SWIFT, the international payment gateway has announced that it is working on interlinking Central Bank Digital Currencies for secure international payments. SWIFT, in a blog post said that it is working in partnership with Capegemini to interlink local CBDCs for seamless cross-border settlements.
The announcement was made by the company on May 19. The update says that the interlinking of CBDCs is necessary since this is a missing link that has been overlooked by central banks of many countries seeking to embrace CBDCs for payment.
Experiment Has Shown Promise
According to SWIFT, nine out of ten central banks have shown interest in digital currencies that are backed by their national currencies. Unfortunately, most of these central banks have not taken cognizance of the potential of CBDCs as a means to facilitate cross-border payments. The report says that SWIFT has already started experimenting on cross-border payments using interlinked CBDC and the experiments have shown promise so far.
The company added that work on CBDCs have reached an advanced stage in 9 countries such as the Bahamas and Nigeria. The focus has been on their use for local payments. It added that the prospects of international settlements using CBDCs is the blind spot of the development. It says that countries responsible for 90% of global GDP are interested in CBDC for their central banks.
Thomas Zschach, the Chief Innovation Officer of SWIFT said,
“Facilitating interoperability and interlinking between different CBDCs being developed around the world will be critical if we’re to fully realize their potentials”
Isolated Digital Islands
The SWIFT Head of Innovation, Nick Kerigan, said that unless the blind spot which is the focus on localized CBDCs is addressed, the space will be left with isolated digital islands that are incapable of inter-connectivity. He said that the experiment that SWIFT has worked on since 2021 is to ensure interoperability and friction-less transmission of international settlements.
Kerigan said that the risk of fragmentation is still present in the CBDC space if allowed to develop without the consciousness of interlinking for international settlement.
“Today, the global CBDC ecosystem risks becoming fragmented with numerous central banks developing their own digital currencies based on different technologies, standards and protocols.”
Building A Framework for Industry Standards
The Chief Technology and Innovation Officer, Financial Services, Capegemini, Sudhi Pai, said that navigating through the decentralized space is challenging due to availability of different models and policy considerations. He said that Capegemini is looking forward to working with SWIFT to build industry standards.
Some of the highlighted challenges of interoperability are CBDCs built with different protocols, those built on centralized architecture and others on decentralized frameworks.
“For CBDC payments to flow smoothly and to remove friction, all of these things will need to interoperate,” says Zschach.
CBDC To Work On Existing SWIFT Infrastructure
SWIFT said that the move to create interoperable international payment system using CBDC has reached an advanced stage, where SWIFT is working to ensure interlinking of CBDCs irrespective of the technology on which they were built with.
“We’re exploring whether interlinking could offer a highly scalable and easily integrated solution to making CBDC networks ‘cross-border payments ready.”
The release said that the experiment is now focusing on building a gateway to local CBDC using the SWIFT platform. It said that the gateway will intercept, translate and communicate with SWIFT for onward transmission to another CBDC.
SWIFT says that interlinked CBDCs will work on existing banking messaging infrastructure of the company, such as ISO 20022 and SWIFT’s Private Key.