In recent news, Society for Worldwide Interbank Financial Telecommunication (SWIFT), the international payment system, has reported positive results from a pilot test of transfers between different central bank digital currencies (CBDCs). It also says that the agency sees “clear potential and value” in it.
Sources reveal that the pilot test particularly looked at how different CBDCs can interoperate through an API-based CBDC connector, using two different blockchain networks and existing fiat-based payment systems. The API stands for Application Programming Interface, a set of defined rules that explain how computers or applications communicate with one another. APIs sit between an application and the web server, acting as an intermediary layer that processes data transfer between systems.
According to a press release issued by SWIFT, all the participants involved in the pilot expressed “strong support” for the continued development of the solution. Additionally, they agreed on the idea that the CBDC connector used in the simulations enabled the “seamless exchange of CBDCs.”
Reportedly, 18 central and commercial banks participated in the study, which covered 5,000 simulated transactions carried out over 12 weeks. Among the participating banks, there were some large international players like HSBC, Standard Chartered, and NatWest, as well as central banks like the Deutsche Bundesbank and the Monetary Authority of Singapore.
The announcement mentions that these participants feel that the chances of success would also be true for transfers between CBDCs built on different platforms. The latter is seen as key, given the risk of fragmentation as central banks around the world all build their CBDCs.
Following the conclusion of the pilot test, SWIFT plans to develop a beta version of the system for further testing by the central banks. Once that is completed, SWIFT said that a second phase of sandbox testing will be held for participants to explore new use cases, including securities settlement, trade finance, and conditional payments.
Presenting his thoughts, Tom Zschach, Chief Innovation Officer at SWIFT, said the study has shown that the agency can continue to play a critical role in the global financial ecosystem where traditional currencies and CBDCs co-exist. Quoting him:
Our API-based CBDC connector has been proven to be robust across almost 5,000 transactions between two different blockchain networks and traditional fiat currency, and we’re delighted to have the support of our community in developing it further.
In September, SWIFT announced a partnership with Chainlink, a blockchain-oriented company, to develop a blockchain-based money transfer service. At the occasion, SWIFT strategy director Jonathan Ehrenfeld Solé said that there is an “undeniable interest” from traditional institutions and their investors in digital assets. He also claimed that the same players in traditional finance want access to both traditional financial instruments and new-age digital assets on a single platform.
Similar to SWIFT’s platform, Red Date Technology, a blockchain startup headquartered in Hong Kong has introduced a digital payments platform to blur the gaps between stablecoins and CBDCs. The Universal Digital Payment Network (UDPN) was introduced on January 19 at the World Economic Forum (WEF) 2023 conference in Davos, Switzerland.
The results of Swift’s study come just days after the Bank for International Settlements (BIS), released the results of its pilot study for the use of CBDCs in cross-border transactions. According to the BIS study, central banks can have “almost full autonomy” over the design of their own CBDC, while still making the CBDC interoperable with other countries’ CBDCs for cross-border transactions.
CBDCs have become an increasing topic of interest for institutions across the globe. Given the character of CBDCs, they can play an important role in revolutionizing the financial system. Countries have been enthusiastically participating in pilots and trials of their CBDCs for the advantages it has to offer, however, some have also highlighted concerns like privacy, etc.