Has SWIFT beat crypto in cross-border payments?

In a pair of papers today, financial messaging service SWIFT claimed it has solved two of the most difficult problems digital assets must overcome if they are to revolutionize the way money moves: allowing the coming wave of central bank digital currencies to interact seamlessly and instantly across borders and make trade and settlement tokenized possible across different platforms and make these digital assets interoperable with traditional ones on the same platforms.

Citing successful experiments in both fields, SWIFT said in an announcement on Wednesday (5 October) that it has solved “the significant challenge of interoperability in cross-border transactions by bridging different distributed ledger technology (DLT) networks and existing payment systems, which enables digital currencies and assets to flow smoothly alongside and interact with their traditional counterparts.”

See also: SWIFT plans real-time role for the next 50 years of cross-border payments

Which is a big deal if the two systems work as advertised in the real world. Of course, “if” has been called the longest word in the English language, and for good reason.

There are still a large number of issues and competitors to overcome, especially the stablecoins that are already moving into payment roles – and that have scared central bankers and policymakers so much that they have managed to make CBDCs a front-burner issue on two or two three years.

Crypto competition

Another problem to be solved is how to get an ever-widening range of tokenized assets – not just cryptocurrencies, but also stocks, bonds and ultimately anything of value, such as real estate – and the distributed ledger platforms they move along play well together.

Also read: 37% of companies use Blockchain, Crypto for cross-border payments

Not a few of the latter directly aim to build a cheaper settlement system capable of handling real-time payments more efficiently than SWIFT.

“Digital currencies and tokens have great potential to shape the way we will all pay and invest in the future,” said SWIFT Chief Innovation Officer Tom Zschach. “But that potential can only be unleashed if the different approaches being explored have the ability to connect and work together.”

That sums up the problem nicely – but doesn’t really solve it. SWIFT’s response to blockchain-based upstarts seeking to build a better payments mousetrap makes the case that the legacy infrastructure is an asset rather than a hindrance.

Calling “inclusion and interoperability … central pillars of the financial ecosystem,” Zschach said, “SWIFT’s existing infrastructure can ensure that these benefits can be realized as early as possible, by as many people as possible.”

Beyond that, SWIFT said conflicting technologies, platforms and regulatory environments can create 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 various service providers.”

CBDCs

It’s not just crypto and digital assets SWIFT has to prove they can do best in the real world. There are around 67 countries with interoperable real-time payment rails in place, and it needs to beat stablecoins like Circle’s USD Coin (USDC) and Tether’s USDT – which nearly 100 governments find so threatening that they are building, planning or at least studying central bank-issued versions of digital currency (CBDC) of their fiat money.

On the CBDC front, the upcoming wave of digital currencies such as a digital yuan, digital rupee and likely digital euro, as well as a somewhat likely digital dollar, have a core problem to overcome in terms of interoperability. Built on different platforms and technical standards, CBDCs have other issues, such as the possibility and legality of using one outside the country of origin and differences between wholesale and retail CBDCs.

In a new whitepaper, “Connecting digital islands: CBDCs – Results of SWIFT experiments connecting CBDC networks and existing payment systems to achieve global interoperability,” SWIFT said it partnered with Capgemini to successfully transact across platforms between digital assets built on JPMorgan. Quorum and R3 Corda private blockchains, as well as fiat-to-CBDC transactions between these two digital accounting platforms and real-time gross settlement systems.

This showed that blockchains “could be linked together for cross-border payments through a single gateway” that had the ability to “orchestrate all communications between networks,” SWIFT said.

Fourteen banks including Banque de France, Deutsche Bundesbank, HSBC, Standard Chartered, UBS and Wells Fargo are involved in further experimentation to scale the system.

The solution, SWIFT said, “can provide central bank CBDC network operators with easy activation and integration of domestic CBDC networks in cross-border payments, through the introduction of a Connector Gateway.”

See also: 48% of companies looking for improved cross-border payment solutions

But it’s still a long way off, and there are many political hurdles to climb as well, as CBDCs run into a number of national control issues.

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