Yesterday SWIFT, the organization responsible for messaging most cross border payments, has started a new set of CBDC interoperability experiments partnering with Cap Gemini. It’s concerned that without interoperability, individual central bank digital currencies (CBDCs) could create new domestic silos, fragmenting the global payment landscape.
Last year SWIFT published a report with Accenture sharing work on interoperability between a CBDC and a conventional real-time gross settlement system (RTGS). It’s also conducting experiments for tokenized digital assets with Clearstream, Northern Trust and SETL.
This latest work with Cap Gemini is about enabling interoperability between different types of CBDCs, some of which might be centralized, and others might use blockchain.
“One (challenge) is that there will be multiple CBDC platforms in development in parallel to the existing traditional payment systems,” said Nick Kerigan, Head of Innovation, 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.”
The tests explore interlinking these disparate systems via the SWIFT platform so that a cross border payment would link the origin CBDC system to SWIFT and from there on to the destination CBDC system.
It’s tackling 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,” said Kerigan. “This would help solve a huge technology and industry challenge facing CBDCs.”
A bigger CBDC challenge for cross border payments
CBDC is being explored for cross border payments in part because of the current slow payments and the need to use intermediaries or correspondent banks. In reality, SWIFT’s messages are very fast, although previously, it was hard to discover why a payment was delayed. Many international payment holdups relate to:
- inaccurate bank information
- the need to use correspondent banks
- anti-money laundering queries.
So while SWIFT has rightly identified issues with CBDC interoperability, perhaps there are even more fundamental challenges.
There are multiple ongoing cross border CBDC experiments that include several central banks. Singapore’s Project Dunbar involving four central banks released findings that raise a key issue. If you don’t want the inefficiencies of using correspondent banks, then the obvious solution is to allow foreign banks to hold a domestic CBDC or have a central bank account. That’s something that many central banks are not keen to do.
Otherwise, you will often end up with correspondent banks handling CBDCs for cross border payments with SWIFT in the middle. That seems rather similar to the current status quo. There is one advantage in that the message and money would move together with a CBDC, but will that address the real challenges?