Swift tests show cross-border digital currency potential

Findings from the second phase of Swift’s industry-wide sandbox testing on its central bank digital currency interlinking solution for cross-border payments have received a provisional industry welcome.

Swift said the results of the tests, which concluded last month, show the potential to simplify and speed up trade flows, unlock growth in tokenised securities markets and enable efficient foreign exchange settlement.

The financial messaging provider ran its first sandbox in 2022 involving 18 central and commercial banks and reported back the following March. “The results of that first sandbox were that participants saw clear value and potential in the solution that we developed,” said Nick Kerigan, managing director, head of innovation at Swift. 

It launched the second phase of CBDC sandbox experiments in July 2023 with the key objective of introducing more complex and sophisticated use cases for multi-CBDCs, as well as integration with existing payment systems. Use cases covered trade payments, FX, delivery versus payment and liquidity saving mechanisms.

This latest phase of testing involved 38 global central and commercial banks, more than twice the number in the first phase and with 125 users participating “hands on”. It included the central banks of Australia, France, Germany and Singapore, as well as a number of major commercial banks including HSBC, Deutsche Bank and Standard Chartered. 

In the latest phase of sandbox testing, more complex use cases were explored, employing Swift’s solution to link and orchestrate transactions across simulated digital trade and tokenised asset and FX networks as well as CBDCs for payments. More than 750 transactions were executed during the course of the experiments. 

Swift looked at each kind of use case and how a CBDC, or digital currency more broadly, could add benefit to each. One of the use cases examined was whether a cargo ship entering a port could trigger a payment. 

“We saw that by combining the digital trade and digital trade documents with digital money, you could achieve some real benefits in terms of automation and efficiency,” said Kerigan. “This could be very significant for digital trade in the future.” 

Another finding from the sandbox centred around the digital securities use case. “We were able to show that you could successfully achieve delivery versus payment for securities, when the security and the money were on two different platforms,” he said.

The Swift system could offer additional consumer benefits, according to Paul Darby, delivery lead at quality engineering consultancy Roq. “There would appear to be potential benefits from CBDCs linked to transparency, financial inclusion and mitigating the risk of institutional failure, as well as reducing the costs of cross-border transactions for individuals and small to medium-sized enterprises using those services via the Swift network today,” he added. “There will be much academic dialogue about CBDCs, what they offer and how they improve things.” 

However, he warned, “We only need to look to open banking to realise that consumer adoption is not always straightforward if the process involves behavioural change.”

Tom Fairbairn, distinguished engineer at real-time data platform Solace, suggested that by embracing CBDCs, Swift will enable faster cross-border payments while reducing operational costs, errors and delays for banks as they seek to process international transfers. 

Swift’s latest test phase shows how legacy financial technology can benefit from adopting newer approaches, such as event-driven payment processing and blockchain-based ledgers, without the need to make significant upgrades to legacy banking infrastructure, he added. 

“In even the most legacy of systems, event-driven integration is making inroads,” said Fairbairn.

Leo Smigel, founder of trading and investment guide Analyzing Alpha, agreed with Fairbairn that results from Swift’s second phase of testing open up strong potential for more efficient transactions across currencies and asset classes. 

“The connector conceptually moves us closer to a more integrated financial system that leverages new technologies,” he said. “As with any significant development, a gradual, consultative approach between the public and private sectors seems wise.” 

However, he went on to say, both the opportunities and risks require ongoing understanding and co-operation across stakeholder groups and international borders to achieve inclusive progress.

Rajesh Sinha, practice lead at UK technology consultancy Esynergy, suggested banks should be “nimble” in implementing other payment rails that offer other advantages such as speed, cost, reliability and visibility. But, he stressed, “This Swift initiative is an exciting next step for the financial world and ultimately for its customers.”

Expressing a note of caution following Donald Trump’s recent threat to put a stop to CBDC development in the US, Carlos Kazuo Missao, head of innovation for the Americas at digital transformation company GFT, warned: “Banks are now a little more cautious to move forward with too much.”

Haydn Jones, managing director and global head of blockchain and cryptocurrency solutions at risk and financial advisory company Kroll, said Swift’s solution provides simplification. Allowing interoperability between CBDC networks and traditional payment systems will offer a more seamless transition to the digital financial era, especially with Swift already established in more than 200 countries, he said. 

“If Swift’s CBDC enters the market quickly, it could become a key player in the global financial ecosystem,” explained Jones. “While notable efficiency opportunities are likely to flow from the initiative, this solution could present a standoff for central banks involved in developing the Brics currency, potentially weakening its global position in markets.”

Prior to starting to develop an experimental solution to interlink CBDCs for cross-border payments, Swift published its first white paper in 2021. “We knew that Swift couldn’t solve that alone. We needed to harness the insights from the Swift global community,” added Swift’s Kerigan.