The global bank messaging network, SWIFT, plans to launch a new platform in the next two years, to connect the wave of central bank digital currencies in development to a new finance system called Connector.
According to SWIFT head of innovations Nick Kerigan, this new system has been tried for six months with the collaboration of 38 member groups of central banks and settlement platforms. The joint venture seems to be the largest global partnership on CBDC and tokenized assets,
Central Bank Digital Currencies (CBDCs) have been a topic of discussion and research among central banks for several years.
The concept gained significant attention following the emergence of Bitcoin and other cryptocurrencies in the early 2010s. However, the actual introduction of CBDCs varies by country, with some central banks piloting or exploring CBDCs in the late 2010s and early 2020s.
Notable examples include the People’s Bank of China (PBOC), which began piloting its digital currency electronic payment (DCEP) in 2020, and the Eastern Caribbean Central Bank (ECCB), which launched its DCash CBDC pilot in 2021.
The timeline for introducing CBDCs varies depending on the specific initiatives and developments within each jurisdiction.
CBDC Challenges
About 90% of the world’s central banks have been trying to explore the digital version of their currencies before SWIFT innovations, but have been hindered by technological complexities.
SWIFT’s new financial system will ensure different country CBDCs can be used together, even if they are built on different protocols, to reduce payment system risks. The CBDCs could be used in complex trade and foreign exchange payments at a better transaction speed and lower cost.
Kerrigan also noted that banks could as well use their existing infrastructure as it has been tested and proven by those who took part.
Why Central Banks Struggle to Establish Their Currency CBDCs Before SWIFT Innovation
- Technical Complexity: Developing and implementing a Central Bank Digital Currency (CBDC) involves intricate technical infrastructure and cybersecurity measures, posing significant challenges to central banks.
2. Security Concerns: Ensuring the security of CBDC transactions against cyber threats and fraud requires robust encryption and authentication protocols, adding complexity to development.
3. Privacy Protection: Balancing the need for transaction privacy with regulatory requirements for transparency poses a challenge, as central banks must design CBDCs that safeguard user privacy while complying with anti-money laundering (AML) and know-your-customer (KYC) regulations.
4. Financial Inclusion: Designing CBDC systems that cater to the unbanked and underbanked populations while also serving the needs of technologically advanced users presents a dilemma for central banks.
5. Monetary Policy Implementation: Integrating CBDCs into existing monetary policy frameworks and ensuring they function effectively alongside traditional monetary tools requires careful consideration.
6. Interoperability: Achieving interoperability between different CBDC systems and existing payment infrastructures domestically and internationally requires collaboration and standardization efforts, which can be challenging to coordinate.
7. Cross-Border Payments: Addressing regulatory and technical barriers to enable seamless cross-border CBDC transactions while mitigating risks associated with money laundering, terrorism financing, and capital flight poses significant hurdles for central banks.
8. Public Acceptance: Gaining public trust and acceptance of CBDCs amid concerns about data privacy, security, and potential disruptions to existing financial systems presents a communication and education challenge for central banks.
9. Regulatory Compliance: Navigating complex regulatory landscapes and ensuring CBDCs comply with domestic and international regulations, including those related to financial stability, consumer protection, and competition, is a formidable task for central banks.
10. Infrastructure Investment: Implementing the necessary infrastructure to support CBDC issuance, distribution, and redemption requires substantial investment and may strain central bank resources, particularly in developing countries with limited financial infrastructure.
Now, SWIFT plans to help the central banks overcome all the challenges that have hindered the establishment of CBDCs. This plan has a roadmap of 12 – 24 months to launch as a product.
Kerrigan said it’s moving from the experimental stage to a reality. Though the given timeframe could shift, SWIFT is determined to get the platform running to maintain its dominance in the bank-to-bank plumbing network.
