SWIFT, the world’s biggest financial messaging system has launched a running sandbox where blockchain based central bank digital currencies (CBDC) can connect to each other globally through SWIFT, as well as connect their blockchain system to SWIFT’s more traditional ‘fiat’ system.
14 central and commercial banks, including Banque de France, the Deutsche Bundesbank, HSBC, Intesa Sanpaolo, NatWest, SMBC, Standard Chartered, UBS and Wells Fargo, are now collaborating in the testing environment, SWIFT said.
“Digital currencies and tokens have huge potential to shape the way we will all pay and invest in the future,” says Tom Zschach, Chief Innovation Officer at SWIFT, before adding:
“We see inclusivity and interoperability as central pillars of the financial ecosystem, and our innovation is a major step towards unlocking the potential of the digital future.
For CBDCs, our solution will enable central banks to connect their own networks simply and directly to all the other payments systems in the world through a single gateway, ensuring the instant and smooth flow of cross-border payments.”
In a report detailing their experimentation, SWIFT says they built two simulated CBDC networks, one implemented on R3 Corda, and another on Quorum, a permissioned Proof of Authority (PoA) version of ethereum.
CBDC network regulators will run and govern a ‘trusted DLT node’ created as part of Swift’s solution, allowing them to have a view on transactions within the permissioned blockchain as well as its messages to the Connection Gateway.
Then, connecting these two systems is as simple as implementing “a standard escrow mechanism to prevent double spend,” which they did.
At a high level view, they have basically created what in the crypto space is called a bridge. If, for example, you want to transfer funds from Ethereum to a second layer called Arbitrum, which is sort of its own network, you ‘lock’ the funds on Arbitrum’s ethereum smart contract, and then receive the eth – kind of printed out – in the Arbitrum network.
The reverse is just as easy. The Arbitrum eth is burned or destroyed, and you receive the on-chain eth, minus any fees.
The technical details are quite a bit more complicated, but in this SWIFT implementation it is somewhat similar in that they lock the assets in an escrow, tell the SWIFT system it is locked, and then receive the funds from the other party.
SWIFT thus acts as a clearing house of sorts, although it doesn’t necessarily need to hold funds as it can just pass messages.
For just two blockchains where you can mint and burn, that would be easy. You burn the amount in say 0x1x address on ethereum, and mint the same amount on address 1BrT where they’re sent, with some conversion Oracle in the middle.
No reason why you can’t do this with the third or fourth blockchain, like Quorum, Corda, or any system that allows for minting and burning.
Bitcoin or eth doesn’t allow it, so you need a custodian in the middle to transport BTC to eth. To transport eth to eth_copy, however, you can do it in a decentralized way through smart contracts and some sort of a feed or oracle that can read movements, or indeed messages, in this smart contract.
Which is to say that to connect two different assets, in this case different national fiats in different networks, there probably isn’t another way than through a SWIFT like intermediary, unless you go peer to peer, but then you’d need to peer to peer with 193 countries, instead of just one SWIFT.
Interestingly however they explored the use of a blockchain system to connect these different blockchains, something that has not been achieved in the crypto space, and wasn’t pursued here either because according to the cited Project Dunbar report published in March 2022:
“Given the complexity of having multiple central banks sharing critical financial infrastructures and the unique requirements of each jurisdiction, a common multi-CBDC platform may be more likely to be implemented as a series of regional platforms rather than as a single global platform.
This naturally leads to considerations around how it may be possible to connect these individual regional platforms to realise synergies such that participants transact directly across jurisdictions.”
A bigger question is whether it can technically be done at all, but connecting these blockchains through some sort of intermediary, if nothing else than a feed/oracle, is possible.
Naturally that means the feed is the weakest link, and we’ve had plenty of oracle exploits in this crypto space, which have had the beneficial end-result of strengthening their implementations.
But, such feed would be on SWIFT systems with SWIFT security where the same weakness applies even now because obviously if you can access their messaging system without being noticed, you can send a lot of money to wherever you want.
“We have built a CBDC sandbox and visual interface that is now being used by more than 10 institutions – including central banks, market infrastructures and commercial bank from across the globe – to assess potential use cases and wider CBDC operability,” SWIFT says, adding:
“We started welcoming our banks into the sandbox in September and will seek feedback through to late 2022.”
So this is already up and running, though in a very test environment, with SWIFT claiming it can increase efficiency as rather than connecting to numerous intermediaries for a cross border transfer, you connect to just one.
SWIFT further points out that 9 out of 10 countries are exploring CBDCs, and nine countries even claim to have them live running.
Even Ukraine is looking at e-hryvnia. They’re working with Polygon, the ethereum second layer. They’re a fairly decent team working on some bleeding edge zk-tech solutions for blockchain scaling.
“We hope to start a couple of [pilot projects] at the beginning of the next year,” the Digital Economy Directorate of Ukraine, Yulia Parkhomenko, said at GITEX in Dubai.
We have not however yet come across a partially-opened and semi-crypto like CBDC where the public can deploy their own smart contracts.
One of the biggest appeal of ethereum, spurring the rise of defi and much else, is its self-executing open source code system, or smart contracts, where anyone can publish whatever they like.
CBDCs instead are more like bitcoin, where you can just move it from A to B, and any smart contract aspects at least so far are limited to the back-end participants, the permissioned validators.
Technically however there isn’t much of a reason why you can’t have a public CBDC in regards to permissionless smart contract publishing.
Politically, it can be a matter even for a referendum as it would be a fairly fundamental change in the banking system where commercial banks are effectively replaced by the central bank.
Developments in CBDCs therefore have become less interesting to coders since a debate on the matter by central bankers closed with that political question which is now kind of being sidestepped or ignored entirely to limit such CBDCs to very background, deep pipeline, potential efficiencies for mainly commercial banks and some potential gains for the public in regards to speed and costs of transfers.
At the same time, the crypto space is now moving towards a potential breakthrough in zk-tech scaling, which can with time be applied at the base open public blockchain layer.
CBDCs therefore do not quite compete anymore, in their current implementations, with open blockchain networks, but remain of interest to the wider financial system as who knows what exactly might come out of it and efficiency is efficiency.