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The Need to Connect

CBDCs are taking root in the region as interest in them increases across the globe. Nick Kerigan, Managing Director, Head of Innovation at Swift answers key questions about interoperability and its role in the progress of CBDCs development.

Nick Kerigan, Managing Director, Head of Innovation at Swift

How are CBDCs continuing to develop globally, including in the MEA region?

Interest in CBDCs continues to gain momentum worldwide. Currently more than 130 countries are now exploring a digital currency, according to the latest Atlantic Council tracker. Several have fully launched a CBDC, while more are in advanced phases of development, including pilot stage. A recent survey from the Official Monetary and Financial Institutions Forum found that nearly 70% of central bank respondents expect to issue a CBDC within the next decade. China’s digital yuan has passed USD 250 billion in transactions within one-and-a-half years of its launch, while the ECB is now in the preparation phase for a digital euro. In India, meanwhile, commercial banks are processing a million transactions per day throughout the country for the digital rupee.

CBDCs are a focus throughout the MEA region, with the latest Atlantic Council tracker showing multiple countries have CBDCs in development. In the Middle East, the Central Bank of the UAE has been involved in various CBDC experiments and in January 2024 completed its first digital dirham transaction with China, valued at USD 13.6 million. The tracker also indicates that Turkey and Saudi Arabia are at pilot stage. Across Africa, Nigeria is among the countries globally that have launched a CBDC whilst Ghana, Tunisia and South Africa have reached pilot stage.

What challenges does the development of CBDCs present?

While the rise of CBDCs is accelerating, fragmentation at the global level remains a major risk. As central banks develop their own digital currencies and seek to solve different use cases, they’re using different technologies, standards and protocols. If such fragmentation persists, it could lead to unconnected ‘digital islands’ springing up around the world, presenting barriers to businesses and consumers attempting to make international payments using CBDCs.

This is only one element of increasing fragmentation fuelled by digitalisation and geopolitical shifts. As such it becomes even more important to ensure interoperability in payment systems and avoid new frictions. With new technologies evolving and new forms of value coming on stream including CBDCs, the financial community can work together to ensure seamless interconnection between new and existing systems.

How is recent work on CBDCs helping to pave the way forward?

We have been working closely with our community to investigate whether and how Swift can enable the global CBDC ecosystem. We are agnostic about whether CBDCs should or should not be used. Our focus is on facilitating cross-border interoperability and interlinking between different CBDCs, and between CBDCs and existing payment types and systems, if they are introduced. We have been working with the community to lay out a path to seamlessly exchange CBDCs on a global scale, regardless of the tech they’re built on and alongside fiat currency.

In 2021, we published the results of a first round of experiments that showed how Swift could enable interoperability between CBDCs. Further experiments in 2022 demonstrated a new interlinking solution for connecting CBDC networks and existing payment systems. We opened this up to testing by the Swift community through our first phase of sandbox testing, with results published in March 2023. Following that, we released an enhanced beta version of our connector solution, tested with three central banks.

In July 2023, we launched a second phase of our CBDC sandbox project, one of the largest global CBDC collaborations ever. We explored more complex use cases, using the solution to connect and orchestrate transactions across simulated digital trade and tokenised asset and FX networks, alongside CBDCs for payments. The project was carried out over six months. 38 central banks, commercial banks and market infrastructures from around the world participated, including the Standard Bank of South Africa from MEA. The experiments found that the solution has the potential to simplify and speed up trade flows, unlock growth in tokenised securities markets and enable efficient FX settlement – all while allowing financial institutions to continue to make use of their existing infrastructure.

What tangible outcomes could the industry expect to see in enabling CBDCs to better interoperate?

In digital trade, the collaborative experiments successfully demonstrated interoperability between different digital networks and trade platforms, with Swift’s solution facilitating atomic trade payments – payments that are completed simultaneously, alongside the transfer of assets, rather than sequentially. Smart contracts and event-driven programming enabled the automation of payments only once certain conditions had been met, meaning trade flows could potentially become automated 24 hours a day, seven days a week. Participants also highlighted the solution’s potential to reduce delays in global trade, enhance trust among parties and significantly lower transaction costs.

In securities, the lack of interoperability between tokenisation platforms is a barrier to the growth of tokenisation. The experiments showed that Swift’s solution was able to interlink multiple asset and cash networks and could facilitate atomic delivery versus payment across those platforms. Tokenisation is a new market which is attracting widespread industry interest due to its potential to improve liquidity, lower transaction costs and enhance transparency and security.

Finally, the experiments showed that the connector could play a role in foreign exchange. Working closely with CLS, the connector was shown to be interoperable with the existing market infrastructure, facilitating FX netting and settlement via CBDCs.

What are the next steps for moving towards greater interoperability for CBDCs?

Participants in our experiments agreed on three principles for interoperability. The first is interlinked networks – it is essential to ensure native technical interoperability between different digital networks. There is an opportunity to achieve interlinking by leveraging the industry’s investment in ISO 20022 messaging as the common language for payments across new and established networks.

Second, a single point of access can enable institutions to reuse their existing channels, reach new networks and bring down participation costs. Co-existence is the third principle. With new digital networks expected to co-exist with traditional market infrastructures, seamless interactions will be needed between the new and the old.

We plan to continue collaborating on CBDCs with our global community, based on these shared principles, to help further drive innovation and continue working towards interoperability.