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Public-private cooperation and partnership are key to advancing CBDCs

By Sharon Toh

Whilst the merits of CBDCs are still widely debated, central and commercial banks are actively exploring the use of CBDCs in local markets. 

Interest in Central Bank Digital Currencies (CBDCs) has been gaining momentum globally over the past several years. While the merits of CBDCs are still widely debated, central and commercial banks are actively exploring the use of CBDCs in local markets. Currently, 130 countries representing 98 percent of global GDP, are at various stages of CBDC exploration – a significant jump from May 2020 when only 35 countries were considering a CBDC. Today, 19 of the Group of 20 economies are now in the advanced stage of CBDC development, and 11 countries have fully launched a digital currency.

Potential for wholesale CBDCs for cross-border payments and settlements in Singapore 
With its mature private sector digital payment platform, advanced technology and info-communications infrastructure, and its role as a regional hub for international finance, Singapore has been one of the frontrunners of CBDC initiatives. The Monetary Authority of Singapore (MAS) has been actively experimenting with digital currency connectivity –domestically, Project Orchid to develop the infrastructural and technical approach to issue a digital dollar should the need arises. MAS recently published a whitepaper building on Project Orchid, encouraging central banks, financial institutions and fintechs to understand the design considerations in the use of digital money.  This came with the release of software prototypes that demonstrate the concept of Purpose Bound Money, which enables senders to specify conditions, such as validity period and types of shops, when making transfers in digital money across different systems. 

In November 2022, MAS joined Swift’s CBDC sandbox, an expanded collaboration with international partners including 17 other central and commercial banks to enable CBDCs to move between DLT-based and fiat-based systems using existing financial infrastructure. The test was set up so that central and commercial banks could experiment with and validate the effectiveness of the solution and share insights for continual development. This initiative is an expanded collaboration of MAS’ Ubin+, which studies business models and governance structures where settlement can be performed instantly.

Enabling interoperability alongside emerging innovations 
The motivation for the development of wholesale CBDCs focuses on creating an enhanced payment system that is both efficient and secure, particularly for cross-border transactions while reducing their inherent transaction costs. While it offers opportunities, there is also the proliferation of multiple CBDC platforms in development, parallel to existing financial systems. With majority of central banks focusing on domestic usage, and develop digital currencies based on different technologies and procedures, many ‘digital islands’ will proliferate. As development progresses based on varying central bank arrangements and their parameters, CBDCs and established infrastructures will need to co-exist as the industry moves towards trials and system integration. 

Addressing the risk of fragmentation 
Therefore, the need to develop a process for transactions to flow between different CBDC platforms is critical. A multilateral interoperable solution is needed to connect CBDC networks and existing payment systems globally and enable seamless CBDC transactions to flow across borders.

Fortunately, integrating CBDC connectors into existing cross-border payment systems will not require a reinvention of new practices to ensure security, compliance, authentication, and tracking. Leveraging industry-standardised approaches such as ISO 20022 will ensure that CBDC transactions carry rich standardised payment data. Establishing a solution to bring interoperability to CBDCs will be a long process, but continuous public-private cooperation in innovation and experimentation will pave the way to a frictionless future for digital currencies. It is also crucial for solutions to allow banks to easily integrate their domestic CBDC flows with their cross-border payments system.

Connecting digital islands: Swift’s experimental CBDC connector 
As a cooperative with an international financial network of more than 11,000 financial institution members globally, Swift has been helping to enhance the underlying financial infrastructure that the global economy relies on. 

Swift’s experimental solution enables CBDCs to move between DLT-based and fiat-based systems using existing financial infrastructure. The Swift solution was put to the test by deploying it in a collaborative sandbox, and our API-based CBDC connector has been proven to be robust across almost 5,000 transactions between two different blockchain networks and traditional fiat currency. Participants saw clear potential and value in Swift’s initiatives in further developing its interlinking solution and are keen on the continued collaboration with Swift to drive further innovation in this space.  

Swift has developed a beta version of the solution that is currently being tested further by central banks, with real-time feedback opportunities. With this groundbreaking solution capable of interlinking CBDC networks and existing payments systems for cross-border transactions, interoperability and this seamless transaction flow - is within sight.   

The future of payments
In an increasingly digital economy, CBDCs hold the promise of dramatically changing the global payments landscape – creating new opportunities for faster, cheaper, more secure cross-border transactions – and making the world more financially inclusive. While challenges remain, the continued strong public-private cooperation and partnership involving industry players, both time-honoured and new institutions, and regulators is key to heralding a new era of efficient, secure, and inclusive cross border payments. 

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