In a pair of papers today, financial messaging service SWIFT claimed that it has solved two of the thorniest problems digital assets must overcome if they are to revolutionize the way money moves: allowing the coming wave of central bank digital currencies to interact seamlessly and instantly across borders and making trading and settling tokenized possible across different platforms and making those digital assets interoperable with traditional ones on those same platforms.
Citing successful experiments in both fields, SWIFT said in an announcement Wednesday (Oct. 5) it has solved “the significant challenge of interoperability in cross-border transactions by bridging between different distributed ledger technology (DLT) networks and existing payment systems, allowing digital currencies and assets to flow smoothly alongside, and interact with, their traditional counterparts.”
See also: SWIFT Plots Real-Time Role for Next 50 Years of Cross-Border Payments
Which is a mighty big deal if the two systems work as advertised in the real world. Of course, “if” has been called the longest word in the English language, and with good reason.
There are still a great number of issues and competitors to overcome, most notably the stablecoins that are already moving into payments roles — and have so frightened central bankers and policymakers that they’ve managed to turn CBDCs into a front-burner issue in two or three years.
Crypto Competition
Another problem to be solved is how to make an ever-proliferating range of tokenized assets — not just cryptocurrencies but also equities, bonds and ultimately anything of value, such as real estate — and the distributed ledger platforms they move along play well together.
Read also: 37% of Firms Use Blockchain, Crypto for Cross-Border Payments
Not a few of the latter are aiming squarely at building a cheaper settlement system that is capable of handling real-time payments more efficiently than SWIFT.
“Digital currencies and tokens have huge potential to shape the way we will all pay and invest in the future,” said SWIFT Chief Innovation Officer Tom Zschach. “But that potential can only be unleashed if the different approaches that are being explored have the ability to connect and work together.”
That sums up the problem nicely — but doesn’t really solve it. SWIFT’s answer to blockchain-based upstarts seeking to build a better payments mousetrap amounts to the argument that its legacy infrastructure is an advantage rather than a hurdle.
Calling “inclusivity and interoperability … central pillars of the financial ecosystem,” Zschach said, “SWIFT’s existing infrastructure can ensure these benefits can be realized at the earliest opportunity, by as many people as possible.”
Beyond that, SWIFT said conflicting technologies, platforms and regulatory environments could create market inefficiencies. As a result, it wants to extend its role to include tokenized assets, noting that “institutional investors increasingly expect access to all asset classes (both traditional and digital) which belong to various service providers.”
CBDCs
It’s not just crypto and digital assets that SWIFT must prove it can best in the real world. There are some 67 countries with interoperable real-time payments rails in place, and it has to beat stablecoins like Circle’s USD Coin (USDC) and Tether’s USDT — which nearly 100 governments find so threatening that they are building, planning or at least studying central bank-issued digital currency (CBDC) versions of their fiat money.
On the CBDC front, the coming wave of digital currencies like a digital yuan, digital rupee and likely digital euro, as well as a somewhat likely digital dollar, have a core problem to overcome in terms of interoperability. Built on different platforms and technical standards, CBDCs have other issues, like the ability and legality of using one outside of its country of origin and differences between wholesale and retail CBDCs.
In a new whitepaper, “Connecting digital islands: CBDCs — Results of SWIFT experiments interlinking CBDC networks and existing payments systems to achieve global interoperability,” SWIFT said it worked with Capgemini to succeed in making cross-platform transactions between digital assets built on the JPMorgan Quorum and R3 Corda private blockchains, as well as fiat-to-CBDC transactions between those two digital ledger platforms and real-time gross settlement systems.
This showed blockchains “could be interlinked for cross-border payments through a single gateway” that had the ability to “orchestrate all inter-network communication,” SWIFT said.
Fourteen banks including Banque de France, the Deutsche Bundesbank, HSBC, Standard Chartered, UBS and Wells Fargo are involved in further experimentation to scale the system.
The solution, SWIFT said, “can provide CBDC network operators at central banks with simple enablement and integration of domestic CBDC networks into cross-border payments, through the introduction of a Connector Gateway.”
See also: 48% of Companies Looking for Enhanced Cross-Border Payment Solutions
But that’s still a long way off, and there are plenty of political obstacles to be climbed as well, as CBDCs run into a host of national control issues.
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