As financial systems all over the world undergo digital transformation, SWIFT–the most trusted channel for messaging across international banking systems–is emerging as a driving force enabling innovation among global financial systems. The majority of central banks, around 90% according to reports, are actively researching how to develop a unified international payment framework. Under this notion they are developing the Central Bank Digital Currencies (CBDCs) to establish a streamlined infrastructure for borderless payments.
What is CBDC and How does it work?
The Central Bank Digital Currency (CBDC) is the digital form of a nation’s currency. This shall be both issued and regulated by the corresponding country’s central bank. CBDCs can be considered as digital money from the government holding the same nominal value as physical cash. Hence, they cannot be equated to cryptocurrencies as they are backed by governments in every country. They work on a safe and secure platform and these digital ecosystems make use of blockchain technology that makes the processes transparent. Hence CBDC allows individuals to make easy transactions across the globe which are cost-effective and can also be tracked easily through the services provided not by a third-party but by the central bank systems.
What is CBDC Service and Its Interoperability?
CBDC service aims at bringing together the central banks of nations around the world under a single platform. However, the real challenge arises as individual central banks of countries are attempting to operate with their own digital currencies. Since the functioning of these central banks might follow different rules and regulations or varied blockchains, uniting them under a common framework is the hardest part of implementing CBDCs. The disruption in the interoperability of CBDCs can affect international trade and transactions.
SWIFT provides a solution to this–spanning over 11500 financial organizations across 200 countries. Through these connections, SWIFT aims to merge different CBDCs across the world in order to enable seamless digital transactions between central and commercial banks. Another primary benefit is that the difference in the technology that these global banks use does not affect these transactions once they are merged under SWIFT.
The SWIFT CBDC Connector: Linking the Digital Islands
The SWIFT CBDC connector, with years of experience in digital financing, has thoroughly tested and proved that safe and easy exchange of digital currency can be practiced with its CBDC connector. This exchange can be made possible with the SWIFT CBDC connector without manually altering, directly integrating or making changes to the existing systems of the banks.
In order to test working of digital currencies across the systems of global banks, SWIFT conducted the latest sandbox experiment involving 38 institutions, inclusive of central banks, commercial banks and settlement platforms. The experiment turned out to be a success enabling easy transactions – both Payment-versus-Payment (PvP) and Delivery-vs-Payment (DvP) across different blockchains.
Nick Kerigan, Head of Innovation, at SWIFT claimed that their CBDC connector could successfully complete cross-border transactions minimizing the expenses of multiple connections based on the blockchain of different banks. He added that the SWIFT connector has been made future ready also due to the cost-effectiveness and improved security of digital transactions.
How to Make International CBDC Payments Using SWIFT
CBDC payments using the SWIFT connector can be completed within seconds and remains a secure digital payment option. Time of settlement is a major concern these days in global transactions. It might take days to settle payments while using the traditional transaction methods. Using the SWIFT connector, combining CBDCs, on the other hand, can ensure payments are settled in seconds with better transparency and less risk factors involved. This innovation has opened new opportunities benefiting foreign exchange (FX) trade finance and remittances in settling payments with minimal risks and faster completion rate.
Furthermore, with a view to remain futuristic, SWIFT has embedded CBDC transactions within the format of ISO 20022. Through this alignment the SWIFT connector can provide the best infrastructure to support global transactions between traditional and modern digital system.
Tokenised Assets and the Next Frontier
Another area that has been brought under focus of SWIFT CBDC is tokenised assets. Market experts are of the opinion that by the end of 2030 tokenised assets will boom reaching $16 trillion. Through the integration of tokenised assets using SWIFT CBDC connector, digital and traditional payments along with digital assets and smart contracts can all be performed seamlessly. Hence, the SWIFT CBDC will soon be enacting the role of a central coordinator bolstering its role in global finance messaging. This marks a revolution in global transactions as the industry shows a shift towards tokenisation and automation.
Conclusion
The primary goal of the SWIFT CBDC connector is to bring the Central Bank digital currencies across the globe under one unified transaction system. This targets to stop their functioning in isolation which creates delays in payment settlements. Further, SWIFT also ensures seamless transactions of digital, tradition and tokenised assets keeping itself ready for the future They lead the way by evidencing the significance of interoperability in an era of decentralization, creating a vital link between the traditional banking systems and the rapidly evolving digital currencies across various central banks.
