Early incarnations of Central Bank Digital Currencies (CBDCs) are showing enormous promise for the global financial sector, opening up new trade opportunities and accelerating global payments and commerce. However, the largely siloed development of digital currencies and their supporting infrastructure is creating a fragmented innovation landscape, challenging interoperability and effectively undermining the promised benefits of a CBDC.
Suresh Rajalingam, Swift’s head of Oceania, looks at ways to harmonise innovation efforts and create an interoperable global digital payments network.
The global financial landscape continues to progress to a digital future, with banks, institutions, and countries exploring potential use cases for digital assets and currencies. Interest has accelerated in recent years, especially around central bank digital currencies (CBDCs), which has led to more clarity on the value they can provide markets.
This acceleration is expected to remain steady, with forecast growth of digital assets being high; Standard Chartered and Synpulse predict the market size of real-world tokenised assets will reach heights of US$30 (AU$48) trillion by 2034, presenting far-reaching implications for the financial industry.
Locally, interest is spiking too, with the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) launching Project Acacia, exploring how digital money and infrastructure can support wholesale tokenized asset markets, and inviting industry feedback as part of a broader roadmap on the future of digital money and CBDC in Australia.
While the individual innovation of digital assets and currencies is ongoing both locally and globally, it’s crucial for financial markets worldwide to prioritise the global interoperability of these assets. Otherwise, they risk creating fragmented digital ecosystems.
Uniting digital islands
There are still a variety of obstacles to overcome before digital assets and currencies can be interconnected and scaled in the global financial system effectively. A core issue lies in siloed innovation and developments. There are a number of platforms, technologies, and regulatory frameworks that support digital innovation, and not all are compatible with each other. This has created a fragmented landscape of “digital islands,” which impacts navigation for market participants, as the range of solutions lack interoperability, while also increasing costs and risks.
For instance, institutional investors often face challenges in scaling their digital asset operations because of the complexities involved with various tokenisation platforms. Likewise, while recent data from the Atlantic Council shows that more than 130 countries and currency unions are looking into CBDCs, significant work is still needed to integrate these new currencies into the global economy.
To achieve global scale for digital currencies – making them beneficial for both financial institutions and the broader economy – a collaborative effort from the industry will be essential.
The key lies in collaboration
At the recent Sibos 2024, hosted in Beijing, CBDC innovation was a key topic of conversation. Representatives from China, the Bahamas, Kazakhstan and Europe all discussed the topic, diving into the nuances and challenges of the technology.
In line with the global sentiment, the key takeaway from these discussions was the need for a complete ecosystem to make the widespread adoption of CBDCs possible. Thus, it is crucial for the industry to establish a process that facilitates transactions between various CBDC platforms, and it’s critical that they seamlessly coexist with traditional forms of money. A multilateral interoperability solution is necessary to connect CBDC networks with existing global payment systems, enabling seamless and frictionless cross-border transactions – something Javier Pérez-Tasso, CEO of Swift, shared at Sibos Swift is very focused on.
A new milestone for digital assets and currencies
Committed to enabling interoperability for digital currencies across markets, Swift has actively explored ways to make this a reality. Recently, Swift announced central and commercial banks, which took part in previous experimentation and sandbox testing, will be about to harness its network to deliver trial transactions of digital currencies and digital assets at the beginning of next year. This initiative represents a significant milestone as the industry moves closer to the industry’s goal of providing financial institutions with a single point of access to various digital asset classes and currencies.
Swift has also been named as a participant in Project Agorá, a Bank for International Settlements-led project analysing the integration of tokenised commercial bank deposits and tokenised wholesale CBDCs on a unified platform.
As new forms of value emerge, the industry should focus on working to ensure they can seamlessly make and track transactions of all kinds of assets across different markets, borders, and institutions. Using the same secure and resilient infrastructure will be imperative to this.
