SWIFT is taking the job of interlinking CBDCs across the world into its own hands
- With countries around the globe experimenting with CBDCs, the digital currency solution is set to grow in popularity over the next few years.
- To avoid fragmentation in upcoming solutions, SWIFT is experimenting with an interlinking solution that connects its current architecture to CBDCs.
Central Bank Digital Currencies are a digital version of cash offered and regulated by central banks.
The idea is that, unlike privately-issued crypto, this type of digital currency is less volatile and hence more secure. Other than being less volatile than crypto, there are quite a few other advantages to adopting CBDCs. For one, they favor remittances and digital payments and can be more easily integrated into current payment infrastructures. And second, CBDCs can ease the inclusion of those who are unbanked or underbanked because it reduces reliance on cash and eases access to digital finance, according to the IMF.
The potential of CBDCs is drawing global attention. 110 countries across the world are exploring digital currencies and 11 already have launched CBDCs in various phases of development.
Still, there is a strong possibility that independent development and implementation of CBDCs can lead to unconnected digital islands. This is because each development uses its own selection of protocols, standards, and technologies and in doing so, runs the risk of being disconnected from other CBDCs around the world.
The solution: CBDC sandbox by SWIFT
As a global member-owned cooperative that functions as a large messaging system, SWIFT allows banks to receive payments even if the sender and receiver bank at different institutions. With 40 years of experience and a global footprint, SWIFT has a pretty sophisticated infrastructure already in place for cash. This allows the cooperative to bring interested parties to a single platform to test and discuss a system for CBDCs that can sit on top of its network.
SWIFT has been experimenting with a solution for CBDCs for several years, but in 2022, the organization built a simulation of its platform and an experimental software component or “connector”, the combination of which would allow CBDC networks to link together at the infrastructure and technical levels. In the sandbox environment, banks could query the system with CBDC transactions and check how different types of cross-border payments would work through SWIFT’s solution.
These experiments involved 18 institutions ranging from central banks, market infrastructures, and commercial banks from around the world. Institutions like Banque de France, HSBC, SMBC, Standard Chartered and BNP Paribas were part of the experiment.
Additionally, the organization ran an “observer series” in parallel with its CBDC sandbox experiments in which four additional central banks were able to provide input and feedback on the solution without having access to the sandbox itself. This meant that these banks couldn't query the sandbox systems with test transactions but could provide input on how such a system should ideally work from their point of view.
Looking under the hood
The sandbox experiments ran for 12 weeks in which the banks had continuous access to the experimental solution. Every 2 weeks representatives from participating institutions gathered to discuss and provide feedback on the solution. Here, they reviewed technical issues such as roles and responsibilities within the network, technical and implementation considerations, identity, and privacy considerations.
The sandbox itself was built on top of Amazon Web Services (AWS) and was hosted by two blockchain networks, Quorum and Corda, as representative distributed ledger technologies (DLTs). In total, 4,736 transactions were processed on the networks (including test payments).
According to SWIFT’s Nick Kerigan, MD and head of innovation, the experiments went well, and the testing showed their solution has the potential to meet the interoperability needs of central and commercial banks. Now the organization is planning a second testing phase of the sandbox in which all 18 previous participants will be invited to join, as well as other interested institutions.
Ideally, this new system will be able to emulate current infrastructures and offer a similar experience to the current architecture. It will also limit any possible fragmentation in the development of digital currencies ensuring that digital currencies can work in harmony with the current infrastructure already in place.
The key questions now center around how soon this architecture will become commonplace and whether it will encompass recent offerings by SWIFT like SWIFT Go, which allows small businesses to send cross-border payments faster and more predictably than before.