Financial news

Three central banks and monetary authorities and a group of over 30 financial institutions have begun beta-testing a new solution for interlinking central bank digital currencies (CBDCs) from financial messaging service provider Swift.

Swift explained that the news marks “a new milestone” as it aims to facilitate interoperability between fiat and digital forms of value. As the financial messaging service aims to enable CBDC interoperability, three central banks including the Hong Kong Monetary Authority (HKMA) and the National Bank of Kazakhstan (NBK) have integrated the solution with their infrastructure for direct testing.

Additionally, 30 financial institutions are experimenting with the solution in a new sandbox to explore further use cases. Swift named the Reserve Bank of Australia, Deutsche Bundesbank, HKMA, Bank of Thailand and CLS as a selection of the participants involved in a second phase of sandbox testing.

During this phase, commercial banks, central banks and financial market infrastructures will explore additional use cases, including trigger-based payments for digital trade platforms, foreign exchange models, liquidity-saving mechanisms and delivery versus payment.

Tom Zschach, chief innovation officer at Swift, discussed the firm’s aims: “Our focus is on interoperability – ensuring that new digital currencies can seamlessly coexist with each other and with today’s fiat-based currencies and payment systems.”

Eighteen central and commercial banks concluded the first phase of sandbox testing in March 2023, finding “clear potential and value” in the API-based CBDC connector following a comprehensive review. In the first phase of Swift’s experiments and sandbox testing, almost 5,000 transactions were simulated between two different blockchain networks and with existing fiat-based payment systems.

Central and commercial bank participants noted that the connector enabled the seamless exchange of CBDCs, even for those built on different platforms.

Combatting global fragmentation 

Swift’s efforts come as CBDC development continues to accelerate across the globe. According to The Atlantic Council, 130 countries, representing 98 per cent of GDP, are now exploring CBDCs. Meanwhile,  19 of the G20 countries have already entered the advanced stages of CBDC development – with nine already in pilot.

Zschach continued: “The financial community has already recognised the strong potential of our CBDC innovations for preventing digital islands, while securely bridging the payment systems of today and the future.

“This next phase of testing and exploration will help us further refine the solution to ensure it is as effective as possible, and at scale.”

Swift explained it fears that these CBDC developments could lead to a fragmented landscape across borders, as most countries focus on domestic usage. To counter this, Swift has focused on interoperability for digital currencies and tokenised assets.

Ultimately, Swift hopes to enable each CBDC to seamlessly scale if and when they are deployed into the financial ecosystem.