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Swift launches second phase of CBDC interoperability testing

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(Kitco News) - The Society for Worldwide Interbank Financial Telecommunication (Swift) has announced the launch of the next phase of its work on central bank digital currency (CBDC) interoperability, which includes the addition of three central banks that will be beta testing the system for interoperable CBDCs.

According to a press release from Swift, 30 financial institutions are currently experimenting with the CBDC connector solution in a new sandbox “to explore further use cases.”

“Swift committed to developing a beta version of its CBDC connector solution after a first iteration of sandbox testing, with participants recognizing the solution’s ‘clear potential and value’,” the release said. “The beta solution has taken its next step, with three central banks and monetary authorities, including the Hong Kong Monetary Authority (HKMA) and the National Bank of Kazakhstan, integrating the solution with their own infrastructure for direct testing.”

In the second phase of sandbox testing, commercial banks, central banks and financial market infrastructures will explore new use cases including trigger-based payments for digital trade platforms, foreign exchange models, delivery vs. payment, and liquidity saving mechanisms.

Participants in the second phase include the Reserve Bank of Australia, Deutsche Bundesbank, HKMA, Bank of Thailand and CLS. The first phase of sandbox testing included 18 central and commercial banks.

“Our focus is on interoperability – ensuring that new digital currencies can seamlessly coexist with each other and with today’s fiat-based currencies and payment systems,” said Tom Zschach, chief innovation officer at Swift. “The financial community has already recognized the strong potential of our CBDC innovations for preventing digital islands while securely bridging the payment systems of today and the future. This next phase of testing and exploration will help us further refine the solution to ensure it is as effective as possible, and at scale.”

Data provided by The Atlantic Council shows that 130 countries, representing 98% of global GDP, are now in some phase of exploring CBDCs. 19 of the G20 countries are in the advanced stages of CBDC development, with nine already in the pilot stage, including China, India, Australia, Russia, Japan and Saudi Arabia.

Some have warned that the creation of multiple CBDCs could lead to “a fragmented landscape across borders, as most countries focus on domestic usage,” the release said. To counter this fragmentation, Swift has prioritized a focus on interoperability for digital currencies and tokenized assets “to enable them to seamlessly scale if and when they are deployed into the financial ecosystem.”

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SWIFT first started exploring CBDCs in 2020 and published a paper titled, “Exploring Central Bank Digital Currencies: How they could work for international payments,” which explored the potential benefits and challenges of CBDCs for international payments.

In March 2021, Swift partnered with Accenture to develop a prototype for a CBDC interlinking solution that would allow CBDCs to be exchanged between different central banks and payment systems.

In October 2022, Swift revealed that it had developed a solution that enables CBDCs to move between distributed ledger technology-based and fiat-based systems using the existing financial infrastructure. The sandbox testing was then established so that central and commercial banks could experiment with the solution to validate its effectiveness and help guide its development.

During the first phase of sandbox testing, nearly 5,000 transactions were simulated between two different blockchain networks and with existing fiat-based payment systems. Central and commercial bank participants reported that the connector enabled the seamless exchange of CBDCs, even for those built on different platforms, and expressed strong support for the solution’s continued development.

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