SWIFT experiments to make seamless cross-border CBDCs payments

  • By Zilla Efrat

SWIFT, the world’s leading provider of secure financial messaging services, is testing how it can interlink domestic central bank digital currencies (CBDCs) emerging worldwide to make cross-border payments with CBDCs more seamless and frictionless.

SWIFT says it conducted its first set of CBDC experiments in 2021. These demonstrated it could successfully orchestrate a cross-border transaction between one entity on a CBDC network based on distributed ledger technology (DLT) and a second running on an established real-time gross settlement (RTGS) system.

Now, it says, moving to the next level in collaboration with Capgemini.

According to a new report from the Bank for International Settlements, nine out of 10 central banks are now exploring CBDCs, digital versions of existing central bank money.

In addition, more central banks are in the advanced stages of their CBDC exploration. Nine countries are already live with their own digital currency, including Nigeria and the Bahamas.

SWIFT says while much of the current focus on CBDCs is on how they could help achieve domestic policy goals, there’s one potential blind spot: their use cross-border.

“Facilitating interoperability and interlinking between different CBDCs being developed around the world will be critical if we are to fully realise their potential,” Thomas Zschach, chief innovation officer at SWIFT.

“Today, the global CBDC ecosystem risks becoming fragmented with numerous central banks developing their own digital currencies based on different technologies, standards and protocols.”

“If left unaddressed, this fragmentation could lead to ‘digital islands’ springing up across the globe,” adds Nick Kerigan, head of innovation at SWIFT.

“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.”

“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,” says Sudhir Pai, chief technology and innovation officer, financial services at Capgemini. “We look forward to continuing to collaborate in building industry standards and frameworks with SWIFT.”

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

“CBDCs are new forms of fiat currencies that have the potential to enable new or better payment capabilities,” he adds.

“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.”

SWIFT says 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 DLT.

And, just as different types of money are used in different payment systems today, the same will eventually be true for CBDCs. “For CBDC payments to flow smoothly and to remove friction, all of these things will need to interoperate,” says Zschach.

Leveraging its experience in bringing about standardisation and best practices in international payments, SWIFT is exploring its role in solving the interoperability question. In its 2021 experiments, it demonstrated that it could achieve interoperability between CBDCs and existing payments systems, using banks communicating via established messaging.

Its new experiments with Capgemini go a step further. SWIFT says it is testing how it can interlink, at a network level, CBDC platforms regardless of technology, with existing payments systems, via the SWIFT platform. It is also exploring whether interlinking could offer a highly scalable and easily integrated solution to making CBDC networks “cross-border payments ready”.

In these experiments, it is building and demonstrating the ability to deploy a gateway on a domestic CBDC network. The gateway will intercept cross-border transactions on the network, translate them, and send them to the SWIFT platform for onward transmission to another CBDC network or established payment system.

This collaborative proof of concept addresses the interlinking of different CBDCs. It also reuses existing bank messaging standards and authentication models, including ISO 20022 and SWIFT’s Private Key Infrastructure. It aims to ensure that the solution can be accessible across SWIFT’s unique community of more than 11,000 financial institutions in over 200 countries.

“We are combining our deep expertise in payments with significant investments in several CBDC related innovations. This collaborative effort with SWIFT aims to remove entry barriers for all participants around the globe where CBDCs coexist with traditional payment rails,” says Rishabh Shah, head of capability development for DeFi at Capgemini.

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, it is addressing three use cases: CBDC to CBDC, fiat to CBDC, and CBDC to fiat.

“If the experiments are successful, it will demonstrate that SWIFT has the capability and technical components to interlink different networks,” says Kerigan. “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.”

SWIFT is already well advanced with the experiments and will publish the results shortly. It will also be looking beyond CBDCs to how it can enable interoperability between other digital assets and currencies as they are developed and become regulated globally.