In two research papers today, financial messaging service SWIFT claims to have solved two of the toughest problems that digital assets must overcome if it is to revolutionize the way money moves: allowing the next wave of central bank digital currencies to interact seamlessly and instantaneously across borders and making trading and settlement enabled across different platforms and making these digital assets interoperable with traditional assets on those same platforms.
Citing successful experiences in both areas, Swift said in Advertising On Wednesday (October 5th), it was able to solve the “great challenge of interoperability in cross-border transactions by interconnecting different distributed ledger technology (DLT) networks and existing payment systems, allowing currencies and digital assets to flow seamlessly alongside and interact with them.” their traditional counterparts.
See also: SWIFT charts a real-time role for the next 50 years of cross-border payments
Which is a pretty big deal if the two systems work as advertised in the real world. Of course, “if” has been named the longest word in the English language, and for good reason.
There are still a plethora of problems and competitors to overcome, most notably stablecoins that are already transitioning into payments roles – and they have frightened central bankers and policy makers so much that they have been able to turn central bank currencies into a primary problem in two or three years.
Another issue that needs to be resolved is how to create an increasingly ubiquitous set of token assets — not just cryptocurrencies but also stocks, bonds and ultimately anything of value, like real estate — and the distributed ledger platforms that move along it play nicely together.
Read also: 37% of businesses use Blockchain and Crypto for cross-border payments
Not a few of these aim directly at building a cheaper settlement system capable of handling real-time payments more efficiently than SWIFT.
“Cryptocurrencies and tokens have tremendous potential to shape the way we will all pay and invest in the future,” said SWIFT’s Head of Innovation. Tom Zachach. “But this potential can only be unleashed if the different approaches being explored have the ability to connect and work together.”
This sums up the problem nicely – but doesn’t really solve it. SWIFT’s answer for blockchain-based startups seeking to build a better payment mousetrap lives up to the argument that their legacy infrastructure is an advantage, not an obstacle.
Calling “inclusiveness and interoperability… key pillars of the financial ecosystem,” said Zschach, “the existing infrastructure of SWIFT can ensure that these benefits can be realized at the earliest opportunity, by as many people as possible.”
Moreover, SWIFT said that conflicting technologies, platforms and regulatory environments can lead to market inefficiencies. As a result, it wants to expand its role to include tokenized assets, noting that “institutional investors increasingly expect access to all asset classes (both traditional and digital) belonging to different providers.”
It’s not just crypto and digital assets that SWIFT has to prove its best in the real world. There are about 67 countries with interoperable real-time payment rails that have to outpace stablecoins like USDC and Tether’s USDT – which nearly 100 governments find to be such a big threat that they are building and planning or at least Central study. Digital currency issued by banks (CBDC) for their fiat money.
In terms of digital central bank currencies, the next wave of digital currencies such as the digital yuan, the digital rupee, the potential digital euro, as well as the somewhat potential digital dollar, faces a fundamental problem that must be overcome in terms of interoperability. Depending on different platforms and technical standards, digital central bank currencies face other issues, such as the ability and legality to use one outside the country of origin and the differences between wholesale and retail digital central bank currencies.
In a new white paper, “Connecting Digital Islands: CBDCs – Results of SWIFT experiments linking CBDC networks with existing payment systems to achieve global interoperabilitySWIFT said it has worked with Capgemini to successfully conduct cross-platform transactions between digital assets built on the JPMorgan Quorum and R3 Corda blockchains, as well as paper-to-CBDC transactions between these two digital ledger platforms and real-time total settlement systems.
SWIFT said this showed blockchains “can be interconnected for cross-border payments through a single gateway” that has the ability to “coordinate all communications between networks”.
Fourteen banks, including Banque de France, Deutsche Bundesbank, HSBC, Standard Chartered, UBS and Wells Fargo are participating in further experiments to expand the system.
SWIFT said the solution “could provide central bank CBDC operators with enabling and simple integration of local CBDCs into cross-border payments, through the introduction of the Connector Gateway.”
See also: 48% of businesses looking for improved cross-border payment solutions
But that is still a long way off, and there are plenty of political hurdles to overcome as well, as digital central bank currencies face a host of national oversight issues.
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