As countries evaluate potential use cases and economic effects of central bank digital currencies (CBDCs) in pilot projects, many have questioned how interoperability between them could exist. In answer to this, Swift has revealed progress as it tests the potential for international transfers across over 200 countries.
As increasing numbers of CBDC pilots worldwide are announced, digital currencies continue to dominate the discussion. However, as public interest levels soared, so too have questions about the central bank-backed digital currencies. Privacy issues and potential use cases of different CBDCs have become hot topics, and these concerns have been well documented.
Regardless of concerns, many governments and central banks have gone full steam ahead into technical preparations for CBDCs. The value of payments through CBDCs could reach $213billion annually by 2030, according to a recent study by Juniper Research. This forecast represents a growth of over 260,000 per cent from the current value of just $100million in 2023.
It seems inevitable that CBDCs will be released, and used, in countries across the world – joining Nigeria, the Bahamas, the Eastern Caribbean, and Jamaica. For those interested in the technical and practical aspects of CBDCs, questions about interoperability have surfaced.
Use cases for CBDCs will undoubtedly vary across the world, as different countries look to introduce them into different economic landscapes and focus attention on domestic usage. As they are built in various ways, Swift warned of the issues the that “fragmentation” of CBDCs worldwide could cause.
In response to this, the interbank messaging company began testing its own solution: an API-based CBDC connector. Swift deployed the solution into a sandbox and gave 18 central and commercial banks 12 weeks to test it.
Participants included the Monetary Authority of Singapore, BNP Paribas, HSBC, NatWest, the Royal Bank of Canada, Société Générale and Standard Chartered, among others.
‘Clear potential and value’ in Swift solution
The sandbox testing appeared successful and Swift revealed positive feedback. It facilitated a wide range of experiments and involved 4,736 CBDC-to-CBDC and CBDC-to-fiat simulations over the 12-week period.
Participants processed transactions between the Quorum and Corda blockchain networks, as well as between Corda and a fiat currency.
Tom Zschach, chief innovation officer at Swift, discussed the solution for connecting CBDCs following the testing. “Our experiments have shown the critical role that Swift can play in a financial ecosystem in which digital and traditional currencies co-exist,” he said.
“Our CBDC connector has been proven to be robust across almost 5,000 transactions between two different blockchain networks and traditional fiat currency. Many participants have made clear their desire for continued collaboration on interoperability.”
Following the positive tests, Swift has plans to begin developing a beta version of the solution for payments. Hoping to complete this in the coming months, central banks will then further test the beta version.
Lewis Sun, global head of domestic and emerging payments at HSBC, also highlighted the importance of the solution. Sun explained: “Interoperability is key to realising the potential of CBDCs to deliver real-time cross-border payments.
“While interest in CBDCs is growing, so is the risk of fragmentation as a widening range of technologies and standards is being experimented with.
“Our continuing collaboration with Swift, central banks and other commercial banks provides an invaluable platform to innovate solutions that can bring about faster, cheaper and more secure cross-border payments.”
Swift is also holding a second phase of sandbox testing, to enable the Swift community to collaborate on CBDCs connectivity.
The sandbox will focus on new use cases, including securities settlement (i.e. cross-asset exchange), trade finance and conditional payments.