Through a collaboration with Capgemini, SWIFT has announced that it wants to explore the possibility of interlinking domestic and international CBDCs. The move will allow for the seamless cross-border payments of digital currencies.

Addressing the CBDC Fragmentation Issue

The number of central banks exploring digital currencies has increased significantly. According to a new report, about nine out of 10 central banks worldwide are now researching them. The countries covered by these currencies account for more than 90% of global GDP.

The number of countries that have already started using digital currencies is increasing, most notably the Bahamas and Nigeria. However, one potential blind spot; their usage can vary widely across international borders.

Thomas Zschach, the Chief Innovation Officer of SWIFT, warns that the lack of interoperability between the various Central Bank Digital Currency (CBDCs) being developed worldwide could threaten the ecosystem’s potential. Due to multiple standards and protocols, the development of new digital currencies could become fragmented.

According to Nick Kerigan, head of innovation at SWIFT, the lack of standardization across the various platforms and financial institutions could create digital islands worldwide. It could also hamper the ability of consumers and businesses to make cross-border payments.

In 2021, SWIFT conducted a series of experiments using blockchain technology to orchestrate cross-border transactions between two entities. These experiments demonstrated the potential of the DLT-based CBDC network to run a second, real-time gross settlement system.

Through a collaboration between Capgemini and SWIFT, the institution is testing how to interlink the various domestic-based cross-border payment networks, making it easier for people to make cross-border transactions.

SWIFT and Capgemini Exploring Cross-Border Payment

Through SWIFT’s extensive experience in developing and implementing international payments standards, they are exploring the role of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in addressing this issue. In 2021, they successfully tested the idea of interoperability between various payment systems by using established messaging.

Through a collaboration with Capgemini, they’re exploring the possibility of interlinking existing payments systems and CBDC networks. It could help make cross-border payments more accessible and cost-efficient. In addition, they are also exploring how this could help make the networks more resilient.

They’re developing a gateway that can be deployed on a domestic CBDC network through these experiments. It will then convert and send cross-border transactions to another central bank’s payment system.

The solution is built on a collaborative proof of concept that combines the existing authentication models and bank messaging standards from ISO 20022 and Private Key Infrastructure. Its goal is to be widely used by financial institutions worldwide in over 200 countries and 11,000 financial institutions.

“We are combining our deep expertise in payments with significant investments in several CBDC related innovations. This collaborative effort with SWIFT aims to remove entry barriers for all participants around the globe where CBDC’s coexist with traditional payment rails,” says Rishabh Shah, Head of Capability Development for DeFi, Capgemini.

Overcoming Connectivity Issues

Many obstacles prevent the broader adoption of CDBCs. According to Kerigan, several challenges need to be overcome before banks can fully realize them. One of these is the lack of a single platform that will enable the development of multiple CBDCs to parallel the traditional payment systems.

Although CDBCs have the potential to improve the efficiency and capabilities of traditional payment systems, they are not yet a replacement for the conventional infrastructure. The two parties will still need to work together to seamlessly make their respective systems work.

Notably, similar to how money is used in different payment systems, banks will eventually use the same in the operations of CBDCs.

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