperability, and this is particularly pleasing,” said Zschach, commenting on the sandbox testing and next steps.
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