Swiftly conquering the new digital frontier

How can central bank digital currencies and tokenised assets be effectively integrated into the world’s existing cross-border money flows? We turned to Swift’s Head of Innovation Nick Kerigan for the answer

We’re entering a pivotal period as the payments industry is looking at adopting the data-rich ISO 20022 as a standard for Swift cross-border payments messaging with effect from March 2023.

The global benchmark is widely seen as an essential component of payments modernisation initiatives, and its adoption by Swift is expected to unlock new opportunities for thousands of financial institutions, such as boosting operational efficiency, enhancing customer experience and enabling innovative new services.

But Swift is already looking beyond it, to help the industry take seamless crossborder transactions to a whole new level. The heavyweight payments facilitator is exploring how it can help pave the way for adoption of central bank digital currencies (CBDCs) and tokenised assets, a paradigm shift in the way we move money and securities around the world.

Embedded in 11,000 institutions across more than 200 countries, Swift is by far the world’s biggest financial messaging system. But it’s recognised that there’s a robust challenge brewing from a host of fintechs that are also developing traditional counterparts. This represents a major milestone towards enabling the effective integration of alternative finance into the international financial ecosystem, and it could unlock a new form of transacting that can boost financial inclusion and improve companies’ liquidity by enabling a greater diversity of traded assets.

solutions to solve cross-border payment pain points. These new entrants are evidence of what Nick Kerigan, head of innovation at Swift, and a 20-year payments veteran, calls ‘new frontier trends’, and they include alternative finance in all its flavours.

Because Swift sits across the whole of the financial community, Kerigan believes it’s uniquely placed to bring institutions together to collaborate on such innovations. And two separate, successful experiments it has run with the industry have already proved that CBDCs, and tokenised assets specifically, can move smoothly on existing financial infrastructure, allowing them to flow alongside – and interact with – their more

Global shift:

There is a sense that CBDCs are ‘inevitable’, says Kerigan

INTERLINKING CBDCs

According to Atlantic Council figures from October, 105 countries, representing more than 95 per cent of global GDP, are exploring the use of CBDCs. There

are two types of these CBDCs – wholesale and retail. Wholesale CBDCs are mainly used by financial institutions, whereas retail ones are issued by central banks and used by consumers and businesses, just like physical forms of currency.

Eleven countries – none of them leading economies – have now fully launched a CBDC for retail or wholesale use; some are experimenting with both. Jamaica is the latest to launch with the JAM-DEX, while, among major economies, China’s CBDC pilot has made the most noise. It’s ramping up its retail testing, while, in October the wholesale digital yuan was the most issued and actively transacted token in a six-week trial organised as part of mBridge, a multi-CBDC project involving a single blockchain infrastructure for cross-border payments between China, Hong Kong, Thailand and the United Arab Emirates.

The World Economic Forum, among others, recognises that CBDCs offer new and exciting ways to democratise finance – such as giving the previously unbanked buying power, introducing them to financial tools and increasing competition in global markets. But to make digital money effective, several challenges must be overcome.

One of the foremost is interoperability. While the majority of central banks are actively considering digital currencies, they often use different technologies and primarily focus on domestic use. To work across borders, digital currencies need to overcome inherent differences to not only interact with each other, but also with existing fiat currencies. Nevertheless, says Kerigan ‘there’s a feeling among the financial community that they are becoming, in some sense, inevitable’.

“Swift doesn’t advocate for or against CBDCs,” he adds. “But, seeing this growing momentum, we need to consider how it impacts the financial community, and, in particular, how it impacts the world of payments – cross-border payments. We need to help central banks that are developing CBDCs ensure these CBDCs don’t become digital islands. How do they connect with the rest of the world? And how do we all ensure that crossborder payments can be enabled by CBDCs, rather than inhibited by them?”

In a persuasive experiment, Swift, in collaboration with Capgemini, achieved CBDC-to-CBDC transactions between different DLT (distributed ledger technology) networks based on popular Quorum and Corda technologies, as well as fiat-to-CBDC flows between these networks and a real-time gross settlement system. This proved that the blockchain networks could be interlinked for cross-border payments through a single gateway, and that Swift’s new transaction management capabilities can orchestrate all inter-network communication. As a next step, 18 central and commercial banks, including Banque de France, the Deutsche Bundesbank, HSBC and NatWest, are working together in a testing sandbox environment to accelerate the path to full-scale deployment.

In a separate experiment with a different group of industry participants, Swift similarly demonstrated that its infrastructure can act as an effective conduit for multiple tokenisation platforms and different types of cash payment.

Tokenisation remains a relatively nascent market, but the World Economic Forum estimates it could reach $24trillion by 2027. Potential benefits include greater market liquidity and fractionalisation, which could increase access to investment markets for retail investors.

“The tokenised assets trend is a really fascinating one,” says Kerigan. “The securities industry is starting to look at

Swift doesn’t advocate for or against CBDCs. But, seeing this growing momentum, we need to consider how it impacts the financial community, and, in particular, cross-border payments

the potential of token technology to achieve some interesting and important benefits – for example, fractionalisation. This can help to achieve better liquidity and also potentially better access to investments. It helps people who maybe have $10 but not $1,000 to trade at any one time. But it means institutional investors can then also start to look at things like more sophisticated trading strategies, and more diversified risk management. The challenge is, most of these tokenised assets are being created on new and specific platforms, and so, if you’re an existing, scaled securities market player, the question is ‘which of these platforms do I integrate with and what’s the opportunity cost of doing that? How do I know which will be the one where most of these assets are going to sit ?’.”

Over a year and working in tandem with Citi, Clearstream, Northern Trust, and SETL (its technology partner), Swift ran 70 scenarios simulating market issuance and secondary market transfers of tokenised bonds, equities and cash.

Across these scenarios, Swift successfully served as a single access point to various tokenised networks and highlighted that its infrastructure can be used to create, transfer and redeem tokens and update balances between multiple client wallets, as well as provide interoperability between different tokenisation platforms and existing account-based infrastructure.

“This potentially gives those securities institutions a way of accessing this new market, with the integrations being done by Swift on behalf of the market participants,” says Kerigan. “So, doing those integrations once, with Swift, rather than doing them many times with all the different securities participants. I think that’s a pretty exciting kind of experiment. We really like doing these forms of collaborative innovation, and working with our clients to figure out new solutions.”

These two experiments, when taken together, form a significant part of Swift’s extensive innovation agenda that aims to underpin its strategic focus on enabling instant, frictionless and interoperable cross-border transactions. Now that it has decided to throw its hat into the ring, it will be interesting to see whether this ups the ante when it comes to the adoption of CBDCs and tokenised assets.

“If you look across digital assets, or digital currencies, the common thread Swift can help solve is actually doing things once for the financial community, so that those 11,500 banks and corporates don’t have to repeat it many, many times,” concludes Kerigan. “Ensuring interoperability between those platforms, through standards, through API connectivity and so forth, that’s where we can add value.”